July 1, 2009
Vol 2, Issue 7
Jean Keener
Jean Keener
Happy Independence Day this weekend!  I hope the holiday allows you some time to relax and enjoy some fireworks with family and friends.
The second quarter of 2009 is officially over.  For the quarter, the Dow and S&P gained 11% and 15%, respectively, while the Nasdaq added 20%.  Those numbers sounds great, but we all know what a bumpy ride it's been and will likely continue to be.
In this newsletter, we have information on building an emergency fund, factors to consider in diversifying your investments, how to decide if you should refinance your mortgage, and more.  As always, feel free to e-mail me at jean@keenerfinancial.com with requests for newsletter topics you'd like to see covered.  Thank you, and Live Well.
In This Issue
Raised FDIC limits
10 Tools: Build an Emergency Fund
Diversifying your Investments
Down Market Estate Planning Opportunities
Should You Refinance Your Mortgage?
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Raised FDIC limits extended
Time is an issue
I posted a note on my blog about the increased FDIC insurance limits being extended, but wanted to make sure that all of my newsletter readers were aware of it too.
On May 20, 2009, President Obama signed the Helping Families Save Their Homes Act of 2009. Included in the legislation was a provision that postpones until January 1, 2014 the expiration of the $250,000 limit on Federal Deposit Insurance Corp. (FDIC) insurance for bank deposit accounts. The limit was raised in 2008 from $100,000 per depositor at a given institution, and had been scheduled to revert to the previous $100,000 limit on December 31, 2009.
The legislation covers all account categories other than: (1) IRAs and certain other retirement accounts, which will continue to be covered up to $250,000 per owner after January 1, 2014, and (2) non-interest bearing transaction deposit accounts, which temporarily have unlimited coverage and are insured under the Transaction Account Guarantee Program, which is still scheduled to expire after December 31, 2009.
The Act also extended to January 1, 2014 the National Credit Union Share Insurance Fund's $250,000 share insurance coverage of accounts at credit unions.
10 Tools to Build an Emergency Fund
Person ThinkingSo, you know you need an emergency fund.  You've been trying to build one, but just can't seem to get there.  The percentage of people living paycheck to paycheck ranges depending on who's surveying from 47% (Careerbuilder 2008 survey)  to 71% (American Payroll Association 2008 survey).  This issue isn't unique to any particular income level - the Careerbuilder survey also shows 21% of Americans with $100K+ incomes living paycheck to paycheck.  Whatever the actual percentage is, if you're one of the people in the paycheck-to-paycheck boat, you know how challenging it can feel to change the situation.
If you're determined to make this change, you have to do more than nickel and dime your emergency fund.  More than the popular "save the change" program on your credit card (nothing wrong with this, it's just not enough). The small things do add up, but it's very slow and doesn't really give you that sense of accomplishment most of us need to continue. 
First, set a goal. 

Ideally, you'd have 6 months' of living expenses in an emergency fund.  But for a true paycheck-to-paychecker, thinking about the ideal makes you laugh.  So start with $1,000.  Then when you get that, you can change your goal to one month's expenses.  Then three, etc.

Second, set a timetable. 

Don't give yourself a lot of time to save $1,000.  You want a sense of urgency to achieve your first milestone.  I'm not going to get specific here because depending on your income level, it might be reasonable to do it in one month or three months.  But I wouldn't suggest more than six months for anyone.

Third, pick 3 things from the list at  www.KeenerFinancial.com that you can do today. 
Fourth, write it down and show it to someone.

I will save $_______  by ______ (this date) by doing items 1)______________, 2)__________, and 3)____________.  Your chances of success increase exponentially when you write your goals down and share them.  Good luck!
Diversifying your Investments
DiversifyingIf we knew the future, we wouldn't need to diversify our investment portfolios.  We would just pick the asset class that was going to do the best and put all our money there.  But of course, none of us know the future.  And while we may have strong opinions and reasoned analysis that supports what we believe will happen, we would still be foolish to "bet" that our predictions will be 100% accurate.
Diversifying your portfolio is one of the fundamentals of successful investment.  You seek asset classes that don't move in the same direction as each other and that will produce different results based on different economic conditions.  Here are some of the factors we need to consider in building a diversifed portfolio:

Deflation vs. inflation: Many economists--including those at the Federal Reserve Board--are concerned about the potential impact of prolonged drops in stock or housing values. However, efforts to combat deflation also raise the specter of potential inflation. Your portfolio should take both possibilities into account.
Currency fluctuations vs. stability: Risk aversion last year boosted the U.S. dollar. However, that trend could reverse at some point if investors tire of Treasuries' low returns or become more concerned about rising U.S. deficits. Balance that possibility against potential instability in overseas currencies and markets.
Income vs. growth: A company's ability to provide stable dividends may assume greater importance. Balance the benefits of ongoing income against the fact that smaller, growth-oriented companies have led the market out of every recession since 1971.
Estate Planning Opportunities in a Down Market
Mature WomanMost Americans are not subject to the federal estate tax at its current exemption levels.  For 2009, each person can pass $3.5 million to heirs estate-tax free at their death.
However, if your estate has the potential to be affected by the estate tax, you have some planning opportunities right now.  A down market can mean tough times, but it can also present unique opportunities to minimize property transfer (gift and estate) taxes. While owning assets that are losing value might seem like a bad thing, it may actually be a great time to reduce your taxable estate by gifting those assets to beneficiaries. That's because current low asset values and interest rates enable you to make gifts at a lower gift tax cost. And, if and when the market rebounds, those assets will be growing in your beneficiary's estate and not in yours. Here are a few gift-giving techniques that take advantage of today's economic climate.

Basic gifting

Each year, you can make gifts of up to $13,000 to anyone you want, to as many people as you want, tax free under the annual gift tax exclusion. You can give away twice that amount if both you and your spouse make the gifts together (this is called gift splitting). And, you can give away an unlimited amount if you pay tuition or medical bills on behalf of another person (just be sure to make these payments directly to the school or health-care provider).

Family loans

You can lend money to your children at the current IRS minimum interest rate (known as the AFR, which changes monthly), and then potentially forgive an amount equal to the gift tax exclusion each year. (The gift tax exclusion amount is adjusted for inflation; $13,000 is the figure for 2009.).

Additional down-market estate planning opportunities include grantor retained annuity trusts (GRAT), intentionally defective grantor trusts (IDGT), and charitable lead trusts (CLT).  For information on these, visit www.KeenerFinancial.com.
Should You Refinance Your Mortgage?
refinanceMortgage rates on 15- and 30-year fixed mortgages are at all-time lows. So, is now a good time to refinance your existing mortgage? That depends on several factors.

The first, of course, will be your loan-to-value ratio. In no-cash-out refinancing (where the amount of your new loan doesn't exceed the balance of your existing loan, plus points and closing costs, if applicable), you may be able to borrow as much as 95% of your home's value. However, if the value of your home has fallen below the amount of your existing mortgage balance, you may be unable to refinance at all, except through the American Recovery and Reinvestment Act of 2009's Home Affordable Refinance program. But let's assume your loan-to-value ratio is still "above water"--that is, the value of your home is still greater than your mortgage balance.

If you refinance your mortgage to a lower interest rate, you may save a substantial amount on your monthly mortgage payment--which will give you more money to put toward your savings goals or reducing your other expenses. This is one of the main reasons people consider refinancing their mortgages. But what other factors do you need to consider?
How much will it cost?
The cost of refinancing can include both points you pay and other expenses (called happy couple at computer"closing costs") related to refinancing.

One point equals 1% of the amount to be financed. So, if the refinancing costs will include an up-front charge of 0.5 points and you're refinancing $200,000, you will incur a charge of $1,000 (special tax treatment applies to points).

Closing costs typically include an application fee, attorney's fee, appraisal fee, credit report fee, loan origination fee (which can be 1% or more of the amount you refinance), title search fee, and title insurance. Get a "good faith estimate" from each potential lender and compare both closing costs and interest rates. 
Don't forget to talk with your current lender about modifying your existing loan.  They may have programs available to waive part or all of the closing costs to retain your business.  There may also be special programs available to you based on your profession or other affiliations, so talking with knowledgable mortgage professionals may provide you with some additional leads on the best deal.
Be careful about lenders that advertise "no points, no closing costs" refinancing deals. Often these plans simply roll the closing costs into the amount to be refinanced, or come at a higher interest rate.
How long will it take to recoup the costs?
To determine your break-even point (the point at which you'll begin to save money after paying fees and closing costs), divide the amount of your monthly mortgage payment savings due to refinancing into the cost of refinancing; the result is your break-even point, expressed in months.
Example: If you're saving $100 per month on your refinanced monthly mortgage payment, and your refinancing costs totaled $3,700, your break-even point is in 37 months.  It makes sense to refinance if you're certain that you'll be able to recoup your refinancing costs while you're still living in your home. Ideally, you should recover your costs in one year or less.

A matter of term
In many cases, refinancing may mean taking out a mortgage with a new term equal to the original term of your refinanced mortgage, not equal to the remainder of the term on that mortgage. Depending on when you refinance, this can make a significant difference in the amount of interest you'll pay overall.
Example: You have a $200,000 30-year fixed mortgage at 6%, with a monthly payment of $1,199. After 6 years, you have paid $69,131 in interest on that mortgage. At that point, you refinance your remaining principal balance of $182,796 for a new 30-year fixed mortgage at 5% with a monthly payment of $981. Over the life of that new mortgage, you will pay $170,468 in interest. So, your total interest payment will be $239,599 ($69,131 + $170,468). If you had stayed with your old mortgage at 6%, you would have paid a total of $231,676 in interest. Instead, by refinancing when you did, you'll pay an extra $7,923 ($239,599 - $231,676) in total mortgage interest.

Because of this, you may want to consider applying the monthly mortgage payment savings after refinancing toward additional principal payments. By doing so, you can reduce both the term of your mortgage and the total interest you'll pay.
Crunch the numbers first
In many cases, refinancing looks attractive in the short term because your monthly mortgage payment will be lower--and that can be important to your monthly budget. But will it really save you money to refinance, both in the short run and in the long run? That depends on many factors. Look at them all before you make your decision.
I hope you found this newsletter informative.  KFP offers a free, no-obligation initial consultation to start the financial planning process.  To learn more or schedule a time, call 817-993-0401 or e-mail jean@keenerfinancial.com.
Jean Keener, CRPC, CFDP
Keener Financial Planning

Keener Financial Planning is a fee-only financial planning and investment advisory firm working with individuals at all financial levels.
All newsletter content Copyright 2009, Keener Financial Planning, LLC.