September 17, 2010
Vol 3, Issue 9
Jean Keener
Greetings!
Jean KeenerGood morning. 
 
Thank you so much if you voted in the Best of Keller.  I'm delighted to share that I was voted Best Financial Planner again.  You can see the winners in all the categories next week when the "Best Of" section is published in the Keller Citizen.  I appreciate your support!
 
Last month in the market stocks were down sharply with the S&P 500 losing 4.5% for August.  The results took us back into negative territory for the year, although we've been making up ground in September so far.  The bond market had better news with positive returns in the 1% - 2% range.  This year has provided near continual reminders of the importance of diversifcation, not reacting to short-term fluctuations, and continuing to focus on your long-term financial plan. 
 
In this month's newsletter, we have information on teaching college students about money, 2010 year-end tax planning, the higher FDIC insurance limits being made permanent, and more.  As always, feel free to e-mail me at [email protected] with requests for newsletter topics you'd like to see covered or to discuss concerns or questions on anything in the financial world. Thank you, and live well.
In This Issue
College Students and Money
2010 Year End Tax Planning
Higher FDIC Insurance Limits
A stronger dollar's effect on your portfolio
Keller Public Library free Retirement Planning Workshop
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Helping College Students Learn About Money
Learning about MoneyAs college gets into full swing this fall, one of the biggest pitfalls new students away from home can encounter is money issues.  Here are some topics to cover with your child, and there are plenty of good reminders here for all of us!
 
Lesson 1: Budgeting 101
 
Perhaps your child already understands the basics of budgeting from having to handle an allowance or wages from a part-time job during high school. But now that your child is in college, he or she may need to draft a "real world" budget, especially if he or she lives off-campus and is responsible for paying for rent and utilities. Here are some ways you can help your child plan and stick to a realistic budget:
 
Help your child figure out what income there will be (money from home, financial aid, a part-time job) and when it will be coming in (at the beginning of each semester, once a month, or every week).
 
Make sure your child understands the difference between needs and wants. For instance, when considering expenses, point out that buying groceries is a need and eating out is a want. Your child should understand how important it is to cover the needs first.
 
Determine together how you and your child will split responsibility for expenses. For instance, you may decide that you'll pay for your child's trips home, but that your child will need to pay for art supplies or other miscellaneous expenses.
 
Warn your child not to spend too much too soon, particularly when money that has to last all semester arrives at the beginning of a term. Too many evenings out in September could lead to a December of too many evenings in eating cold cereal.
 
Acknowledge that college isn't all about studying, but explain that splurging this week will mean scrimping next week. While you should include entertainment expenses in the budget, encourage your child to stick closely to the limit you agree upon.
 
Show your child how to track expenses by saving receipts and keeping an expense log. Knowing where the money is going will help your child stay on track. Reallocation of resources may sometimes be necessary, but help your child understand that spending more in one area means spending less in another.
 
Encourage your child to plan ahead for big expenses (the annual auto insurance bill or the trip over spring break) by instead setting aside money for them on a regular basis. Caution your child to monitor spending patterns to avoid excessive spending, and ask him or her to come to you for advice at the first sign of financial trouble.
 
You should also help your child understand that a budget should remain flexible; as financial goals change, a budget must change to accommodate them. Still, your child's ultimate goal is to make sure that what goes out is always less than what comes in.

Lesson 2: Opening a bank account
 
For the sake of convenience, your child may want to open a checking account near the college; doing so may also reduce transaction fees (e.g. automated teller machine (ATM) fees). Ideally, a checking account should require no minimum balance and allow unlimited free checking; short of that, look for an account with these features:
 
  • A simple fee structure
  • ATM or debit card access to the account
  • Online or telephone access to account information
 
 To avoid bouncing checks, it's essential to keep accurate records, especially of ATM or debit card usage. Show your child how to balance a checkbook on a regular (monthly) basis. Most checking account statements provide instructions on how to do this.
 
Encourage your child to open a savings account too, especially if he or she has a part-time job during the school year or summer. Your child should save any income that doesn't have to be put towards college expenses. After all, there is life after college, and while it may seem inconceivable to a college freshman, he or she may one day want to buy a new car or a home.

Lesson 3: Getting credit
 
If your child is age 21 or older, he or she may be able to independently obtain a credit card. But if your child is younger, the credit card company will require you, or another adult, to cosign the credit card application, unless your child can prove that he or she has the financial resources to repay the credit card debt. A credit card can provide security in a financial emergency and, if used properly, can help your child build a good credit history. But the temptation to use a credit card can be seductive, and it's not uncommon for students to find themselves over their heads in debt before they've declared their majors. Unfortunately, a poor credit history can make it difficult for your child to rent an apartment, get a car loan, or even find a job for years after earning a degree. And if you've cosigned your child's credit card application, you'll be on the hook for your child's unpaid credit card debt, and your own credit history could suffer.

Here are some tips to help your child learn to use credit responsibly:
 
Help your child to get a credit card with a low credit limit to limit risk of running up a large balance.  Explain to your child that a credit card isn't an income supplement; what gets charged is what's owed (and then some, given the high interest rates). If your child continually has trouble meeting expenses, he or she should review and revise the budget instead of pulling out the plastic.
 
Teach your child to review each credit card bill and make the payment by the due date. Otherwise, late fees may be charged, the interest rate may go up if the account falls 60 days past due, and your child's credit history (or yours, if you've cosigned) may be damaged.
 
Emphasize that purchases should only be placed on the credit card if they can be payed in full when the bill arrives. Getting into the routine of running any credit card balance is not a healthy financial habit.  An undergraduate student making only the minimum payments due each month on a credit card could finish a post-doctorate program before paying off the balance.
 
Make sure your child notifies the card issuer of any address changes so that he or she will continue to receive statements.
 
Finally, remind your child that life after college often involves student loan payments and maybe even car or mortgage payments. The less debt your child graduates with, the better off he or she will be. When it comes to the plastic variety, extra credit is the last thing a college student wants to accumulate!
Year End Tax Planning Considerations for 2010
Tax PlanningYear-end tax planning is as much about 2011 as it is about 2010. Often, there's a real opportunity for year-end tax savings when you can predict that you'll be paying taxes at a lower rate in one year than in the other. For example, under the right circumstances, deferring a year-end bonus or potentially accelerating deductions into the current year can pay off in a big way. Of course, to effectively plan, it helps to have a good idea of what next year's tax rates will be. Unfortunately, as 2010 draws to a close, 2011 brings some uncertainty in that regard.
 
Will there be higher tax rates in 2011?

Currently, there are six marginal federal income tax brackets: 10%, 15%, 25%, 28%, 33%, and 35%. These brackets--the result of 2001 tax legislation--expire at the end of 2010. As things stand now, in 2011 the 10% bracket disappears, and the remaining brackets return to their pre-2001 levels: 15%, 28%, 31%, 36%, and 39.6%. Though it would take action by Congress, the president has indicated that he would like to permanently extend the 2010 rates for individuals earning less than $200,000 and married couples earning less than $250,000 (these dollar benchmarks would be reduced by an amount that reflected the standard deduction and exemption amounts), but allow the two highest brackets to return to 36% and 39.6% for higher earners.
 
What about long-term capital gains?

Currently, long-term capital gain is generally taxed at a maximum rate of 15%. If you're in the 10% or 15% marginal income tax bracket in 2010, though, a special 0% rate applies (in other words, you owe no tax on any long-term capital gain). The same rates apply to qualified dividends received in 2010.

These rates also expire at the end of the year. The maximum rate on long-term capital gain in 2011 will generally increase to 20%, with a 10% rate applying to individuals in the lowest tax bracket (special rules would apply to qualifying property held for five years or more). Qualifying dividends will be taxed as ordinary income. The president has proposed to permanently extend the 0% and 15% rates, with a new 20% rate applying to high-income individuals (those in the 36% and 39.6% tax brackets). Again, though, that all depends on what Congress does in the next few months.
 
Other considerations

2010 Roth IRA conversions: A special rule applies to Roth IRA conversions in 2010 that allows you to postpone paying federal income tax on the income that results from the conversion. Instead of including the taxable income that results from the conversion on your 2010 federal income tax return (still an option if you so choose), you can report half the income on your 2011 return and half on your 2012 return. Whether a Roth conversion makes sense for you depends on your individual circumstances, including your marginal income tax rate in 2011 and 2012.
 
Alternative minimum tax (AMT): In a now-familiar pattern, legislation that temporarily increased AMT exemption amounts, forestalling a dramatic increase in the number of individuals ensnared by the tax expired at the end of 2009. Congress is likely to act, but the specifics are uncertain.
Required minimum distributions (RMDs): The requirement to take minimum distributions from IRAs and defined contribution plans was temporarily suspended for 2009; minimum distribution requirements are once again in effect for 2010.
 
Pending legislation: Legislation is pending to extend some popular provisions that had expired, including the ability to deduct state and local sales tax in lieu of income tax on Schedule A, the additional standard deduction for state and local real property tax, and the above-the-line deduction for qualified tuition and related expenses. And additional legislation is likely, too, so stay up-to-date.
Higher FDIC Insurance Limits Made Permanent
Higher FDIC insurance limitsThe Financial Reform legislation that passed this summer made the higher $250,000 FDIC insurance limits permanent.

Generally, deposit accounts at banks and savings and loans insured by the Federal Deposit Insurance Corporation  (FDIC) are insured up to $250,000 per depositor per bank. FDIC insurance covers checking, NOW, and savings accounts; money market deposit accounts; and time deposits, such as certificates of deposit (CDs). It does not cover mutual funds, stocks, bonds, life insurance policies, annuities, or other securities, even if they were bought through an FDIC-insured bank.

You can't increase your protection simply by opening more than one account in your name at the same bank (for example, splitting the money between a checking and a savings account, or opening accounts at different branches of the same bank). However, deposits that represent different categories of ownership may be independently insured. For example, a joint account qualifies for up to $250,000 of coverage for each person named as a joint owner. That coverage is in addition to the $250,000 maximum coverage for each person's aggregated single-owner accounts at that bank. For example, a married couple with three accounts at one bank--they each have $250,000 in an individual account, and they also have $200,000 in a joint account--would qualify for FDIC insurance on the entire $700,000.
 
The limit on the amount protected in one or more retirement accounts at one bank also is $250,000; this is separate from the $250,000 coverage of individual accounts. (Remember, however, that FDIC insurance applies only to deposit accounts, not to any securities held in an IRA or other retirement account.)
 
There also may be additional safety nets. In some states, a state-chartered savings bank is required to have additional insurance to cover any losses beyond the FDIC limits. Some banks also may participate in the Certificate of Deposit Account Registry Service (CDARS), which enables a bank to spread large CD deposits among multiple banks while keeping the amount at each individual bank, including the original bank, within FDIC insurance limits. According to the FDIC, no depositor has ever lost a penny of funds that were covered by FDIC insurance. An online calculator at the FDIC's website, www.fdic.gov, can help you estimate the total FDIC coverage on your deposit account.
 
Credit Unions and Brokerage accounts also have protections in place.  We will cover more on that in future newsletters.
Effect of Stronger Dollar on Your Portfolio

InvestingIn the summer of 2008, investors were watching the dollar shrink. Because interest rates here were still relatively low, investors favored riskier investments that offered higher returns. The euro's value climbed to a record of almost $1.60 at one point. But with autumn came the crisis that shook the global financial system. Panicked investors suddenly decided that dollar-denominated assets such as U.S. Treasury bonds didn't look so wimpy after all. Within three months, a euro was worth 30 cents less. Worries about the European debt crisis and whether the euro would even survive as a currency has kept the dollar at roughly the same level or better for much of 2010.

What does that mean for your portfolio?  

The most obvious impact of a stronger dollar is on the value of overseas investments; the value of holdings denominated in a foreign currency will fluctuate with the exchange rate between that currency and the dollar. Some mutual funds that invest overseas attempt to hedge their currency exposure, using currency futuresand other derivatives to try to limit the impact of that fluctuation on the fund's value. Others do not, hoping that any dollar weakness will increase the fund's value for U.S. investors.  A falling dollar can enhance the returns of an unhedged fund, but the lack of a hedge leaves it unprotected if the dollar strengthens. 

Before investing in an international fund, you want to understand the additional risks of global investments, including political risks, currency risks, and different accounting standards; all of these can vary considerably by country and region. Also, find out whether the fund is hedged or unhedged.

A stronger dollar can affect your portfolio even if you don't think you own any foreign investments. Many U.S.-based multinationals get a substantial percentage of their revenues overseas. A stronger dollar can cut into those revenues as U.S. exports become more expensive for overseas consumers. Also, many broad-based mutual funds include a percentage of overseas holdings among their assets.
Free Retirement Planning Workshop Tuesday September 21
Keller Public Library Free Financial Education SeminarsI am providing a free retirement planning workshop on Tuesday, Sept. 21 at 6:30 pm at the Keller Public Library, and you're invited!
 
This is a repeat of April's popular program and will cover retirement savings strategies and a worksheet to calculate if you're on a track.
  
Space is limited and registration is encouraged to ensure your space. RSVP to [email protected].
 
Future months topics include (always the third Tuesday of the month):
 
October: How much insurance do you really need?  Will focus on the basics of life, disability, and long-term care insurance -- who needs them, when you need them, what kind, and how much
November: Maximizing Social Security Benefits for Baby Boomers (repeat of August's program)
 
The Keller Public Library is located at 640 Johnson Road.
I hope you found this newsletter informative.  KFP offers a free, no-obligation initial consultation to start the financial planning process for new clients.  To learn more or schedule a time, call 817-993-0401 or e-mail [email protected].
 
Sincerely,
 
Jean Keener, CRPC, CFDP
Keener Financial Planning

Keener Financial Planning is an hourly, as-needed financial planning and investment advisory firm working with individuals at all financial levels.
 
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