Building Your Credit Today
As part of a comprehensive wealth accumulation discussion, I talk with
individuals about the importance of home ownership. In many cases accumulating
enough funds for the down payment/closing costs and securing a loan are
key areas that have to be addressed. Should credit problems become a stumbling
block, I often recommend a secured credit card as the best way to start
building/repairing your credit. If you are a student, you may qualify
for a student credit card. Not only does a good credit history determine
your credit worthiness but landlords, banks and even employers read this
report to assess your track record of financial responsibility.
Credit cards are not a luxury. They are required financial tools. If you
travel, you need a credit card to book flights, reserve hotel rooms and
rent cars. Plus the “convenience” of buying consumer items
is very much credit card orientated.
Before you obtain an unsecured credit card, loan or mortgage you first
need to prove your "credit worthiness". The way to do this is
to establish good credit history and one of the easiest ways to get started
is getting a secured credit card.
A secured credit card is backed by your personal savings. Unlike an unsecured
credit card you will need to make a deposit before receiving your card.
This can be submitted instantly by including your bank details when completing
a secured credit card application. Generally, once a deposit is made to
a secured credit card company your deposit is safe and also makes monthly
interest. The secured credit card is then mailed to you typically between
5-10 business days.
There are numerous secured credit cards on the market. You should pick
the one that will best fit your particular financial situation. Like all
consumer purchases it is best to shop around. There are various interest
rates, security deposit requirements, and fees. To get your secured credit
card you should be ready to spend from $50 to $500 out of your pocket.
Credit may vary between cards but is usually around 20% of your total
deposit. For instance, if you were to deposit $500 you would receive a
credit line of $600. You will be able to use your major secured credit
card for virtually all purchases. Providing you make your minimum payments
on time, the growth of your credit will get reported to all the main credit
bureaus every month. Equifax, Experian, and TransUnion are the major credit
bureaus. In some states, you are entitled to a free copy of your credit
Soon you will have established a “positive” credit history
to receive an unsecured credit card with a higher credit limit or even
that mortgage loan.
You Have the Right Mortgage?
Often I am asked questions
concerning home mortgages due to the current historically low interest
rate environment many of my client’s have taken advantage of to
refinance mortgage debt, move up to a larger home and buy a second or
even third property. One of the easiest ways to figure out if your current
mortgage is best suited to your particular situation is by asking yourself,
“How long will I be in the house?” You probably can’t
answer with absolute certainty, but you can play the odds.
Let us assume, for example, you are single and plan to buy a small condo
but you can easily envision yourself married in a few years; or you’ve
just started a family and plan to trade up to a new home in five to seven
years. In both of these cases an ARM (Adjustable Rate Mortgage or Variable
Rate) would probably best meet your financial needs. On the other hand,
maybe you’ve had your family and want to settle into a place with
a good school system that your kids will need for the next 12 years. Here,
a fixed rate mortgage will probably best suite your need.
Where a fixed rate mortgage locks in a rate for the length of your loan
(between 10 and 30 years), an ARM rate is fixed for a short period of
time (usually between 1 to 10 years) and then varies every year after
that period. The longer the rate is fixed, the higher the interest rate
you’ll get. Generally speaking, ARMs will cost you less in the short-term.
The risk with an ARM is that if you stay in the property longer than the
allotted fixed period the initial low interest rate could rise. What is
worse, you could end up paying much more than you bargained for than if
you had just went with a fixed rate originally.
Let’s say you need a mortgage of $150,000. A 30 year fixed rate
of 6% will give you a mortgage payment of $900 a month whereas a 5/1 ARM
at 4.875% will give you a mortgage payment of $794. This is a savings
of $106 per month and $6,360 over the first five years of the loan. You
could use this additional money to fund your child’s education,
reduce monthly debt or add it to your retirement savings. This $6,360
could be worth over $76,000 if invested at 10% annually for 25 years.
Why give more of your hard earned savings to a bank if you don’t
The general rule is if you plan on owning your home for 7 years or more,
a fixed rate mortgage is probably best. However, if you think you will
be moving before 7 years, then an ARM might make more sense. Be sure to
shop around for the most competitive rate you can find.
PUT YOUR TRUST IN TRUSTS
No longer just for the super-rich, trusts are becoming an important method
of estate planning for more and more people concerned with the management
and distribution of their legacy.
trust is a written, legal arrangement that allows you to arrange for the
transfer of property or assets in order to take care of a third party.
There are three parties involved in the execution of a trust. First, there
is the donor (also known as a grantor or a settlor) who
provides the assets to be passed along, and who also decides the terms
of the trust.
The donor chooses the beneficiary or beneficiaries, the
person, people, or entity who will receive the proceeds of the trust.
The donor also appoints the trustee, which essentially
acts like the executor of a will. The trustee controls the assets in the
trust, oversees the investments, and is in charge of making payments to
the beneficiary. Trustees can either be a person or a corporation—an
actual trust company or a bank. Some trusts have both types. The individual
trustee may better understand the donor’s intent or family situation,
and the corporate trustee knows how to invest money.
When you sign over assets to a trust, you no longer own them. The trust
does. If you are also the trustee, however, you have complete control
to buy, sell, or give away the assets as you like. With certain trusts,
one person can hold multiple roles. The donor, for example, can also be
the beneficiary if the purpose of the trust is to pay for the donor’s
support if he becomes incapacitated. Some trusts let you be donor, beneficiary,
and trustee at the same time.
offer many benefits for many purposes
You control how the assets in the trust are invested and distributed.
You specify how much your beneficiaries receive, and on what schedule.
You can restrict your trust so that beneficiaries only receive money if
they need a college education, or if they buy a house. These ground rules
are set up in the trust document, which is legally bound to follow your
wishes to the letter.
A trust can protect and provide for you if you should ever become sick
or unable to care for yourself. You can protect your minor children in
case your spouse remarries after your death. Your estate also benefits.
Certain types of trusts allow you to transfer assets tax-free or avoid
inheritance taxes. Because a trust does not go through probate court,
you and your beneficiaries save time and retain your privacy as well.
Trusts can also potentially avoid conflicts between surviving relatives.
You can limit how the assets are used by the type of trust you establish.
For example, support or special needs trusts allow you to provide support
for a child or a spouse with a serious illness or disability. Spendthrift
trusts let you limit the amount of money an irresponsible family member
receives at one time. A generation-skipping trust permits you to leave
money for a grandchild, and the parent can access it without getting taxed.
A charitable trust allows you to help your favorite charity or your alma
mater—and you can receive tax benefits, and sometimes an annuity,
during your lifetime. There are even blind trusts, usually held by politicians
or public officials, where a trustee makes investment decisions without
the owner’s knowledge to avoid any possible conflicts of interest.
Trusts can be revocable or irrevocable. With the former, you can change,
add to, or cancel the terms of the trust, its beneficiaries, and its assets,
as well as who serves as trustee, at any point up until your death. However,
the big drawback is that the holdings will be considered part of your
estate, and are therefore susceptible to taxation.
Irrevocable trusts, like they sound, cannot be canceled or changed once
executed, so you had better be certain everything is set up as you wish.
This type of trust, however, keeps the assets within it from being counted
as part of your estate, and it may be useful in keeping the assets away
from your creditors.
But don’t do it yourself
Trusts may not be the solution to every situation. First of all, trusts
are complicated to set up, so you should definitely consult a financial
professional or a lawyer experienced in estate planning. Beware of con
artists selling do-it-yourself trust kits or financial companies that
sign you up for mass seminars to sell you other investment vehicles.
You’ll probably need more than one trust to accomplish every single
one of your goals, so the need for a professional is undeniable. With
the new tax laws, estate tax levels and rules are going to change every
year until 2010, and it’s in your best interests to make sure the
trust document follows federal and state laws. Of course, you should discuss
your situation with a qualified financial professional who can best advise
REIT STUFF: REAL ESTATE INVESTING FOR THE REST OF US
Despite a troubled economy these days, the real estate sector still percolates
along at a relatively healthy pace. You don’t have to be Donald
Trump or Mort Zuckerman to potentially benefit from investing in real
All you need to do is check out a real estate investment trust (REIT).
A REIT (pronounced “reet”) is a corporation that invests in,
and usually manages, real estate properties that generate income. When
a company incorporates as a REIT, it pays low or no federal corporate
or state income tax. REITs are required by law to annually distribute
at least 90 percent of their taxable income to shareholders who in turn
pay taxes on dividends and capital gains. REITs are forbidden from passing
along their tax liabilities to investors.
A REIT allows individual investors to essentially reap the financial benefits
of being a landlord without all the risks involved with developing and
managing properties. Unlike a regular hands-on landlord, investors don’t
get much say in certain crucial matters such as how properties are managed,
who the tenants are, or when holdings should be sold.
The health of the stock or bond markets has little effect on the performance
of a REIT since it is influenced by a different set of variables. Investors
look to REITs because they may provide high levels of income with long-term
moderate growth. The returns of a REIT tend to fall between those of stocks
and bonds, and often have relatively secure yields that outpace inflation.
The returns on REITs have held their own against dot-coms, the Enron and
Worldcom meltdowns, and even September 11. In fact, over the past twenty
years, REITs have averaged a 13.8-percent annualized return, which stacks
up pretty formidably against other asset classes.
Because of their stable returns, REITs usually suit investors looking
to diversify their portfolios and minimize risk. They have a high degree
of liquidity, meaning they can be sold on the stock exchange and converted
to cash when necessary.
Congress created REITs in the 1960s in order to enable individuals to
invest in large-scale real estate projects. It figured the easiest way
to do this was to set up a system that was similar to purchasing other
securities: through publicly traded stock on a securities exchange. According
to the National Association of Real Estate Investment Trusts, there are
around 300 REITs in the U.S., with a combined $300 billion in assets;
about 200 of them are publicly traded.
A board of trustees, often with backgrounds in real estate sales and development,
determines how a REIT invests. It also hires management personnel, who
are often given an ownership stake in the REIT to ensure that properties
are being managed to benefit every investor. The board analyzes the balance
between the supply of new buildings and the demand for them. When the
amount of office space grows too fast for the market to snap up, rents
decrease and property values can decline, which can badly affect the REIT’s
As you would do with any other investment, consult with your financial
professional before you invest. He or she will be able to help you determine
if a REIT has a place in your investment portfolio.
411 on Reverse Mortgages - Part II
Last month I provided information regarding Reverse
mortgages and how it could be leveraged financially by older homeowners.
How much can you borrow?
Reverse mortgage programs vary greatly. The amount you can borrow and
the amount that must be repaid can vary from one plan to another. Before
applying for a reverse mortgage, decide how much money you need to borrow.
The amount you are eligible to receive is based on your age, the appraised
value of your home, and the interest rate the lender charges. Generally,
the older you are, the more cash you can receive. Also, the greater the
value of your home and the lower the cost of the loan, the more cash you
are likely to receive.
If you choose a credit line rather than monthly payments or a lump sum,
you can take cash when you need it up to the amount of your credit line.
Some reverse mortgages include a credit line that steadily increases over
How much does it cost?
The total amount you will owe at the end of the loan will be how much
cash was paid out to you by the lender plus all the interest that has
accumulated on that loan. However, you can never owe more than the value
of the home at the time that the loan is repaid. Most reverse mortgages
are “non recourse” loans, which means that the lender cannot
try to claim your (or your heirs’) income or other assets —
only the value of the home. The application costs should include only
the cost of an appraisal for your home and the cost of a credit report.
Any other costs are usually paid for with an initial payment from the
loan itself and become part of the total balance you owe. (Many of these
other costs are like those found in regular mortgages: interest charges,
origination fees, title search, and so on.)
Types of reverse mortgage plans
Home Equity Conversion Mortgage (HECM) loans
HUD, working through the Federal Housing Administration (FHA), insures
reverse mortgage plans under the Home Equity Conversion Mortgage program.
These mortgages are available from HUD-approved lenders across the country.
A list of HECM lenders is available from the Fannie Mae Public Information
Office, at 1-800-7FANNIE (1-800-732-6643).
Fannie Mae loans
Fannie Mae, a quasi-governmental agency, offers its own reverse mortgage
program, the Home Keeper Mortgage. In addition, Fannie Mae offers the
FHA-insured HECM loan discussed above.
Also known as conventional reverse mortgages, lender insured loans offer
monthly loan advances or loan advances plus a line of credit. Be sure
to check out the financial strength of the company offering the loan.
Charges tend to be higher than those of FHA or Fannie Mae plans, but it’s
also possible to find higher maximum loan advances. Some loans include
an annuity that continues making monthly payments, even if you sell your
house. (These annuity payments may be taxable and can affect your eligibility
for Supplemental Security Income and Medicaid.)
Public sector loans
Many state and local governments offer loans, secured against the value
of the home, to provide money for paying property taxes or for repairing
or improving homes. These are somewhat limited in scope, and generally
available only to low- or moderate-income homeowners. Contact a representative
from your city or state government for details.
Choosing a reverse mortgage plan
Before shopping around for reverse mortgage plans, you’ll need to
decide the following:
- How much money you need?
- How long you will need the money?
- What form you would like the payments to take (lump sum, monthly payments,
Put together a list of lenders offering reverse mortgages. Reverse mortgages
are offered through banks, mortgage companies, savings associations, and
credit unions, as well as through the government agencies discussed above.
Contact three or more lenders (also called originators). Speak with loan
officers by phone to get an idea of the options available. Ask for information
by mail, including a breakdown of all costs and options a
Meet with lenders and ask questions. The Federal Truth in Lending Act
requires lenders to inform borrowers about the plan’s terms and
costs, including the Total Annual Loan Cost.
Ask if the reverse mortgage is insured. For insured mortgages, loan advances
will continue and you may remain in your home as long as you live, even
if the amount borrowed exceeds the value of the home. Fixed-term, uninsured
loans are available in a few states, but are risky, since the balance
is due at the end of the term. If you are unable to refinance when that
time comes, you could be forced to sell your home to repay the loan.
Don’t choose without counseling
Reverse mortgages can be an excellent option for some people, but you
should be very careful to study all your options. It is strongly recommended
that you take advantage of one of the readily available forms of consumer
counseling before taking out a reverse mortgage.
If you seek FHA-insured or Fannie Mae reverse mortgages, you will automatically
receive financial counseling from an independent, third-party agency at
little or no cost. You will also be told about alternatives and options
that may be more appropriate for you than the reverse mortgage.
If you are looking at other kinds of reverse mortgages, contact a HUD-approved
housing counseling agency that will advise you at little or no cost. You
may also want to discuss the loan with an investment professional or an
attorney specializing in elder law who is familiar with reverse mortgages.
411 on Reverse Mortgages - Part I
older people are house-rich and cash-poor. They own a home, free and clear,
that may be worth hundreds of thousands of dollars. Yet they have little
income and can’t afford repairs, taxes, health care, or living expenses.
They could sell their house and find a less expensive place to live, of
course. If they have lived in the home a long time, have friends and family
living nearby, and feel comfortable and secure in the neighborhood, moving
may be a very unpleasant option. For these people, a reverse mortgage
maybe the answer.
What is a reverse mortgage?
Reverse mortgages, also known as home equity conversions, allow homeowners
over age 62 to convert home equity into cash, while continuing to live
in their homes. In contrast to the conventional “forward mortgage,”
where you repay debt each month and eventually own your home, a reverse
mortgage offers you a loan against the value of your home. This means
that the amount of debt increases over time as payments are made to you
and as interest compounds. A reverse mortgage can provide cash as monthly
payments, a lump sum, or a line of credit. The monthly payments may be
for a specific number of years or for as long as you live in your home.
If you use the loan to buy an annuity, the payments can continue for the
rest of your life, no matter where you live. These funds are not considered
income for tax purposes and do not affect your Social Security or Medicare
benefits (Supplementary Security Income and Medicaid can be affected).
You retain title to your home and you are responsible for taxes, repairs,
and maintenance. The loan is repaid with the funds received when the home
is sold — either when you move or when you die. In some cases, you
can keep receiving monthly payments as long as you live, even if you do
have to move out of your home. Your loan might also become due if you
fail to pay your property taxes, fail to keep up your homeowner’s
insurance, or fail to maintain the property. The lender may also be able
to make extra payments to you to cover those expenses.
should take a reverse mortgage?
- A reverse mortgage might make sense for you if you plan to stay in your
home for several years.
- If you plan to stay only a short time, the up-front costs can make a
reverse mortgage as expensive as a short-term loan.
-You are willing to use up some or all of the value of your home.
- A reverse mortgage leaves fewer assets for your future use or for the
benefit of your heirs.
Who is eligible?
To qualify for most reverse mortgages, borrowers must be at least 62 years
old and the home being borrowed against must be the owners’ principal
residence (where they spend the majority of the year). If the home has
more than one owner, all must become borrowers. The homeowners must either
own the home free and clear or have only a small remaining debt which
is to be paid off immediately using a cash advance from the reverse mortgage.
Most borrowers start by paying off their remaining debt. Single-family,
one-unit dwellings are eligible for all reverse mortgages. Multi-unit
owner-occupied dwellings, condominiums, and manufactured homes are eligible
for some but not all reverse mortgage programs. Mobile homes and cooperatives
are not eligible.
Affirmative Action Using Retirement Plans and Life Insurance
Whether you’re age 25 or 65, planning for a financially secure future
is an evolving process. As you get closer to retirement, you’ll
have a good understanding of how far your retirement assets will really
go. Will those assets take care of you and your spouse? Will there be
enough left to provide a legacy to your children or even their children?
With proper planning, the assets in a traditional Individual Retirement
Account (IRA) could help you create a source of income for several generations
of your family. To create this type of legacy with your IRA, you’ll
need to apply what’s known as the “Stretch IRA” technique.
Stretch IRA refers to the two-pronged strategy of 1) withdrawing from
your IRA only the required minimum distributions each year after you reach
age 70 and 2) making the proper beneficiary designations.
The mechanics behind a Stretch IRA are fairly simple. The process begins
when your retirement money is distributed to you.
Six steps to a good stretch:
1. Open an IRA
2. Name your spouse as your primary beneficiary
3. After your death, your spouse rolls remaining assets to his or her
4. Your spouse names a son or daughter as beneficiary
5. After your spouse’s death, your son or daughter receives minimum
distributions from the IRA and names his or her child as beneficiary
6. Distributions continue until the beneficiary IRA is exhausted
One cautionary note: make sure your beneficiaries know what your
plans are and that each beneficiary knows what they are supposed to do.
If a beneficiary cashes out, your plan won’t work.
Benefits of the Stretch IRA
There are several ways that traditional IRA owners and their beneficiaries
may benefit by employing the stretch technique:
1. More money may be passed along by the IRA owner to the next generation.
2. If the owner’s situation changes while living, he or she still
has the right to liquidate as much of the IRA as needed.
3. If the beneficiary’s situation changes after the death of the
owner, the beneficiary can always
take a full or partial liquidation instead of the minimum required distributions.
4. Payments to beneficiaries are paid out as death distributions. Therefore,
there is no 10% penalty even if the beneficiary is under age 59.
Is a Stretch IRA right for you?
The stretch technique may or may not be a good idea for you. It depends
on what you have determined your retirement needs are. Generally, traditional
IRA owners who don’t need to live on their IRA assets, who want
to minimize taxes paid in retirement, and who wish to create a legacy
may want to consider this strategy. Should you find that you wish to create
a greater legacy for your children and their children or if you don’t
have the liquid assets available, you can always purchase life insurance
which provides a federal and state tax-free death benefit. As a starting
point, you should talk with your investment professional or tax adviser.
Each year, you should perform this check-up to make sure your
financial house is in order. The following checklist can serve as your
financial laundry list for a review every year.
1. Know what you have. Prepare a net-worth statement along with a balance
sheet. What do you own? How do you own it? And where is it? Keep a copy
of this offsite, maybe with a trusted friend or family member who might
also serve as your executor. Keep a statement of your year-end position
detailing your assets. It is suggested that you keep year-end statements
2. Does the above list make sense? Do you have an investment strategy
or are you investing on a whim? Are your assets aligned with your goals?
If not, start making changes now. Remember that a good plan is worthless
if you are not taking action.
3. Review your tax situation. Check your deductions, Alternative Minimum
Tax (AMT), and life changes. Review your assets for capital gains and/or
losses. Consider gifting appreciated stock to charity so that you can
take an income tax deduction on the value of the stock and avoid paying
capital gains taxes on the appreciation.
4. Know your company benefits and how they may best benefit you. If you
are married or have a significant other, review benefits for overlaps
or gaps. Look for the most cost-efficient and appropriate choices that
match your needs. Don't get caught at the 11th hour of your open enrollment
period and default to last year's choices. Use your benefits wisely.
5. Make a record of household and/or office contents, possibly using a
video recorder or camera. Keep the written record, pictures, or video
somewhere other than your house! Even the best records won't do you any
good if they are lost in the same catastrophe.
6. Take your photo negatives to your safety deposit box or other safe
place. In the event of a fire or other disaster, people often say that
losing a lifetime of photos is the most devastating loss of possession.
Most homeowner policies will even pay for replacement cost.
7. Prepare and/or review wills and associated documents such as Durable
Powers of Attorney and advance Health Care Directives. Also, do the people
who need to act on your behalf know your wishes or have copies of the
8. Check your Social Security earnings history. Social Security automatically
sends a history statement a few months prior to your birthday each year.
If you have not received yours, request one. Also follow up every three
years by requesting and checking this statement for errors and omissions.
It is much easier to correct a problem within a three-year span than to
recognize and correct a mistake made 30 years ago.
9. Review your insurance policies. Has your homeowner's policy increased
in coverage as the value of your property increased? Is the level of content
insurance adequate? Do you have replacement cost coverage? What is the
limit of liability coverage? Given your level of net worth, do you need
an "umbrella" liability policy? What happens to your family
in the event of disability or death? Are you insured? Is it adequate?
Have you read the fine print? Are your beneficiaries current?
10. Check your credit report. See who is requesting credit information
about you. Check with Equifax (1-800-685-1111), Experian (1-888-397-3742),
or TransUnion (1-800-680-7293). Don't wait until you need a mortgage to
identify problems or mistakes. Also call the credit agencies above to
request removal of your name from credit bureau mailing lists and stop
unsolicited pre-approved credit card offers.
11. Write a letter of instructions and talk with your family. Put together
a map that will allow your family to take over your finances and ensure
that your wishes are carried out. List trusted advisers along with their
phone numbers. It's also not a bad idea to sit down with your family and
let them know what you have. While how much you share with your family
depends on how much you trust them, you can at least let them know that
an inventory exists and where to find it.
Back to Top
tax-prep tip: Take your time and use a calculator!
I’m not a tax expert, but if you do your taxes yourself, you might
find these tips helpful. Every year, over 4 million math errors are made
on federal tax returns. Of course, we all know the outcomes of these mistakes:
delays in processing refunds rightfully due to you or, worse, the dreaded
audit. Nobody likes to do taxes, and we tend to rush through filling out
the forms. But a little care and an eye toward the following problems
may save you many headaches down the road.
1. Make sure you have the correct social security numbers for you, your
spouse, and your kids if you’re claiming them. It sounds silly,
but almost 1.2 million of us mess this up each year.
2. Don’t forget to sign your return. And date it. Without a signature,
the IRS will consider the return invalid and mail it back to you. However,
interestingly enough, the IRS tends to be less picky about this if you
happen to be mailing them a check!
3. Crunch the numbers twice. Every year, hundreds of thousands of people
miscalculate their income and the amount of personal exemptions. This
increases your risk of coming up with an incorrect amount for either your
amount due to the IRS or your refund.
4. Proceed carefully on the tax tables. Yes, there are too many of them,
and yes, they’re hard to read without a telescope. But when you
enter the wrong amount, you may end up overpaying or being under-refunded.
If you don’t have 20/20 vision, you might want to use a tax-prep
software package, which will figure those amounts out for you automatically.
5. Don’t seal the envelope until you know all the required documentation
is included. You’d be surprised how often people forget to include
W-2s, 1099s, and other proof of income or deductions.
6. Make sure you check your previous annual returns for any carryover
credit you may have. You have five years to carry forward such credits
(like unmatched investment losses), so you might as well use them to reduce
your current year’s liability.
7. Don’t forget the baby-sitter. The child care tax credit can be
worth up to $4,800 for you—but you have to include your provider’s
social security or federal identification number on your return. And there’s
a box that must be checked next to your children’s names on your
8. Remember your refinancing. If you were among the many who took advantage
of last year’s lower interest rates and refinanced your mortgage,
you can write off points you pay over the life of the loan. And start
a tickler file for your 2003 return and drop a reminder in it that you
can write off points next year as well.
Investing: Investments that "Really" Let You Sleep At Night
Socially responsible investing (SRI) was born of the “avoidance
investing” of the 1920s in which individuals shunned the so-called
“sin stocks” of the Prohibition Era—shares of companies
connected with alcohol, tobacco, or gambling. Almost half a century of
war, protest, and reform would produce the first investment vehicle fund
in the mutual fund industry. As the first investment vehicle to adopt
broad standards of social responsibility in choosing its investments,
it ushered in a new type of investment philosophy that has been the subject
of much myth and controversy for almost three decades.
Taking a stand
The cornerstone of SRI is social screening—the inclusion or exclusion
of corporate securities in investment portfolios based on social or environmental
criteria. SRI is a catchall phrase, which, at its broadest, refers to
all investment and money management activities undertaken according to
certain social values instead of, or in addition to, purely financial
considerations. Differing political, social, and ethical viewpoints among
investors spawn differing opinions on what is socially responsible, allowing
for as many different SRI investment vehicles as there are socio-environmental
issues and individuals. There is no single definition, no single prototype,
leaving the potential number of different SRI vehicles limitless. Potential
screens range from the standard tobacco, alcohol, gambling, and pornography
screens, to animal testing and cruelty-free issues, gay and lesbian rights,
international citizenship, pollution, abortion, and contraception.
Many managers integrate SRI research into their investment process, making
sure that they adhere to very rigorous investment disciplines first, and
then meld in social research second. The intersection of the two processes
leads to a portfolio that is disciplined and rigorous from an investment
thought process, but happens to have a social overlay. First and foremost,
most managers probably agree that clients want investment performance
and that neither investment results nor investment disciplines can take
a back seat to social screenings.
Which brings us to
the long-standing rub on SRI—ethical objectives vs. investment performance.
The great debate that morals and money do not mix still rages, with many
experts asserting that performance should not be subordinate to personal
values and social concerns when it comes to investing. For nearly three
decades, pundits have suggested that the two disciplines should be mutually
exclusive and that to apply ethical objectives to a portfolio is to sacrifice
investment performance. But academics studying the topic have yet to find
a clear-cut relationship, positive or negative, that links social criteria
and stock performance.
A myth debunked
So how do socially
responsible funds stack up? An enlightening survey commissioned by a leading
mutual fund sponsor revealed that investors are more aware of socially
responsible investment vehicles today than ever before—and are more
likely to invest in them. The survey, conducted by Yankelovic Partners,
found that 43 percent of investors were familiar with the idea of socially
responsible investing, up from 30 percent in 1996. Twenty-five percent
of those surveyed said they had invested in such vehicles, an increase
of 14 percent from 1996. Even in the turbulent stock markets of 2000,
social screened investments of all types continued to equal or exceed
their non-screened counterparts when it comes to performance and ratings.
Poised for growth
Increased SRI awareness has led to increase SRI offerings. In a report
from the Social Investment Forum (SIF) released in November 1999, socially
responsible investing assets under management in the U.S. came in at just
under $1.5 trillion, up from $529 billion in 1997, an increase of 183
percent. The report also confirmed that all segments of social investing—socially
screened investment vehicles, advocacy efforts, and community investment—combined
for over $2 trillion, an increase of 82 percent from 1997. SRI now accounts
for roughly 13 percent of assets under management in the U.S.—one
out of every $8 invested. As more and more investors find they can satisfy
their consciences and their investment objectives at the same time, that
percentage will only climb higher, positioning socially responsible investing
for even greater growth well into the 21st century.
to Financial Matters
and Your Finances
over 1.1 million divorces occurring each year, it is becoming essential
for many individuals to be familiar with issues concerning divorce –
planning ahead, knowing what steps to take, and moving forward as an informed
and confident single person.
life after divorce
Once you and your spouse decide to divorce, there are many questions you
need to answer. Do you know the tax implications of alimony and child
support? Are you thoroughly familiar with the various investments and
savings accounts you own with your spouse? Have you decided how to divide
your property? It is strongly suggested that you seek the advice of professionals
who will work as your advocate and save you money over the long term.
Make sure your attorney is well versed in divorce tax issues in order
to help you avoid costly tax pitfalls. A financial planner can help you
develop realistic projections of living expenses – especially important
if your spouse handled most of the finances – and can also advise
you on which assets to keep, how to invest your settlement money, and
how to follow a budget that will adapt to your new lifestyle.
Other ways to plan
1. If you still have underage children, make sure you and your children
are fully insured, including health, disability, and life insurance.
2. Review and revise your will, name a guardian for children under the
age of 18, add a living will and power of attorney.
3. Report your new status in writing to all institutions that gave you
credit, and cancel joint credit cards. Establish your own credit if you
haven’t already done so.
4. You also should learn all you can about your spouse’s finances,
including savings accounts, retirement plans, pensions, and investments.
Locate any financial documents indicating income, assets, and debts, and
make copies of all recently filed financial statements.
Important tax issues
- You recognize
no gain or loss on the transfer of property (such as real estate or
stocks) to your spouse, incident to a divorce proceeding.
- In general, your
tax filing status depends on your marital status on the last day of
the tax year (December 31 for most taxpayers).
- Generally, legal
fees incurred in a divorce proceeding are non-deductible expenses, but
tax advice fees can be deducted.
divorce – moving forward
1. Get all your paperwork in order, including your final divorce decree
and settlements papers. Make several copies, and put the originals in
a safe deposit box.
2. Develop a budget and start recording what you spend each month.
3. Evaluate your current financial situation and begin investigating investments
that would be appropriate for your new lifestyle.
to Financial Matters