the wall street journal. personal finance workbook

OTHERBOOKSBYJEFFDOPDYKEAND

THEWALLSTREETJOURNAL

TheWallStreetJournalGuidetotheBusinessofLifeNancyKeatesTheWallStreetJournalCompleteMoneyampInvestingGuidebookDaveKansasTheWallStreetJournalCompletePersonalFinanceGuidebookJeffDOpdykeLoveandMoneyALifeGuidetoFinancialSuccessJeffDOpdyke

INTRODUCTION

PART1

BUILDINGYOURFINANCIALBASE

CHAPTER1BudgetingThePersonalBudgetTheSpendingPlanPayYourselfFirstEmergencySavingsTheAnnualBudget

CHAPTER2BankingCheckingSavingsandCertificatesofDepositCheckingAccountsCertificatesofDepositmdashandWhenBreakingOneMakesSenseBuildingaCDLadder

CHAPTER3PlanningPreparingfortheWorstInsuranceDoINeedInsuranceHowMuchInsuranceDoINeed

CHAPTER4BorrowingAccumulatingandManagingDebtWarningSignsYouCarryTooMuchDebtIsYourDebtTooHighPayingDownDebtBuyingaHomeRentingVersusBuyingWeighingtheTrade-OffsHowMuchCanYouAffordShoppingforaLoanTaxSavings

CalculatingtheEquityinYourHomeToRefinanceorNotTheOldCollegeTrySavingforaChildsEducationHowMuchtoSaveBuyingaCarTheInsandOutsofAutoLeasesTurningaMoneyFactorintoanInterestRateComparingLeasesCHAPTER5BePreparedmdashItsNotJustaMottofortheBoyScoutsTheWalletRegisterFinancialAccountsSafe-DepositBoxes

PARTII

BUILDINGYOURASSETS

CHAPTER6InvestingDeterminingYourNetWorthRatingYourToleranceforRiskShortTermLongTermSomethinginBetweenCompoundingTheMostPowerfulForceintheUniverseFirstThingsFirstBrokerage-FirmBasicsWallStreetinWordsandFormulasCalculatingYourRateofReturnIndexInvestingNoEffortRequiredExchange-TradedFundsMinimalEffortRequiredDollar-CostAveragingCHAPTER7RetirementPlanningFeatheringtheNestEggHowMuchWillINeedinRetirementAssetAllocationRocketScienceforBeginners

AssetAllocationModelsWhereDoIInvestWhatMightaDiversifiedPortfolioLookLikeCompanyStockBuySellorHoldTheABCsofIRAsAnnuitiesGreatforSomeLousyforManyWhichAnnuityIsRightforMeATaxingMatterCONCLUSION

ThesimplefactaboutpersonalfinanceisthatmanagingyourmoneyrequiresabitofmathSorry

Intruthmostofthemathiseasyandobviousthoughsomeofitcanseemcomplexwhenyoumustmakecomparisonsbetweensaybuyingacarandtakingtherebateorthe 0 financing or leasing the vehicle insteadWith some of it like gauging yourpotential financialneeds for retirementorgauging thecostsof collegeeighteenyearsfromnowmdashwellitssometimeshardtoevenknowwheretobegin

ThusthisworkbookThesepagesaredesignedtocomplementacompanionbookTheWall Street Journal Complete Personal Finance Guidebook a thorough primer forunderstandingand taking control of everyaspectof yourpersonal financial lifeThatsaidthisworkbookiswrittentostandonitsownforthosewhoalreadyhaveaworkingknowledgeofpersonalfinanceandjustwantaresourcetohelpcalculateforinstancewhen itmakes sense to refinanceyourhomeorhow to comparison-shop for thebestmortgageAlongwithvariousworksheetsandformulasdesignedtomakethemathpartof personal finance easier a variety of tips are interspersed throughout to help youmake better decisions when spending saving and investing your limited resourcesAlsogiventhatweliveintheInternetageinteractiveversionsoftheworksheetscanbefoundonlineatwwwWSJcomBookTools

ThisworkbookisdividedintotwobroadsectionsldquoBuildingYourFinancialBaserdquoandldquoBuildingYourAssetsrdquo The first section tackleswhatwell call domestic financemdashallthatmoneystuffthathappensinthehomecreatingabudgetbalancingacheckbookmanaging your debt and protecting your familys assets with life insurance In thatsection youll also find help planning for college and planning for the worstmdashthepossibility that bad things happen that require you to tap into emergency savings orwhichdemandyouproduceafullandimmediateaccountingofthepossessionsinyourhome Youll also learn how to determine in your situation the smartest method foracquiringacar

The second section pulls apartwhat youneed to knowabout investing everythingfrombuyingstocks throughabrokeragefirmtodeterminingtheright typeofannuity

for you and your family In between youll findworksheets thatwill help you gaugeyourowntoleranceforriskandarundownofthetermsandformulasthatWallStreetemploys The ldquoBuilding Your Assetsrdquo section is largely structured around puttingtogetherawell-diversifiedportfolioinyourretirementsavingsaccountssincepreparingforretirementisthemostsignificantinvestmentpurposemostreaderswillhave

ToparaphraseWoodyAllens famousclaim that90of success is just showingup90offinancialsuccessisjusttryingYoudontneedtobeacertifiedfinancialplanneryoudontneedtobeacharteredfinancialanalystYoudontneedtobeamutual-fundportfoliomanageroraWallStreetinvestmentbankerYoudontevenneedadegreeinfinancetomanageyourownmoney

Allyouneedyoualreadyhaveadesiretoknowandaworkbooktoleadtheway

Ohandofcoursealittlemathwhichweregoingtohelpyouwith

yramidsallstartthesameasolidbaseonwhichtobuildthe

restofthestructurePersonalfinanceisnodifferentSureyoucanstartatthetopthrowingyourmoneyintoinvestmentslikestocksandbondsandannuitieshopingthatwillturnafewdollarsintoafortunesolargeyoudontneed toworryabout all thoseniggling financialmatters likebalancingyourcheckbookandsavingOryouwakeupfromthedreamand start at the beginning Even the superwealthy plan their financesandpayattentiontothebasicsThatshowmanyofthembecamerichinthefirstplaceNeither wealth however you define that nor financial securityhappensovernightYesthereareanumberofpeoplewhowinlotteriesand suddenly come into instant riches And many of them end upspending or wasting most of their winnings some even end up inbankruptcycourtForyouseefinancialsuccesshasnothingtodowithhavinga lotofmoney its abouthavinga lotof successmanaging themoneyyoudohaveYoucanmake$100000ayearandlivepaychecktopaycheckandonthebrinkofinsolvencybecauseyoucantmanageyourspendingandyouhavenoideahowtosave(andmanymanypeoplearein this position) Similarly you can earn $40000 and know withoutquestionthatyouarefinanciallysecureandsolventandthatyouhaveadequate savings to help cover a rainy day aswell as your retirementsomeday(andtherearemanymanypeopleinthispositiontoo)Thosewhoknowsuccessbuilta solidbaseearlyonAnd theyknowthat base beginswith thatmost dreadedofwords in personal financebudget

aveyoueverdrivenfromMountSterlingUtahtoDixvilleNotchNewHampshireDo you even knowhow to begin planning that

route If youre fairly fluentwith the points on a compass you couldprobablywindyourwayoutoftheWasatchMountainsandheadinthegeneraldirectionof theEastCoastbutyoud likelyhaveachallengingtime with the finer points of efficiently finding your way to DixvilleNotchinthefarnortherntipofNewHampshireAroadmapwouldofferimmenseutilityInmanyways budgeting is the roadmap to your financesAfter all

moving in generally the right direction is fairly easy but it doesntnecessarilygetyoutowhereyouthinkyouregoingYouknowyouhavetosetasideenoughmoneyfromeachpaychecktopaythebillsandyouknowyouresupposedtosavesomethingifyoucanforthatproverbialrainydayForalotofpeoplethatdefinestheextentoftheirbudgetingmdashspendwhatyouneedsavewhatyoucanImagine though having a benevolent guide to steer your path to

showyouwhereyourespendingYoudhaveabettergraspofthecoststhat are necessary in your life and those that are extraneous ThusinformedyoudbepreparedtomakesmarterdecisionsonspendingandsavingThatdoesntmeanyoudbetetheredtoabudgetthatsappedthefun fromyourdaysandnightsRather youdbe empowered todecideforyourselfwhatyouwanttospendyourmoneyonItmaybethatyouwant to spend $3000 on a vacation to Cairo instead of fund anindividual retirementaccountand thats fineButyourproblemisyou

cant spare the cash because your expenses never leave anything butpocketchangeattheendofeverymonthWithaplanhoweveryoumightquicklyfindthatmanyofthedailyexpensesyouhaveinlifearentnecessaryandthatwithalittlejiggeringyoucanalteryourmonthly spending so thatyoucanactually save forwhatyouwantthattripmdashorthemoneytofundthatIRAorcoverthedownpaymentonanewcarorwhateverwantsitsatopyourwishlistThekeytoallofthisandmoreisyourbudgetOfcourseformanypeoplethewordbudget immediatelyconjuresupdisagreeable images of a binding straightjacketmdasha confiningdocumentthattellsyouwhatyoucanandcantspendBudgets dont have to be that way Budgets dont even have to bebudgets You can think of them instead as spending plans Though itsoundslikesomuchsemanticsbudgetsandspendingplansaredifferentif only because of the psychological reaction they each illicit Wherebudgets bespeak confinement spending plans epitomize freedombecausetheyallowyoutomakethedecisionsonhowyouwanttospendorsaveyourmoneyHereswhythepsychologicalimpactofaspendingplan is relevant Money is as much about psychology as it is aboutfinance How you think about money and the lessons youve learnedaboutmoneythroughtheyearsmdashfromparentsinparticularmdashshapethewayyouspendandsaveoftenwithoutyourevenrealizingitByusingadifferenttypeofbudgetingsystemaspendingplanyouregaincontrolpsychologicallyoften the trickmanypeopleneed tobetter livewithintheirmeansEssentiallyaspendingplanworksbymatchingyourknownincometoyour necessary expenses each month Then the plan allows you toresolvehowyouwanttodistributeanyexcesscashthatremainsmdashyourdiscretionary incomeYoucanchoose topaydownyourcreditcardorcarnoteerasingyourdebtquickerYoucanchoosetoputthatmoneytowardavacationanewwashingmachineafancymealatarestaurantwithyoursignificantotherYoucanopttoburyitinthebackyardbuyshares of a mutual fund open a Roth IRA or fund a college savingsaccount for your child Basically you candowhatever youwantwithyourmoneybecauseyouretheonecallingtheshots

That might not seem like such a huge leap forward in the art ofbudgeting but again money is often a psychological and emotionalgame If a spending plan leaves you feeling in charge of yourmoneywhile abudget leavesyou feeling like a slave toyourmoney chancesare very good that the spending plan survives to help you achievefinancial successwhileabudget isexiled to thegarbagebinnever tohelpyouachievemuchofanythingUltimately a personal budget and a spending plan accomplish thesame goalmdashproviding a framework for sensible spending and healthysaving Inorder to see that and to build the financial foundation youneed so that you can better understand the way your money flowsthroughyourlifestartingoffwithapersonalbudgetandworkingyourwayuptoaspendingplanisasolididea

THEPERSONALBUDGET

You dont have to rush into a full-blown detailed spending planimmediately if the thought of trying towrap your arms around all ofyour monthly finances is intimidating Instead this personal budgetallowsyoutosetanexpectedspendinglimitinvariousbroadcategoriesatthestartofthemonthandthenattheendofthemonthyoucompareyour actual costs with your budgeted costs Seeing those differencesmonth in and month out gives you a clearer understanding of whereyourereallyspendingyourmoneyknowledgethatultimatelywillallowyou to scale back spending on what you determine is wasteful orunnecessaryandbeefupyouroutlaysinthosecategoriesthataremoremeaningfultoyourlifeMore important the personal budget will revealmdashbefore yourspendingbeginsforthemonthmdashwhetheryourexpectationsexceedyourbankrollIftheydoyoullneedtorecalibrateyourexpectedspendingtomatch your expected income otherwise youll be the embodiment ofldquoliving beyond your meansrdquo an assured path to financial ruin if thetrendpersistsComemonthsendyouhavea fewtasks foremost ifyour spending

hasexceededyourincomeyouneedtoexaminethosecategorieswhereyouoverspentandaskyourselfwhathappened Ifover severalmonthsyou see that you consistently overspend in certain categories theproblem could be that you are underestimating how important theseareas are to your lifestyle Basically youre underbudgeting and willneed to readjustOr it couldbe thatyourenotexercisingenoughself-restraint in your discretionary spending something that you mustaddressbecauseacertainamountofdiscipline isakeycomponent foranyonewhowants to succeedwith their finances At some point youhavetobeaccountabletoyourselfIn similar fashion you should discipline yourself to examine your

personalbudgeteverymonthlookingforcategorieswhereyounotonlyexceed your anticipated expenses but also those where youoverbudgetedThenyoucaneffectively shift your spendingaway fromcategories that have proven to be less important to you than youimagineandintothosecategorieswhereyouareactuallyspendingyourdollars

Firstmake several copies of thisworksheet so that you have ablankonehandyeachmonthStarteachmonthbyestimatingyourincomeandexpensesineach

of the various categories With certain expenses such as a carpaymentorrentthiswillbeeasyWithotherexpensessuchasfoodandentertainmentitsmoreofaneducatedguessDuringthemonthsaveallofyourreceiptsorkeeparunningtab

ofyourcostsineachcategoryonaseparatesheetofpaperAttheendofthemonthtallyupyouractualcostsandcompare

themtoyourexpectedcostsInthefirstthreemonthsthegoalofthisexerciseistoseewhere

youreover-orunderbudgetingsothatyougainabetterfeelforthetrue expenses you have in life After the first few months thepurpose of this exercise shifts to encourage you to think at thebeginningofeachmonthabouthowyouwanttoallocateyourcashIfyouknowforinstancethatyouwouldliketoreplaceyouragingDVD player you will have an intimate enough understanding of

yourbudgettocutbackonitemssuchasmealsoutentertainmentorclothingexpensesRemember This is a simplified down-and-dirty version of the

moredetailedSpendingPlanWhenyoudecide tomoveup to theSpendingPlanyourentriesherecanbetransferreddirectlyacross

If the Balance is a negative number in the Budget column youneedtorethinksomeofyourexpectedexpensesotherwiseyoullgointodebtforthemonthIf the Balance is a negative number in the Actual column you

went into debt for themonth andmust now take a hard look atyour spending todeterminewhereyouwent too faroff trackPaycloserattentiontoyourspendinginthatcategoryinthefutureIf the Balance in the Actual column is positive you need to

allocate thatmoney somewheremdashadditional spending incategoriesimportant to you particularly focusing on earmarking unspentincome on paying down faster any credit-card debt car loan ormortgage youmight have or funneling it into additional savingsUltimatelyyouaretryingtogetto$0meaningabalancedbudget

THESPENDINGPLAN

Manyofthesameprocessesusedinapersonalbudgetplayoutwithaspendingplanthoughaspendingplanprovidesamoredetailedmethodof estimating tracking and analyzing your income and outflow on amonthlybasisPuttingtheplantogetherwilltakesometimeinthefirstmonthortwothoughitshouldnttakemorethanaboutthirtyminutesto an hour After youre accustomed to how the plan works and howyourmoneyflowsthroughthevariouscategorieseachmonthyoullbeable towhipoutandreviewyourmonthlyspendingplan in justa fewminutessinceyourincomeandmanyofyourexpensesgenerallywontchangedrastically fromonemonthto thenextBythewayyoumightwanttomakeseveralcopiesoftheplansothatyouhaveoneavailableatthestartofeachmonthorvisitwwwWSJcomBookToolsandprintasmanycopiesasyouneedTousethisspendingplanstartwithsomeprojectionsIntheProjected

MonthTotalcolumnestimatehowmuchyouanticipatespendinginallofthecategoriesappropriatetoyourlifeManywontbeSomemightbemissing go ahead and pencil them in under the appropriate heading(ie Home Food Clothing etc) Tally all your projections near thebottomofthespendingplanintheTotalExpensesrowDont view these projections as justwild guesses you hope tomeet

These ultimately form the boundaries you set for yourself in terms ofboth spending and saving It does notmatter if the limits you set foryourself include $500 a month at Starbucks and an equal amountdownloading iTunes into your iPod So long as youre happywith thespendingdecisionsyoumakeandsolongasyourspendingstayswithinthe limits of your income and doesnt cut into your monthly savingsyoure livingwithin yourmeans and theres a very good chance youllsticktoyouplanNow under the Income category at the bottom of the worksheet

estimatethecumulativeamountofallincomeyouexpecttoearnforthemonthIncludeeverythingherenotjustsalaryMaybeyousupplementyour pay by painting and then selling Velvet Elvises (Elvii) on eBayWhatever income you expect to pocket include it here Keep inmindthatthisisafter-taxincomeoryourtake-homepay

So you have two projected numbers now Total Expenses and TotalIncome If the latter is larger than the former youre good to goThismeans your paycheck can handle your spending for the month andwhatever extra amount of income you have remaining you can shovelintosavingsaninvestmentaccountoryoucanreturntoyourspendingplan and assign some or all of that money to categories that areimportanttoyouthatmonthIfhoweveryourexpensesarebiggerthenyouhaveaproblemyoullneedtopareyourexpectationsOnceyouhaveyourexpensesequaltoorsmallerthanyourincomeyourereadyforthemonthYoull notice that the plan is divided into four weeks This divisionhelps you keep track of where you are at any point in the month inrelationtoyourprojectionsIntheearlymonthskeepeveryreceiptyoureceivedropthemintoajarabasketadrawerorwhatevercontainerisconvenientEachweekaddthemup foreachcategory inwhichyouhavetransactionsandjotdownthatnumberintheappropriateboxfortheweekTheaimofthisexerciseistokeepyouinteractingwithyourspendingplanandtoallowyoutoalteryourplanontheflywhennecessaryForinstanceYouveprojectedthatforthemonthyoullspendnomorethan$200eatingoutAsthefinalweekofthemonthstartsyouseeonyourspending plan that youve already spent $185 on restaurant mealsincluding an unexpected $90 tab you got stuckwithwhen you and adozenfriendshitthepriciestItalianeateryintownYouknowinstantlythatyoullbenoshingathomeinWeekFoursinceyouonlyhave$15tospendoneatingoutandyoujustdontcottontoHappyMealsfivenightsstraightOr consider this Its the secondweek of themonth and a group offriendsinvitesyoutothebeachforalongweekendThecost$200forgasandfoodandfestivitiesYoupeekatyourspendingplanandseethatyou can cut $70 from your entertainment and can easily put off untilnext month that new $100 blazer you wanted And youre more thanwilling to cut $30 this month from your grocery bill Just like thatyouve worked directly with your spending plan to finance a longweekend at the beach without negatively impacting your finances orrelyingonthegoodgracesofAmericanExpresstofrontyouthemoney

Mosttraditionalbudgetsarentasmalleablebecausepeopleoftensetthemup once during the year anddetermine an average amount theyexpecttospendineachcategoryThentheydonttypicallyinteractwiththeir budget unless something dramatic changes like they get a raisebuyanewcarmove toanewapartmentorhouseYetyour spendingeachmonthisfluidbecauseyourlifeisfluidAssuchasidefromyourfixed costs youre probably not going to routinely spend exactly thataveragebudgetedamountinsomecategoryThatswherebudgetsstarttogohaywire

Supposeyoubudget$300ongrocerieseverysinglemonthYetinfourconsecutive months your real costs are $270 $328 $307 and $214Youveunder-spentyourbudgetby$81Butyoudontreallyknowthatso you dont know to funnel that cash elsewhere Or maybe yourmonthlyspendingongroceriesamountsto$194$376$297and$355Youreoverbudgetby$22butyoudontknowenoughtotrimspendingelsewhereTruethosedifferencesaresmallandtheymightbeabsorbedelsewhere in your budget accidentally But two things At some pointeven small numbers add up to significant dollars and those smallnumbersmightnotbeabsorbedelsewhereItcouldbethatyouregoingoverbudgetonallyourcategoriesmdashyoujustdontrealizeitNordoyourealize youre sinking financiallyMore likely you just complain everymonth about not making enough money or that youre struggling tomakeendsmeetnotcognizantofthefactthatyouareyourownworstenemyWithaspendingplanhoweveryouseeyouroutlaystakeshapeeveryweek giving you the power to steer them in any direction you deemnecessary In essence youve taken control of your money instead offeelingasthoughyourbudgethascontroloveryouAtthebottomofthespendingplanyoullfindtheMonthlyBalance(atthetopofthispage)Thisisthebuilt-inliedetectorAs the month begins insert on Line 1 of the Beginning of Monthcolumn the balance in your checkbook Add to that the cash in yourwalletandyourTotalExpectedIncomeforthemonthThisrepresentsallthe money you can spend for the month Do not include any of themoneyinyoursavingsaccountMoneyinsavingsisnotavailablemdashandshouldnotbedrawnuponmdashforeverydayspendingneedsTotalExpenses

representsyourprojectedexpensesThe difference between Total Money Available and Total Expensesrepresents how much you should have remaining when the monthconcludesWhenyoureputtingtheplantogetheratthebeginningofthemonthTotalMoneyAvailableandTotalExpenseseithermustequaloneanotherorthedifferencemustbeapositivenumberAnegativenumbermeansyouwillrunadeficitforthemonthasituationyoumustavoidtokeepyour financeshealthy If thenumber isnegativeyoumustadjustyour spending or if possible find a way to increase your incomemdashwithouttappingyoursavingsWhen the month concludes repeat the same process in the End ofMonthcolumnlistyourcheckbookbalance(thesameastheBeginningofMonth)cashonhandandtheactualamountofincomeyouearnedList your actual expenses as recorded in the various categories on thespending plan and subtract those expenses from the total moneyavailabletoyouduringthemonthThedifferenceLine6shouldmatchthedifferenceatthebeginningofthemonthIfnotyouremissingeithersomespendingor incomesomewhere inyour lifeand itsprobablyonthespendingsideThis lie-detector isparticularlyuseful inrelationshipswhenpartnersoften hide expenses from one another for whatever reason You caninstantlyseeifthefamilysspendingforthemonthdoesntbalanceandyoucangobackthroughyourbankandcredit-cardstatementsandbegintopiecetogetherwherethemissingmoneywentPaycloseattentiontoATM withdrawals and checks made out to ldquoCashrdquo Cash expenses arehard to track whereas credit cards explicitly announce what businesswaspaidhowmuchmoneyOftenATMtransactionsandchecksforcashtypically underlie thosemissing expenses since themoneymust comefrom somewhere Debit-card transactions at places like grocery andconvenience stores are another place to look If your grocery expensesseemunusually high the culprit could be a partner secretly snatchingextramoneybyrequestingcashbackwhenpayingforthegrocerieswiththedebitcardandusingthecashonpersonalitems

PAYYOURSELFFIRST

WhenyoureinundatedwithbillseachmonthfindingthesparecashtostuffintoasavingsaccountcanseemimpossibleHeresthesolutionPayyourselfbeforeyoupayyourbills

Thoughyourspendingchangeseverymonthtomatch

yourneedsandwantstherearecertainlifeeventsthat

necessitatethatyoutakeamuchbroaderlookatyourplanand

adjustittomeetchangingdemandsonyourincome

Hereareafewofthosemajorevents

MarriageordivorceIneithersituationyourincome

changesalteringwhatyoucanaffordtospendandsave

AnewjobraisepromotionorasalarydecreaseAn

increaseamongotheroptionsallowsyoutobudgetmore

toaretirementsavingsplanadecreasemaymeanyou

needtotrimbackyourretirementsavingstocovermore

immediateneedssuchashousingcosts

BirthadoptionofachildYourspendingneedsto

alterdramaticallywhenkidsarriveandkidsare

universallymoreexpensivethanparentsestimateYouwill

needtoadjustyourspendingplantomakeroomforthe

addedcosts

Youbuyahouseorcarormakesomelargepurchase

Whenyoutrademonthlyrentforamortgagerefinance

yourmortgageortakeonacarnoteyoullneedtoadjust

thosecategoriesonyourspendingplan

RetirementYourincomechangesandsodoesyour

spendingYoullneedtorefigurebothtoensurethatyour

spendingdoesntexceedthemoneyyouwithdrawannually

fromyournestegg

YourlifeisntjustmeasuredinthepresentYouhaveawholebunchoftomorrowstofinanceaswellThosetomorrowsallarriveatatimeinlifewhen youre no longer employed but with luck enjoying yourretirementWell dig into retirement in greater depth later but at this junctionyou need to consider that retirement is a bill youmust pay since themoney you manage to save during your working career along withSocialSecurityandanypensionor401(k)-styleaccountyoumighthavewillbeallyouhavetocreatethepaycheckyoullliveonwhenyouleaveworkforthelasttimeThe first step toward saving for retirement or toward building anemergencysavingsaccountortowardbuyinganewhomeorcarbeginswithpayingyourselfbeforeyoupayeveryoneelseThat means you must work into your personal budget or yourspending plan an amount ofmoney you automatically take from yourincome every month and stash in a savings account a money-marketaccount or a retirement account As that money grows you canperiodically distribute it among other types of saving and investmentaccountsThe rule of thumb is that you should save at least 10 of yourincome Ultimately that may or may not be enough to fund yourretirementbutitsagoodstartingpointtogetyouthinkingabouthowmuchyoucurrentlysaveandwhatyoucandotosavemore

Fill inthisworksheet tocalculatehowmuchyouresavingcurrentlyorvisitwwwWSJcomBookTools

Ifyouresaving10ormoreofyourincomepatyourselfonthebackmdashthoughyou shouldalways strive to savemorewhereyoucan sinceunexpectedcostscropupinlifethatwillmandatethatyouhaveaccessto cash Rest assured that retirement is more often than not moreexpensivethanmostpeopleplanonIf youre saving less than 10 there are strategies you can use to

bolsteryoursavingsrateFirstsignupforyour401(k)retirementplanifyou havent already This forces you to sock away money with everypaycheckbeforeyouseethemoneyStartoffattheminimum1youllnevermissthecashIfyoucanaffordtostartyourcontributionsatthelevel equal to the companymatch So if your employer gives you 50centsforeverydollaryousaveupto4ofyoursalarythentrytosave4Youre getting an immediate50 returnonyour investment fromthe company Some companies are even more munificent offering adollar-for-dollarmatchThatsalotoffreemoneyyoudontwanttomissouton

Every year increase the amount you save by one percentage pointthatwillhelpyouultimatelygetto10ofyoursalaryAlsowheneveryou earn a pay raise automatically stick half the raise into yourretirementplanThatwayyouresavingmoreanddoingsopainlesslyyetyoustillseesomeofthebenefitsofabiggerpaycheckAnother option Save automatically outside your 401(k) plan With

mutual funds savings accounts savings bonds and IRAs you cancontribute throughout the year on a monthly or quarterly basis toreducethatone-timeshockofhavingtoponyupasizablesumofcashManyemployersmakesavingeasybyautomaticallysendingaportionofyourpaycheckdirectlytoasavingsaccountbeforeyourcheckmakesitintoyourhandsMutual-fundcompaniesandIRAproviderscanarrangeto automatically deduct a predetermined sum from your checking orsavings account on a regular basis Banks will automatically transfermoney to a savings or money-market account from your checkingaccountonwhateverregularscheduleyouestablishSupposeyoudecideyouwanttocontribute$1000toaRothIRAbut

cantseemtofindasparegrandinyourcheckingorsavingsYoucouldinsteadwork$83intoyourmonthlyspendingplanandaccomplishthesamegoal Similarly if your companypays you every twoweeks youcould instruct your payroll department to pull money out of everypaycheckand send it to theUSTreasury tobuyaUS savingsbondThepaperversionofSeriesEEbondssellforhalftheirfacevalueso26weeksof$50purchasesistheequivalentof$2600worthYear1Year2Year3Year4Year5Year6Year7Year8Year9Year10Year11Year12 of $100 bonds at maturity You can find out more about savingsbondsatwwwsavingsbondsgovThepointisthateverypaycheckearnsyouanewopportunitytobuild

wealth It may not be a get-rich-quick-scheme but it is a get-rich-nonethelessschemeIfnothingelse remember thisWealth isneverdefinedbywhatyou

earn butwhat you save Learn to save and youll learn to bewealthyDontthinksoConsiderthisAssumeyoucanafford$200amonthonacar note for a respectable vehicle but you decide youd rather spend$450toleaseoverafive-yearperiodajazzyroadsterwellbeyondyourmeans And imagine your financially savvy neighbor had the same

choicebutoptedtoinvestthatextra$250everymonthintoahigh-yieldonline savings account that in the fall of 2005 was paying annualinterestpaymentsof4atseveralWeb-basedbanksAttheendoffiveyearsyouhavenothingbutanoldcarprobablywithburger stainsonthe leather andwhich youmust return to the dealer Your neighborhoweverhas$16575Wholearnedtobewealthy

EMERGENCYSAVINGS

Nobudgetmdashnopersonalfinanciallifemdashiscompletewithoutaportionofyourmonthly incomeearmarked for anemergency savings accountThis is a mandatory account for every household because you neverknowwhensomelargeunexpectedexpensecomesalongtoattackyourincomeWhen thosemoments arrivemdashand they invariably domdashthe ability to

rely on yourself will provide a far greater degree of security and amuch-reduced level of stress than youd experience struggling toscroungeupthemoneyyouneedbybeggingandborrowingfromfriends

andfamilyBettertohaveyourownfinancialcushiontofallbackonWhat defines an emergency runs the gamut On the small end you

mightneed to spring for$1000 tocover thedeductibleonyourauto-insurancepolicyifyouwreckyourcarSubstantiallymorecostlylosingyour jobandhaving to relyonyouremergencyaccount to coveryourbills for severalmonthsBy theway semiannualandannual insurancepremiums or quarterly property-tax bills do not qualify as emergencyexpensesmdashthough too often people treat them that way Insurancepremiums and property taxes are known costs that should be factoredintoyourbudgetorspendingplaneverymonthandstashedinasavingsaccount so thatwhen theyariseyouhave themoneyavailable topaythe cost without treating the bill as an unexpected surprise that youmustscrambletoaffordThe emergency youwant to plan for is theworst you can imagine

losing your job for a period of time At thatmoment what you haveaccumulated in savings is themoney thatwill tide youover until youfindnewemploymentHowmuchmoneyyouneed inyouremergencyaccount is an individualmatter since the costs of your lifewill differfrom your neighbors Your account however should cover the basicsyouneedtofeedshelterandinsureyourfamilyTheworksheetonpages27ndash28listslifesessentialcostsPluginyour

monthlyexpenses foreach itemandyoullhavethedollaramountyouspendeverymonthonjustyourbasicexpensesThetoughestpartofbuildinganemergencysavingsaccountisfiguring

outhowmuchmoneytostickintoitSomefinancialplannerssaythreemonths some say a year Generally speaking the more stable yourcareeror thegreater thedemand foryourparticular skills the smalleryour emergency savings must be to cover any time out of work youmight face since replacing your income could be relatively easy Ifhoweveryouarethelastinalonglineofthetypewriterribbonmakersand thats all you know how to make then your emergency accountneeds to bemuch larger to cover a potentially extended periodwhileyoureoutlookingforanewcareerAttheendofthedayonlyyouknowwhattheaccountshouldhold

AskyourselfAtwhatfinancialleveldoIfeelcomfortableThatwilltell

youhowmuchmoneyyouneedtosaveHerestheformula

That answer tells you howmanymonths you could subsist on yoursavingsbeforeitsdepletedSoifyourfinancialcomfortlevelis$20000and your monthly expenses are $2500 youd have eight months ofliving banked away for an emergency ($20000divide $2500= 8) Youmight determine that eight months isnt enough or is too muchallowingyoutodialyourcomfortlevelupordowntomeetyourgoalIf you think of comfort in terms of months rather than in terms of

dollarsthenthisisthecalculationyouwanttouse

If you know you want a years worth of expenses that amount to$3000amonth thenyoullneed to sockaway$36000 to reachyourcomfortzone(12times$3000=$36000)Howeveryoudeterminethesizeofyouremergencysavingsonceyou

havethenumberyoucanbeginsavingtoreachyourgoalSimplyfactorintoyourmonthlybudgetorspendingplananequalamounteachmonththatputsyouatyourgoalwithinwhatevernumberofmonthsyouselectOryoucansavewhateverdollaramountyoufeelcomfortableaffordinginagivenmonthknowingyoullreachyourgoalatsomepointTheresno rule that says youmust reach your emergency savings target in acertainperiodRemembermoney is fungibleand financesare flexibleand savingwhatyoucaneachmonthwhile still enjoyingyourselfwillultimatelyleadtobetterresultsintheendmdashandintheendsuccessisntmeasuredinhowyouattainedthoseresultbutthatyouinfactattainedthematall

JotdownthecostsyouincureachmonthineachcategoryIfyoudonthaveanycostsinsomeparticularcategory

ThecaveatYoumust savesomethingeverymonthconsistentlyYoucant sloughoff foramonthor three tobuysurfing lessonsandanewboardHealthymoneyhabitsarebuiltonthebackofsmallincrementaland consistent steps that relentlessly pushyou towardyour goalswitheverysinglepaycheck

THEANNUALBUDGET

Insideeverycompanyplanningthespendingforthenewyearisthe

equivalent of the capital budget the list of big outlays the managersexpect or want to make during the year to improve the businesssoperationsInapersonalfinancecontextthisistheannualbudgetmdashthebig expensesyouwantorneed tomake to improveyour lifewhetheryour definition of improvement is an extra $1200 in your savingsaccount by years end or a newwashingmachine Building an annualbudgetcomesafterpayingyourself firstandestablishinganemergencysavingsaccountbecauseitsmoreimportanttoestablishasavingsethicand an emergency stash before you worry about budgeting for thecomingyearDont tossyourbudgetor spendingplan into thegarbagewheneach

monthendsAseachyeardrawstoaclosegatherupallyourmonthlyplansandusingablankspendingplanorpersonalbudgetworksheetfillin the average expense you racked up in each of themain categoriessuch as rent or mortgage groceries utilities insurance and suchmdashbasically the essential expenses youmust pay everymonth The fixedexpenses will be easy to budget for the coming year since they dontchangeWithvariableexpenses like foodandelectricityestimatewhatyouexpecttopaygivenwhatyoupaidinthepreviousyearIfyoupayyourcar insuranceeverysixmonths includethosesemiannualcosts inthe appropriate month so that you dont overallocate your income incertainmonthsYoull also need to estimate your monthly income Dont forget to

include any pay raises you might be eligible for though be sure tosubtract the taxes Your human resources department can tell youexactlywhatyourtake-homepaywillbebasedonanewsalarylevelOnceyouvepluggedinyourincomeandnecessaryexpensesyoullsee

howmuchmoney is left over eachmonth Thats themoney you canearmark to various causes throughout the year the money remainingeach month to spend or save as you wish on larger projectsmdashyourcapitalexpensesThequestionbecomesWhatdoyouwishforOntheAnnualBudgetworksheetlistallyourbigknownexpensesfor

theyear that arent onyourmonthlyplans aswell asyourbigwantsDont edit your wants put down everything you might like to

accomplishforthecomingyearanewcaradditionalsavingsadigitalcameraremodellingthekitchenatwoweekvacationtoNewZealandsSouthIslandYourenotlikelytogetthemallinfactyoumightonlybeable to afford one But once you know all that you want you canprioritizethe list thenspendtheyear focusedonattainingthose itemsthataremostimportanttoyouorwhichyoucanaffordthisyearAlongsideeachwantpencilinthecosteitheraknowncostoragood

estimate ofwhat it is likely to costDivide each cost by12 thats themonthlyexpensenecessary to fundthatdesireNow thisdoesntmeanyouhavetogotheentireyearsavingforeachitembeforeyoucanbuyitYoucanspendthemoneyalongthewayknowingthatthecosthasalreadybeenfactoredintoyourspendingFor instance that trip to New Zealand which you want to take in

SeptemberSaytheall-incostforairfarelodgingmealsandexcursionsis$4000Secondgrademathtellsyouthatsabout$333amonthSoyousave that amount every month and by August you have $2664squirreledawayTheother$1336willcomefromyoursavingsaccountandyouwill replenish thatwithdrawalover the remainderof theyearbycontinuingtopay$333amonthback into itThis isanamountontopofwhateverelseyourepumpingintosavingssinceyourgoalshouldalwaysbe toendeachyearwithasavings-accountbalance larger thanthe previous year If you only withdraw and replenish youre justtreadingwaterandthatgetsyounowhereThecaveathereisthisIfyouhavetosticktherestofadiscretionary

expenseonacreditcardbecauseyoudonthaveenoughinsavingsthenthat expense is probably something you should put off until yourfinancesarestrongenoughtosupportitKeep your annual budget with your monthly spending plan or

personalbudget sheets so thatyoucan refer to it asyouprepareyourfinanceseachmonthThatwillkeep fresh inyourmindyourprioritiesandhelpyouseehowyoushouldbespendingandsavingforthemonthtoreachthosegoalsThestrengthofanannualbudgetliesinthefactthatitrequiresyouto

plan ahead for your wants so that you dont tax your budgetmdashandyourselfmdash throughout the year If you can see beforehand what is

important to you in the coming year you can shape your month-to-month spending tomeet what you have designated a priority MaybethattriptoNewZealandissoimportantthatyouremorethanwillingtocutyourclothingordiningorentertainmentexpensestotheboneandyou cut out extraneous celebrity-style magazines and start brown-baggingittoworkfourdaysaweekinsteadofhittingthedelieverydayfora$10sandwichandsoftdrink

Whatever approach you take when youre actively involved inplanninghowyouwanttospendyourmoneyinsteadofjustspendingasyouwishand reacting to it later your financeswill improveandyoursavingswillgrowbecauseyouwillnaturallybecomeabetterstewardofyourmoney

sidefromfishingwaywardcoinsfrombeneaththecouchcushionsas a kid and shoveling them into a piggy bank a basic checking

account represents just about everyones first real encounter withpersonalfinanceThosefirstaccountsaretypicallyatthenearestbranchof the same bank your parents used Surely Mom and Dad put somethoughtintochoosingthebanksowhynotjustopenanaccountwheretheydidThats probably finewhen youre a teen but as youmove into your

own life your own career and your own family your own financialneeds arise Thatswhen youwant to put some thought into the bankyou use and the type of account you bank from Andwhile there arenumerous factors thatyoushouldweighbeforesettlingonaparticularbankandaparticularaccountthisistheprimaryquestionyoumustaskyourselfWhatsizebalancedoItypicallycarryTheanswerwillgoalongwaytowarddeterminingwhereyoubank

particularlyifyoumaintainasmallbankbalanceBecauseofthelitanyoffeesthatbanksnowchargemdashmeetingateller

face-to-facenotusingdirectdepositkeepinga lowbalancemdashchecking

accounts can be costly Therefore if the average monthly balance inyouraccounttypicallyfallsbelowabout$500youllwantabasic freecheckingaccountPayattentionthoughtohowbanksdefineldquofreerdquoNotallbanksoffertrulyfreecheckingYouneedtoreadthefineprinttobeclearonwhatyoucanandcantdoandwhatchargesyoull facefor various activities To get truly free checking you need an accountthat

RequiresnominimumbalanceImposesnomonthlyservicechargeLeviesnoper-checkcharge

CustomerswhomaintainalargebalanceneedtoshoparoundaswellbanksareeagerforyourbusinessandallofferavarietyofservicesthatcansaveyoumoneymdashormakeyoumoremoneyAmongtheperksyoucan find are higher interest rates free checks freewire transfers freestop-paymentservicesandsoonAndyoudontnecessarilyneedtohaveallyourmoneyinyourcheckingaccounttobenefitManybanksletyoulink accounts so that the combined balance in your checking savingsmoneymarketandCDscountstowardyouraveragemonthlybalanceBeyond that a variety of factorswill likely play upon your bankingneeds Every person has different demands so heres a checklist offactors to referencewhen looking for a bank account thatmeets yourneedsThemost efficientway to shop forabank isonline sincebankWeb sites routinely list all the services that come with each type ofaccountthatwillallowyoutodomuchofyourhomeworkquickly

CHECKINGACCOUNTS

Checking accounts are easy You deposit money you withdrawmoneyyouwritechecksyouspendusingyourdebitcardEasyAnd then comes themonthlyheadachemdashreconcilingyour checkbookregisterwithwhatthebanksaysyouhaveIfyoucouldjustmatchthenumberinyourcheckbooktothenumberonthestatementallwouldbe

fineAlasbalancingacheckingaccountdoesnttypicallyworkthatwayBy the time the month ends and the bank sends out your accountstatement more than a week has passed and in that time you haveundoubtedlywrittenmorechecksand

Shopseveraldifferentbanksusingthisformasaguideto

checkofftheservicesthataremostimportanttoyouandto

pricethefeesandaccountminimumsYoullneedmorethan

onecopytoshoparoundsoprintadditionalcopiesat

wwwWSJcomBookTools

Step1Markoffinyourcheckbookallthedepositsand

creditsthatareaccountedforinthismonthsstatementBesure

tomarkoffthematchingentriesonthestatementaswell

Step 2 Add to you checkbook register all the deposits credits and

interest payments you received during themonth that are not already

includedinyourcheckbookMarktheseitemsoffintheregisterandon

thestatement

Step3Subtractfromyourcheckbookalltheservicechargesautomated

monthlydeductionsunrecordedchecksandATMordebittransactions

thatyouforgottorecordwhentheyhappenedAgainmarktheseitems

offintheregisterandonthestatement

Step4Inthecolumntotheimmediaterightonthefollowingpagelist

allchecksinyourregisterthatarenotlistedinyourcurrentstatement

Thesearechecksyouvewrittenbutasofthisstatementremainunpaid

byyourbank

Step 5 In the column to the far right list all the deposits in your

registerthatarenotlistedinyourcurrentstatementThesearedeposits

youvemadeandwhilethemoneyisavailableinyouraccountthesum

hasntflowedthroughyourstatementyet

Ifyourstatementdoesntmatchyourcheckbookregister

herearesomehintstohelpyou

Gobackandaddupalltheunpaidchecksand

depositsinthetwocolumnsabovetomakesureyoudidnt

miscalculateorpunchastraydigitintoyourcalculator

Gobackandredothemathinyourcheckbook

registertomakesureyouradditionandsubtraction

throughthemonthwasaccurate

Comparetheentriesinyourcheckbookagainstthe

entriesonthestatementtomakesurethatyoudidnt

accidentallyrecordinyourcheckbookacheckfor$1921

thatwasactuallyonly$1912accordingtoyourstatement

Besureyouaddedtheinterestpaymenttoyour

registerorsubtractedservicefeesyouwerecharged

Ifyourcheckbookstillrefusestomatchyour

statementyoumayneedtoldquoforcebalancerdquoyouraccount

Seethenextworksheet(page41)

withdrawnmoremoneyandusedyourdebitcardatthegrocerystoreand your ATM card on the way to work and youve deposited yourpaycheckmdashandtheneteffectofitisthatyourcheckbookregisterlooksnothinglikeyourbank-statementbalanceA lot of people never balance their checkbooks They just keep a

running tab on the last line in their checkbook register and hope orassume its vaguely accurate Thats a pretty cavalier way to manageyour money You risk being overdrawn and having to shell out feesneedlessly or you risk not knowing you have more money than yoususpectmdashfundsthatmightreducethefinancialstressyourefeelingcometheendofeverymonthfundsyoumightusetoinvestinanindividualretirementaccountyoudidnt thinkyoucouldafford fundsyoumightuse to buy that new TV and replace the one that picks up thirteenchannelsofsnowandacommunity-accessstationbroadcastingnothingbutlocalzoning-boardmeetingsBalancing your checkbook is an easy task though at times certainly

frustrating when after an hour of calculating and refiguring yourcheckbookandbankstatementare stillZipcodesapartNo frethereshowtomakethenumbersworkBreakoutthecalculatororapencilandpaperandfollowthesimpletenstepworksheetonpages38ndash39Ifafterusingtheworksheetyoustillcantgetyourcheckbookregister

tomatchyourmonthlystatementyoucandooneoftwothings(1)gotoyour localbankbranchand telloneof thebankers sittingatadesk(notatelleratthecounter)thatyourehavingproblemsreconcilingyouraccountandcouldyoupleasehaveacopyofyouraccounthistorygoingback three months Youll have to compare it line for line to yourregisterbutitwillshowyouitemsthatyoumayhaveoverlookedover

themonthsYoucouldalsoask thebanker tohelpyou ifyoure reallystumped(2)YoucanldquoforcebalancerdquoyouraccountessentiallyacceptingthebalancethebankshowsThesesameworksheetscanbeusedtobalanceyoursavingsaccountsaswell

CERTIFICATESOFDEPOSITmdashANDWHENBREAKINGONEMAKESSENSE

In largemeasure certificates of depositmdashsimply called CDsmdashare aninvestment and could just as well be part of the second half of thisworkbook where youll find the tools and strategies for investing instocksandbondsandmutualfunds

Yet justascheckingaccountsare typically the firstpersonal financeaccountformanypeopleCDsarefrequentlyoneofthefirstnoncheckingbank accounts people pursuemdashand one of the last too since retireesroutinely rely on the income they generate from CDs The reason isbecause CDs are easy to understand and entirely safe in that theyrebackedbytheFederalDepositInsuranceCorporationtheFDICmeaningthatevenifyourbankfailsthemoneyandinterestyouveaccumulatedinyourCDwillbereturnedtoyouinfullmdashsolongastheamountislessthan$100000In short CDs aremore souped-up savings accounts thanwhatmostpeople consider to be an investment That goes too for CD ladders

whichwellgetintoshortlyMoreovertheyreaverygoodplacetobeginbuildingyourfinancialbasebeforesteppinguptotheworldofinvestingandWallStreetCDsare simple tounderstandYoudeposit yourmoneyandpromisenottowithdrawitforanywherefromonemonthtotenyearsBecauseofthat promise the bank offers you a premium interest rate higher thanyouwouldtypicallyearnonastandardsavingsaccountThebankdoesthisbecauseitknowsitcaninvestyourmoneyforasetamountoftimeandearnsomeincomeforitselfIn generalwhen interest rates are headingup youwant to stick toshortterm CDs nothing longer than about a year Thiswill allow yourelativelyquickaccesstoyourmoneygivingyoutheopportunitytorollyourcashintohigheryieldingCDsasinterestratesescalate

Ifyoureconsideringashorttermcertificateofdeposit

becauseyoudontwanttolockyourmoneyupbeyondacertain

numberofyearsconsiderwhetheryoumightactuallyearn

morebyinvestinginalonger-termCDthatyoucashoutofmdashor

breakmdashwhentheshortertermCDwouldhavematuredVisit

wwwWSJcomBookToolsforaninteractiveversionofthis

worksheet

Whenratesareheadedsouthhoweveryouwanttolockintolonger-term CDs since youll be locking in an interest rate that is likely farsuperiortowhatyourpeerswillearnmonthsoryearslaterwhenratesaredownDuringaninflationaryboutinthelate1970sandearly 80ssaverswhopurchasedCDswithdurationsoftenyearsandlongerwerelookingmightyflushbytheearly1990swhenrateshadfallentomid-

singledigitsorbelowBanks typically impose an early withdrawal penalty if you reclaim

your money before a CD matures Withdrawing your money early isknown as breaking a CD and youll typically pay a penalty equal tothreemonthsworthofinterestGenerallyyoudontwanttobreakaCDbecause of the income loss you face For that reason you shouldntinvestinalong-termCDifyoumightneedthemoneyearlyHowever in the category of every-rule-has-its-exception there are

timeswhen itmakes sense financially to stickyourcash in the longer-term certificate knowing fullwell that you intend to break the CD atsome point One time to do this when long-term CD rates are highenoughandthepenaltylowenoughthatthenetinterestpaymentsyoureceivestilloutstripwhatyouwouldhaveearnedinashorter-termCDYourbankercertainlyisntgoingtotellyouaboutthisbecauseifyou

investinafive-yearCDwellthebankfullyexpectstohaveuseofyourmoneyforallfiveyearsthebankdoesntwantyoucomingbackearlytogetyourmoneysincethatmeansthebanklosestheopportunitytoearnincome by investing your deposit elsewhere Consider a situation inwhich a five-year CD offers a rate of 45while a two-year CDpays35 At the end of two years a $10000 two-year CD would return$10724Overthatsametwo-yearperiodthefive-yearCDwouldreturn$10940 though you do have to account for the penalty youll pay tobreak the certificatemdashin this case three months worth or a bit morethan$122That still leaves youwithnearly $10818 about $94morethanyoudhavewiththeshorter-termCDForsavvyconsumersinvestinginlonger-termCDswiththeintention

ofbreakingthemearlycanmakesenseJustpayattentiontothesizeofthepenaltysincethemoneythatwillbesubtractedfromyouraccountwhen you reclaim the cash early plays a leading role in this sort oftransaction

Whilethedollarsyouhaveinyourpockettodaylook

identicaltothedollarsinyourpocketlastyearthosedollars

lastyearwereworthmoreThroughtheyearsinflationmdash

definedasthetendencyofpricestoriseovertimemdasherodesthe

valueofyourmoney

WhatdoesthatmeanInshortitmeansthegoodsyou

buytodayrequirethatyouspendmoredollarsthanyouhadto

spendlastyearforthesameitems

Inaverysimpleexamplealoafofbreadthatcost$150

inJanuary2004wouldcost$154ayearlaterFourcents

doesntsoundlikemuchtofretaboutbutwhenyouspreadthat

increasemdash267mdashacrossyourentirespanofpurchasesina

givenyearandthenyouspreadinflationoveryearsand

decadesyouretalkingaboutdifferencesofmanydollarsFor

instancethatsame$150purchasein1955wouldcost$1031

in2005

Thischartshowstherealeffectsofinflationon$1inthe

50yearsbetween1955and2005Noticethedramaticleapsin

the1970sand1980swheninflationintheUShitdouble-digit

levels

BUILDINGACDLADDER

LadderingisasimpleconceptSpreadyouravailablecashmdashldquoladderrdquoitmdashacross a variety of time periods as a means of interest-ratediversificationWithaCDladderaportionofyourcashremainsliquidyetyouultimatelyearnmoremoneyWhy a ladder of allmetaphorsWell the individualCDs symbolizerungs on a figurative ladder each one a little farther away and thehigheryouclimbthehighertherateItworks like thisSayyouhave$10000youwant toput intoaCDShortterm rates dont excite you yet the higher rates mean youmustlock away all your money for longer than you want So split thedifference Put one-fifth (or some such fraction) in a oneyear CDanotherfifthinatwo-yearCDandkeepbuildingaladderuntilyouputthelast$2000inafive-yearCDAseachCDmaturesroll itoverintoanotherfive-yearcontractthatwillkeepeachrungonyourladderfilledoutsinceat theendofYear1yourtwo-yearCDisnowaoneyearCD

andyourthree-yearisnowatwo-yearandsoonThisstrategyofferstwobenefits(1)Youhavetheopportunitytotapyour shorttermmoneywhen it comes due if you need it rather thanhavingallyourcashlockedupforthelonghauland(2)abigchunkofdollarsworksharder foryouover the longer termrather thanearningpaltry returns if you had invested all of your money in a shorttermaccountSoyougetthebestofbothworldshigherreturnsandgreaterliquidityA$10000CDladdermightlooksomethinglikethis

Remember this rule-of-thumb with CDs When interest rates arefallingyouwanttoputasmuchmoneyasyoufeelcomfortablelockingup into long-term CDs that way youll earn the highest rates for thelongestperiodoftimeWheninterestratesarerisingyouwantmostofyourdollarsinshorttermCDsthatwayyourolloutoflower-payingCDsquicklyandintooneswithhigherrates

heBoyScoutmottomdashalwaysbepreparedmdashshouldbestampedatopeveryfinancialdocumentPreparationisoneofthecornerstonesof

financial success and financial security since you never know whattrouble might visit If youre unprepared whatever event arises canseriouslyunderminemdashordestroymdashyouroryourfamilysfinancesPreparingfortheworstmeanspreparingforthebadmomentsbigand

small It means knowing what you own in the event that a disasterdemolishesititmeanskeepingtrackofwhatsinyourwalletincaseitcomesuplostorstolenItmeansstoringtherightdocumentsintherightplaces so that those that are necessary in an emergency arent lockedawayfromyouorthosewhoneedaccessAndintheworstsituationitmeans preparing for the possibility of a premature death that impactsthefamilysincome

INSURANCE

NoonenecessarilylikestobuyinsuranceAtbestthepurchaseseems

such a waste Youre paying all this money every year and not reallyseeinganybenefitfromitifyoureluckyThinkaboutitHowoftendoyou wreck your car How often is your house damaged or yourpossessions stolen Those events are so rare inmost lives that if statelawsandmortgage-companydemandsdidntdictateinsurancecoverageon your car and house a lot of folks would just skip the expense ofinsurancealltogetherYetinsuranceisrootedinsoundfinanceandisjustasimportantasasavings account only from a reverse perspective it wont necessarilymakeyouanymoneybutitcankeepyoufromlosingthemoneyyoudohavemdashandthatsjustassignificantAfterallthinkofhowchallengingitwouldbetoreplaceacar(yoursorsomeoneelsesyoudestroyed)ortorebuildahomeortorestockallofyourdamagedorstolenpossessionsEachofthesecanbeexceedinglyexpensiveandreachsodeepintoyoursavingsthatyoudontbegintohaveenoughtocoverthelossWhen you stop to think about it insurance is one of the smartestfinancial products you can own since it protects you and your familyfrompotentiallycatastrophiclossesthatyoucouldneverpayforonyourownFor that reason insurancedespite the feeling that thepremiumsrepresentmoneywastedisinsteadmoneywellspentmdashsolongasyourenotoverpayingforthecoverageoroverinsuringyourneedsOneofthemostimportantformsofinsurancecoverageforafamilyislife insurance since the unexpected death of a breadwinner can visitserious financial hardships upon a family leaving a surviving spouseunabletopayforthenecessitiesoflife

DOINEEDINSURANCE

ManypeopleskiplifeinsurancebecausetheydontthinktheyneeditIntruthnoteveryonedoesIfnoonedependsuponyoufinanciallyyouprobablydontneedthecoverage But if you have dependentsmdashfor instance children anonworkingspouseparentsyousupportaspecial-needsfamilymember

mdashlifeinsuranceisnecessarysothatyoucanstillprovidefortheirneedsif something unfortunate happens to you This chart will help youdetermine whether you need coverage and explain why you do anddontdependinguponyoursituation

HOWMUCHINSURANCEDOINEED

Theanswertothisquestiondependsonwhattypeofcoverageyouretalkingaboutlifeautoorhome

AUTOCOVERAGE

Your state generallymandates aminimum that youmust carry Butthoseminimumscanleaveyoufeelingmaximumpainifyouevercauseawreck that totals another car or results in bodily injury or death toanother person Youre likely to be sued formore than theminimumsyourinsuranceprovidesThustothedegreeyoucanaffordittheappropriateamountofauto

coverage is enough to protect the amount of assets you haveaccumulated since those assets are at risk in a car wreck Rememberthat your car represents your biggest liability because cars all toofrequently destroy other cars and kill maim or injure people Thatgenerates big-dollar lawsuitsmdashthe very reason you want as muchinsuranceprotectionasyoucanaffordIf thatmuch insurance is too priceymdashevenwith a higher deductible

thatlowersthepremiummdashthenatleastgoashighasyourfinanceswillallowIn general ldquominimumrdquo coverage is whatever your particular state

deems the lowest amount of liability insurance you must carryldquoRegularrdquo coverage typically pays liabilities up to $50000 per personand $100000 per accident ldquoPremiumrdquo coverage goes up to $100000per person and $300000 per accident And ldquoultrardquo coverage is$300000$300000 or with some insurers $250000$500000Various insurers use different designations for the various types ofcoveragemdashsuch as ultra and premiummdashbut the liability limits aregenerallysimilar

HOMEOWNERSCOVERAGE

People often insure their home for the purchase price though thatsnotnecessarilytherightamountYourhometypicallyincludeslandandnomatterwhetheryourhouse isdestroyedby firewindor flood theland isnt going anywhere As such theres no reason to insure thepurchase price since that price includes the value of the landAnd inhigh-rentdistrictslikethemetropolitanEastCoastorcoastalCaliforniathelandvaluecanfaroutstripthevalueofthehomeWhatyouwanttoinsureisthecostofrebuildingthehomeAndwhatis that costWell ask a local builderhowmuchyoudhave topay tobuild a replica of your house inside and out If you have a high-endgourmet kitchen triplecrown molding throughout and wide-plankpinewoodfloorsmakesurethosefinishingdetailsarefactoredinDontrely on the recent sales price of a nearby home again that priceincludesthevalueoftheland

NOTEAlendermighttellyouthatyoumustcarry

insurancetocovertheamountofthemortgage(whichincludes

thelandvalue)butthatsnotnecessarilytrueMany

statesimposelawsthatpreventlendersfromrequiringyoucarry

coveragegreaterthanthatneededtorebuildyourhomeResist

suchapushandyoucansavepotentiallyhundredsofdollarsa

yearonyourhomeownerspolicy

Whatever the final tally thats how much you want to insure yourhomeforBut just tobesafebesuretobuyapolicythatprovides forldquoreplacement costrdquo coverageWith this coverage an insurerwill coverthestatedvalueofthepolicyplusanadditionalamountusually20to25 So if you determine your home would cost say $325000 torebuilda$325000policywouldactuallycoverasmuchas$406250incostsOneotherpointabouthomeownersinsuranceInventoryyourhomeYes this is a monstrous chore since homes are packed with so much

ldquostuffrdquo Yet if ever a disaster arrives if ever your home is flooded orburnedinafireyoullwanttoprovideaninsuranceadjusteracompleteaccounting of what you had inside This will help expedite a processwith as little stress on you as possible After all with so many otherchallenges in your life at that moment youre not going to want tostrugglewithtryingtocomeupwithalistofwhatyouownedInsteaduse the worksheet on the next page to catalog your possessionsVideotapetheinsideofyourhomeaswellasadditionalproofofyourpossessionsThetapewillalsoshowwhatthefinishworkinyourhomelookedlikewhichcancomeinhandyaswellKeepthisdocumentandthevideo ina safe-depositboxaway fromyourhome Ifyourhome isdemolishedinadisasterorafirethedocumentandtapewilllikelybelostordamagedbeyonduse

LIFEINSURANCE

Thiscoveragecomesintwobasicformscashvalueandterm-lifeTheformeractsasalife-insurancepolicyandsavingsaccountrolledintooneinvestmentthelatterispurelifeinsuranceBecause a portion of your cashvalue premium goes into a savings

componenttheamountofinsurancecoverageyoubuyislessthanyoudgetwitha term-life policy charging the exact samepremium For thatreasonterm-lifetendstobethebestoptionforaffordingascheaplyaspossible as much insurance as possible Additionally the fees andexpenses insidean insurancepolicy typicallymake themapoorchoicefor saving Better to buy as much term-life as you need and putwhatever would have otherwise gone into the cashvalue savingscomponent intoa low-costmutual fund tracking theStandardampPoors500-stockindex

BusinesseskeepinventoriesofalltheirassetsSoshould

youIfanunfortunatedisastervisitsyourhomeknowing

exactlywhatyouownwhatyoupaidforitandwhenandany

modelorserialnumberwillallowyoutoimmediatelygetto

workwithyourinsurerreplacingthecontentsofyourhomeor

apartmentKeepanyreceiptsyouhaveandanyyougetinthe

future

Buthowmuch insurancedo youneedFiguringout the answer canfeel like guessing at the number of BBs in a ten-gallon jarmdashwildspeculationYouhaveseveralwaystocalculateanumberThesimplestapproachis to use the rule-of-thumb that says you should buy an amount ofinsurance equal to between five and ten times your annual take-home

pay(Thereasontousetake-homepayinsteadofyourannualsalaryisthatinsurancepayoutsarenottaxedthustheresnoneedtoreplacepre-taxincome)ManypeopleusesevenasanadequatemiddlegroundTowit ifyoubringhome$50000ayear(aftertaxes)youdbuyapolicythatpaysout$350000

That rule-of-thumb is better than nothing since it at least providessome level of protection for your family But its not a very accurateindicator of your needs unless you have no other obligations in lifeexcept to help your spouse pay monthly bills in the event of youruntimelydeathMostpeoplehoweverhavemanyotherexpensestheydwanttocover

in their lives and thuswant to leavebehindenoughmoney to coverafter their deathmdashbe it a mortgage they want to pay off a collegeeducation they want to afford for their kids or helping a survivingspouse cover retirement needs That requires a more detailedcalculation since you need to determine just what those costs are inordertobuyanappropriateamountofinsuranceTheworksheetonpage58isusefulnomatterwhetheryougowitha

cashvalueorterm-lifepolicysinceultimatelyyourepurchasingapolicytocoveraspecificdollaramountofinsuranceintheeventyouoryourspousediesprematurelyWhatmakes insuranceoneof lifes biggest chores is shopping for it

Witheveryphonecall toeveryagencyyoumustrunthroughthesamelonglitanyof

Themostchallengingentryonthisworksheetisthe

family-expensefundThisistheamountofmoneythesurviving

spouseandanychildrenwillneedtoliveonthroughtheyears

Hereshowtoestimateit(visitwwwWSJcomBookToolsfor

aninteractiveversionofthisworksheet)

personaldatavehicleidentificationnumbersinformation

onyourhouseandonandonStilljustlikewithbuyingacar

orahouseyouneveracceptthefirstquoteyougetfroman

insurancecompanybecausechancesareverygoodyoullfinda

betterdealifyoushoparoundalittle

Thisworksheetwillhelpyoukeeptrackofwhoyouve

calledandthedetailsofthequotesandcoveragesothatyou

canmakefaircomparisonsbetweeninsurers

Youcanusethisworksheetnomatterifyoureshoppingforhomeauto

orlifeinsuranceoranumbrellapolicyYoullprobablyneedafewmore

oftheseworksheetstoshoparoundandyoucanhavemanyasyouneed

atwwwWSJcomBookTools

nless youre independently wealthy and can afford cash for yourcars and homes and whatever else you want to buy you will

inevitablyapproachalenderatsomepointtoborrowmoneytocompletea purchase The amount borrowed might be substantial such ashundredsofthousandsofdollarsforahouseoritmightbesmallmdash$10onyourcreditcardforaChinesetake-outmealfortwoWhateverthecaseandwhateverthecosttheunderlyingrulesarethe

same someone or some institution is fronting you the money for apurchaseand in returnyoureobligatingyourself to repay thatmoneywithinterestBut debt is not the same as cash thoughmany people treat it that

wayThey see a $10000 credit limit on theirVisa card and to themtheyhave$10000tospendBorrowingdoesntworkthatwayWhatyouspendisntmoneythatsjustgoneasitwouldbeifyoupulledthecashoutof a checkingor savingsaccountWhatyou spend still exists as adebitbalancenexttoyournameandisthereforemoneythatyoumustbylawreplaceYoumighthavea$10000creditlimitbutifyouhavenowaytorepaythat$10000youspentthenyourlifeisinforawoolyrideasyoustruggletomeetminimumpaymentsmandatedbyalenderorworseslipintobankruptcyandifyoureinamarriageplacestrains

onyourrelationshipSo lets start at the endwith signs that youmayalreadyhavegoneoverboardwithyourborrowing

WARNINGSIGNSYOUCARRYTOOMUCHDEBT

Youre stressedouteverymonthaboutyourability topaydownyourdebtYou have more than one credit card and you can only affordminimumpaymentsoneachYou pay off other bills by taking cash advances against yourcreditcard(s)YouhavemaxedoutthecreditlineononeormorecreditcardsYoureunsureofhowmuchcombineddebtyouactuallyhaveYoulivefrompaychecktopaycheckandcantaffordtosaveYouhavenosavingsaccounttofallbackoninanemergencyorasavings account so small that one or two bills in the first monthwouldwipeitoutYou lease a car that you could not have afforded to buy usingconventionalbankfinancingYourelyonaninterest-onlymortgagetoaffordahouseforwhichyou otherwise could not afford the monthly payments using aconventionalmortgageYoushopcompulsivelyYouandyour spouse fightabout spendingor theamountof thechargesonacredit-cardstatementYoulietoyourspouseabouthowyouspendmoneyoryoueitherhide or throw away the portion of the credit-card statement thatdetailstheexpensesYouvebeendeniedcredit

Ifanyofthoseringtrueinyourlifeyoulikelyhaveadebtproblemandyoushouldseekhelp ingettingahandleonyourspendingsothatyoucanbegin toeradicate thedebtyouowe Ifyoucantcontrolyourdebt or your spending deeply embedded emotional issues may be atplayandyoushouldseekoutafinancialcounselororafinancialplannerwhohasexperiencedealingwithemotionsrelatedtomoneysincemanyfinancialproblemsstemfromemotionalrootsratherthanmonetaryYoucan find the Association for Financial Counseling and PlanningEducation at wwwafcpeorg or track down a local financial plannerthrough the Financial Planning Association (wwwfpanetorg) or theNational Association of Personal Financial Advisors (wwwnapfaorg)Askplannersthatyouspeakwith if theyoranyoneontheirstaffdealswith the emotional issues of saving and spending or if they can referyoutosomeonewhodoes

ISYOURDEBTTOOHIGH

Lendersandcreditcounselorslookatsomethingcalledyourldquodebt-to-incomeratiordquo togaugewhetheryourecarryingtoomuchdebtrelativetothesizeofyourpaycheckThisis inessencethebarometerofyourfiscalhealthA reading below 15mdashthat is your total nonmortgage debt as apercentage of your incomemdashis considered healthy Less than 10 isidealAbove15andyoure skating toward troubleOnceyouexceed20lendersgenerallyconsiderthatyourecarryingtoomuchdebtYoumightbeabletomanagethatdebtloadbutlenderswouldbeconcernedthatanyfinancialhiccupcouldsendyoureelingAtlevelsaboveabout35yourepresentasignificantriskmdashtoyourselfandtoalenderCalculatingyourdebt-to-incomeratioisfairlystraightforwardInthisworksheet do not include your mortgage (or rent) since that is notconsumerdebtInsteadincludeallyourcredit-cardauto-loanor-leaseandhome-equityloansandlinesofcreditandanyotherloansyouhaveoutstanding(visitwwwWSJcomBookToolsforaninteractiveversionofthisworksheet)

PAYINGDOWNDEBT

Therearesixdegreesofseparationbetweenyouandazerobalanceonyourconsumer-creditaccounts

1DETERMINEHOWMUCHYOUOWE

Too many consumers dont really know how much debt they haveTheir wallets are packed with a couplemdashor severalmdashcredit cardsprobably a gas card or two and a few store-branded cards for certainretailers they frequent And the thing is a couple hundred dollars

accumulated on an individual credit card seems manageable in theabstractbecausethehumanmindisexpertatcompartmentalizingYoudontthinkaboutowing$10000intheaggregateyouonlythinkofthe$600onaparticularVisayouhaveinyourwalletandwell that littlebitofmoneydoesntseemlikeallthatmuchThataggregatehoweveriskeyIfyoucanquantifytheproblemmdashandyou can by simply adding together all your debtmdashyou immediatelyestablishthefinishlineyourerunningtowardthetotalamountofdebtyou must pay off Though the distance involved can seeminsurmountableitsnot

Listallthecreditcardsyouownhome-equityloansandlines-of-credit

youhaveoutstandingautoloansleasesandanyotherconsumerdebt

youoweExcludeyourmortgageThetotalmonthlypaymentwillhelp

youputintoperspectivethedegreetowhichyourdebtisconsuming

yourincomeThephonenumbermeanwhilewillserveasfuture

referencewhenyouneedtocallandcloseyouraccountornegotiatea

lowerratewithacreditor

2PayAttentiontoYourSpendingandWhatYouTellYourself

NeverfallpreytothethoughtofldquoOhwellwhatsanother$50rdquoWhenyourestrugglingunderthousandsofdollarsofdebtanditsdinnertimeandyoure thinkingldquoIcangotoTacoCheapoor thatnewsushi jointrdquotoooftenpeopleinthatsituationchoosetheexpensivemealbecause(a)its a seemingly affordable luxury in their life and (b) they think thatbecause they already owe Master-Card $10000 well whats another$50Another $50 is another $50 you could pay toward your credit-card

balancetoreduceyourdebt faster Itdoesntseemlikemuchbutthenagain the first$50you rangupon themarch to$10000wasntmucheitherOver time seemingly inconsequential ripples lead to awave ofchange

3AlwaysPayMorethantheMinimumDueonYourCreditCardsEachMonth

And to the extent you can add a little something extra to your carloanoranyhome-equityloanyouhavePayingmorethantheminimumprovides three benefits you pay down your balance sooner and youreduce theamountof interestyouultimatelymustpaywhich letsyoukeepmoreofyourmoneyforotherpurposesToaccomplishthisfactordebtreductionintoyourpersonalbudgetor

spendingplan eachmonth Insteadof allocating all of yourdisposableincome to entertainment or clothes or books or whatever earmark atleast10ormoreofthatmoneyfordebtrepaymentIfyouwanttobeDraconianuseallofyourdisposableincomemdashthatwhichdoesntgotomandatoryexpensesmdashtorepayyourdebtquickerHowever dont feel like a financial failure if youhave to pay down

yourdebtataslowerpacethanyouwouldlikeSolongasyouremaincommitted to shrinking that balance to zero and so long as you seeprogress in that direction each month you have reason to feel good

aboutyourefforts

4HOLSTERYOURCREDITCARDSANDRELYONCASH

Ifyoudonthavethemoneyonyouattheexactmomentyouwanttobuy something even if its just a $130 diet soda at the drive-throughthatwould first require a trip to theATM for cashdont buy it Littleexpenses seem like nothing after all you cant buy a new house or adreamvacationoraretirementnestegg$130atatimeStillsmallexpensesaccumulateduringthedayandoverthecourseof

a month and if youre tossing off $130 here and $360 there soonenoughyouretalkingabouthundredsofdollarsandoverthecourseofayearthousandsofdollarsThatsparticularlytruewithmuchlargerexpensesthekindyoudidnt

expect tomake butwhich you nonetheless pursue and forwhich youwhipoutthecreditcardtopayYouprobablyknowthesituationwellYoure walking through Wal-Mart there to buy a $3 bottle of dishdetergentandyouspyaDVDyouvebeendyingtoseemdashyouknowtheDVDplayerisonthefritzbuttheresoneonsalefor$89whichseemsprettydarnaffordablemdashsoyouwalkoutofWal-Martwiththat$3bottleofdishdetergentandaDVDplayerandaDVDthatcostyouabout$100combinedThe best solution Keep your credit cards away from your wallet

YoullhearinmanyplacesthatyoushouldcutupyourcreditcardsandonlyusecashoradebitcardButthatsillogicaladviceinanelectronicagewhenyouneedcreditcardstoefficientlyshoponlineortoreserveacarorhotelAbetterbetistosimplykeepyourcreditcardsathomeina safe place locked away Thatway you cant just rip one out of thewallettobuywhateverhascapturedyourfancyatthemomentBetterstillwhenyourcreditcardisathomeyoumustdrivehometo

fetch it That drive home and then back to the store provides time tocool your jets and think about whether you really wantmdashor needmdashtospend thismoney on an item that earlier in the day youwerent even

thinkingabout

5PAYOFFTHESMALLESTBALANCEFIRST

Thisdoesntnecessarily jibewithconventionalwisdomthatsaysyoushould first pay off the card with the highest interest rate Yet byconcentratingonextinguishing thesmallestbalance firstyouseemorequicklythefruitsofyourlaborThatwillkeepyoumotivatedJustkeepmovingupthelineofcardspickingtheonewiththenext-lowest balance This approach is ultimatelymore expensive since thecards with the biggest balances are attacked last But theres a wayaroundthatApplyforalowratecreditcarddesignedforconsumerswhowant to transferover thebalance fromhigher-ratecardsYoucan findthese ldquobalance transferrdquo cards at wwwcred itcardscom Alternativelycall the credit-card company thats charging you the highest rate andnegotiate thatratedownSomanycredit-cardprovidersarecompetingforbusinessthatyoumayhavesomeluckinpersuadingyourstoloweryour interest rate lest you bolt for a competitor Be nice remind theagent thatyouvebeenagoodcustomerforyearsandthatyoucarryabalance but that youre thinking of transferring the balance to a newcardwithalowerrateifthecompanycantreducetherateitschargingyou

6CancelCardsorCloseAccountsWhenYouPayOfftheBalance

If you have several credit cards or other types of credit-basedaccounts closing them down when your balance reaches zeromdashandcuttingupthecardsmdashwillkeepyoufromeverrackingupanotherdimeindebtonthatcardThecaveatDonotcloseacreditcardaccount thatyouhaveownedforyearsYourcreditscoreiscalculatedinpartonhowlongyouvehad

credit in your name If you close the oldest account then the secondoldest account reestablishes your credit history and depending on thespread of years between those accounts you could actually be hurtingyourcreditscoreIfyouroldestaccounthappenstobetheonethatalsosportsthehighestinterestratenoworriesjustdontusethecardKeepit active maybe by using it once every few months to buy gas orgroceriesandpayitoffinfullButusealowratecardifyouregoingtocarryabalance

BUYINGAHOME

Owning a home is the core of the American dream Its also a veryexpensivepropositiongiventhatthemedianpriceofahomeintheUSin2005wasnearing$200000The vast majority of Americans dont have that kind of spare cashlying aroundYet roughly 70of thepopulationowned ahomeas of2005ForthatAmericanshaveamortgagetothankThoughitsthoughtofasaloanamortgageisactuallynotaloanbuta lienMoreover amortgage is not something a lender gives you butrather something you give a lendermdashnamely a legal security (themortgageitself)thatgivesthelendertherighttotakepossessionoftheproperty should you default on repaying the money you borrowed tobuythatparticularpieceofpropertyinthefirstplaceButmaybe you arent convinced youwant to own a home to beginwithAfterallhousesareapriceypropositiongiventhat theresmoreinvolvedthanjustpayingthemonthlynoteBeforeyoubuyahouseyoumustaskyourselfifdoingsoreallymakessensetoyourcurrentfinancialsituationandyourlifestyleYoudontreallywanttofacetheprospectofbuyingahousethendecidingafewmonthslaterthatyoudratherliveinanothercityYoullrackupthousandsofdollarsinlosesfromthefeesandcommissionsyoupaytobuyandsell

RENTINGVERSUSBUYINGWEIGHINGTHETRADE-OFFS

ThebenefitsofhomeownershiparemanifestFirstyoubuildequityinanassetmeaningthatwitheachmonthlymortgagepaymentyouownanincreasinglybiggerpieceof thepropertySecondhomevaluestendtoriseovertimeusuallyalongsidetherateofinflationmdashthoughinsomecities and during certain periods of time home prices can rise muchfasterThatmeansthevalueofyourpropertygrowslargerthroughtheyearscreatingastoreofvalueyoucantaponedaylaterinlifeThirdthefederalgovernmenthelpsyouaffordyourhomebyallowingyoutowriteoffaportionofthemonthlycostintheformofadeductionforthemortgageinterestyoupayOf course some downsides exist too Youre responsible for all

mannerof upkeep through theyears and that eats into your ability tosaveoraffordotherexpensesYourfreedomtomoveonawhimacrosstownoracross thecountry is limitedsinceyouhaveahomeyoumustfirstsellTheresnopromisethathomepriceswillrise theycouldfallandyoucouldlosemoneyIn essence the question of covering your head with a roof comes

downtothisDoyouwanttobuildequityinapieceofpropertyordoyouwantthefreedomnottoworryaboutrepairingabustedtoiletandmowingthe lawnThats thefirststep indeterminingwhetheryouareultimatelyarenterorabuyerandtheworksheetonpage71canhelpyou determine the annual cost of buying versus renting (visitwwwWSJcomBookToolsforaninteractiveversionofthisworksheet)

Intheworksheetexampleonthenextpagethecostofbuyingahouseisabout$300cheapereveryyearThatsnottoimplybuyingisalwayscheaperSometimesrenting ischeaperBut remember thisThecostofmonthly rentescalatesalongside inflationwhile thecostofamonthlymortgage payment tied to a fixed-rate loan never changes So even insituationswhererentingischeaperatfirstitcouldbecomesubstantiallymorecostlyover timeincomparisontoamortgagepaymentAfterallanapartmentoriginallycosting$750amonthwillcostroughly$1000amonthafter10yearsof3 inflationwhile a fixed-ratemortgage thatcost$900amonthwillstillcost$900amonthadecadelater

HOWMUCHCANYOUAFFORD

Knowing whether you can afford the $12 petite filet or the $20porterhouse at the local meatery is pretty simple Knowing you cantafford a $70000Mercedes on a $20000 income is pretty simple But

whenitcomestohowmuchhouseyoucanaffordsuddenly itsnotsosimpleWhenyoustart talkinghundredsof thousandsofdollarsspreadover

thirty years determining what is and is not in your financialneighborhoodgrowsmuchmorecomplexWhenyouaddinthevariousinterest-ratepossibilitieswellthatonlymuddiesthemattermoreNot toworry The house you can afford is not the one you think is

affordableitstheonethelendersaysyoucanaffordmdashbecausethatstheone forwhich the lenderwill loan you thenecessary fundsYoudonthavetovisitalenderhowevertofigureouthowmuchmoneyyoucanborrowandthushowmuchhouseyoucanaffordAll lenders use a formula of one sort of another to determine how

muchmoneytheylllendyouThoseformulasflowdirectlyfromthesizeofyoursalaryandtheamountofdebtyoualreadycarryEverythingelsebeingequal ifyouandyourcoworkerhaveidentical incomesbutyouhaveamoundofdebtyourcoworkerwillbeabletoaffordmorehousethanyoubecausealenderisntgoingtoofferyouasmuchmoneysinceyour salary must repay not just the mortgage but your other debtobligationsaswellLendersgenerallyusetwoformulasmdashafront-endratioandaback-end

ratioSoletscalculatethemasthelenderswould

Thefront-endratio is theportionof your income that you canallocatetomortgagedebtThisnumbervariesbylenderbutittendstogravitateinthe28-to-31rangeThismeansthatnomorethan31ofyourgrossmonthlyincomemdashyourincomebeforetaxesmdashcangotoamortgagepaymentThemathlookslikethis

So if you earn $50000 a year or $4167 a month a lendergenerallywillonlyprovidealoanamountthatkeepsyourmonthlypaymentsunder$1167amonth

The back-end ratio is the portion of your income that you canallocate toalldebt includingmortgage credit-card child-supportandanyother loanpaymentsLendersuseback-endratios rangingfromabout36upthrough50thoughtheygenerallycongregatearound40Themath

With that same $50000 income a lenderwillwant your total debtpaymentstobenomorethanabout$1500amonthLenders will typically choose the lower number of the two

calculationsbutnotalwaysSoitswiseforyoutoknowwhatthosetwonumbersareandwhatnumberalenderwilluseYouwanttodeterminefor yourself whether youre comfortable paying whatever amount theformulas show you can afford to pay Moreover with either of thosenumbersyoucancalculateexactlyhowmuchhouseyoucanbuyThatwillkeepyoufocusedonrealistichomesinsteadofwastingyoureffortstouringthosebeyondyourwalletsabilitytopayTheworksheetonthefollowingpagewillhelpyoucalculateallthose

ratios and determine the price range inwhich you should be huntingYoucanalsovisitwwwWSJcomBookToolsforaninteractiveversionofthisworksheetRememberWhenyouredeterminingwhatsizehouseyoucanafford

themortgageisnttheonlynumberyouneedtoknowYoullalsohavetopayproperty taxes and insuranceTaken together this is knownas thePITIorprincipalinteresttaxesandinsuranceThesimpleformula

Inmost instancesyour lenderwillpackageyourmortgagepaymenttaxes and insurance into onemonthly note The lender strips out thetaxes and insurance and stashes that money in an escrow account in

your name and each year pays your home owners insurance andpropertytaxesforyouwiththatmoney

Or you can arrange to keep the interest and tax portion yourselfmdashmeaningyouonlypaythemortgageeachmonthInthiscaseyoumustremember when to pay your insurance and tax bills during the yearwhichmeans youmust save for them in your spending plan lest youfacefinancialsurpriseswhenthebillsarrive

SHOPPINGFORALOAN

OKsoyouvedeterminedthatyouwanttoownahouseNowcomesthenextbigstepmdashhowtopayforitYoullneedthatmortgageYourenotlikelytobuythefirsthouseyouseeSotheresnoreasontoacceptthefirstmortgageyoucomeacrossLendingisanultracompetitivebusinesswiththousandsoflendersbigandsmallscramblingeverydaytolendmoneytosomeoneforahousepurchase Shop even for half a day and youll undoubtedly find a ratethatscheaperandfeesthatarelowerthanthefirstmortgageyouwereofferedInfactyoushouldprobablyshopforaloanbeforeyoushopforyourhomeThiswayyoullhavenoworriesaboutthemortgagealenderwillprovide and no question about what the price range you should beshoppinginOfcoursetheshoppingcanbeachoresincecomparingloansismorethanseekingoutthelowestinterestrateLendersalsoquotepointsandclosing costs both of which factor into the amount of money youultimatelymustpayforamortgage

Pointsrepresentup-frontcostsyoupaytothelendertolockinaparticularinterestrateSomelenderschargenopointssomechargefractionalpointssomechargetwopointsormoreEachpointistheequivalent of 1 percent of the loan value With a $250000mortgagethenonepointmeansyoullpay$2500WhenyoupaypointsyouessentiallyldquobuydownrdquotheinterestrateThemorepointsyoupaythelowertherateDontshyawayfrompointsjustbecauseitmeansmore up-front costs Overmany years the lower interestratemeansyouwillhavetorepaytensofthousandsofdollarslessthanyouwouldwithano-points loanSo if youplanon living inyourhouse formanyyears paying apoint or two could saveyoubarrelsofmoneyovertimeClosingcostsarefeesyoupaytoahostofserviceproviderssuchas title and escrow companies certain government agenciescouriers and lawyersAsk each lender toprovideyoua list of allthe fees thatyouwillpay so thatyoucaneffectivelycompare the

truecostsofeachmortgage

Use the chart on page 77 to keep tabs onwhich lender offerswhatmortgageatwhatcostVisitwwwWSJcomBookToolstoprintasmanycopiesofthischartasyouneedRememberthatmortgagerateschangedailymdashsometimes several times a daymdashso it will be difficult toaccuratelycomparemortgagesifyougatheracoupletodayafewmoreseveraldaysfromnowandsomeothersaweekortwolater

TAXSAVINGS

The great benefit of home ownershipmdashaside fromhaving a place tostoreyourstuffandsleepatnightmdashis the taxdeductionyoureeligibleforeachyearThe IRS allows you to deduct the interest portion of yourmortgagepaymentaswellasanypropertytaxesyoupayYoumustitemizeyourtaxesmdashthat is fill out ScheduleAmdashto claim these deductions The net

effectmeansyourmortgagepaymentisntascostlyasitappearsSay you buy a $200000 Average American Home putting $40000

down and picking up a $160000mortgage for 30 years at 6 Yourprincipal and interest payment is a little more than $959 a monthAssume property taxes are about $150 each month and insurance isanother$100Yourmonthlyhousenote$1209On that particular mortgage youll pay over the first year about

$9547 in interestand$1800 inproperty taxesYouhaveawrite-offthenof$11347attaxtime(Eachyearthatnumberchangesbecausetax rates change and because the amount of interest you pay growsprogressively smaller in Year 2 for instance total interest paymentsamount to $9515) How much of that $11347 you actually savedependsonyourstateandfederaltaxrateswhichyoucandeterminebylooking at the tax-rate schedules the IRS publishes at wwwirsgov(searchforldquoTaxRateSchedulesrdquo)Assume you and your spouse earn $100000 combined and you file

yourtaxesjointlyIn2005thatincomewastaxedatamarginalrateof25Sayyourstatetaxeswere4sothatoverallyourepaying29intaxesMultiply that percentage by the amount you can claim on your tax

return and you have your annual tax savings In practice it looks likethis

On amonthly basis thats a savings of about $274 Thatmeans therealaftertaxcostofyour$1209monthlyhousenoteiscloserto$935

Income-taxratesworkbytaxingyourincomeatdifferentlevelsasyour

incomegrowsAssumethatyouandyourspousefileyourtaxreturns

jointlyandreport$100000

Assumethatyouandyourspousefileyourtaxreturnsjointlyandreport

$100000inso-calledadjustedgrossincomeorAGIwhichisessentially

allofyourvarioussourcesofincomefortheyearminusthevarious

deductionsyoureeligibletoclaimAt$100000youfallintothe25

taxbracketButthatdoesntmeanyouowe$25000intaxesOnlythe

highestdollarsofyourincomearetaxedatthehighestlevelthisis

whatsknownasyourmarginaltaxrate

YourincomeisactuallytaxedatvariouslevelsalongthewaySowith

that$100000thefirst$14600istaxedat10thenext$44800(or

$59400thetopendofthe15rangeminusthe$14600thatwas

alreadytaxedat10)istaxedat15andsoonUltimatelyitlooks

likethis

CALCULATINGTHEEQUITYINYOURHOME

Whetheryoureapplyingforahome-equityloanortryingtocalculateyour networth you need to know the amount of equity you have inyourhouseThatcalculationissimple

HeresanotherreasontokeeptabsontheequityyouveaccumulatedOnce your equity ownership reaches 20 ormore you can request acancellation of the private mortgage insurance youve probably beenforcedtocarryKnownasPMIthisinsuranceisnotforyourbenefitbutrathercompensatesthelenderincaseyoudefaultonyourmortgageandyour property doesnt fetch enough to pay off the loan balance inforeclosureLenderstypicallywrapPMIintothecostofyourmonthlyhousenoteif

yourdownpaymentoryourequityinthehousefallsbelow20Ona$250000mortgage PMIwill roughly add between $104 and $208 toyourmonthlycostOnceyourequitytops20ofthevalueofyourhouseyourlenderno

longer needs the policy though the company that services yourmortgageisntlikelytoringyouuptoremindyouofthisimmediatelyBylawlendersaresupposedtocancelPMIwhenyourpaymentshave

reducedyourloanbalanceto78ofthevalueofthehomeatthetimeyouboughtitThathoweverdoesnttakeintoaccounttherisingvalueof your home If you bought a $200000 home with 15 down or$30000yet thevalueofyourhomerises to$215000wellyounowhave in excess of 20 equity in your house The math You owe$170000onahomeworth$215000givingyouequityof$45000or209ofthecurrentvalueofyourhouseActuallytheequityyouownonapercentagebasisishighersinceyourmortgagedebtwillbelowerthan$170000becauseyourmonthlynote includesprincipalpaymentsthatwillhavereducedtheamountofmoneyyouoweYoullprobablyneed tohaveyourhomeappraisedbefore the lender

will agree to cancel the policy but youll recoup that cost of a couplehundred dollars in just a fewmonths and then havemoney for other

purposesthatotherwisewouldhavegonetoPMI

TOREFINANCEORNOT

PeriodicallyinterestratesheadlowerallowingconsumerstoborrowmoneyatmoreaffordablepricesInthosemomentshomeownershavean opportunity to refinance their mortgage and save potentiallyhundredsofdollars amonthand tensof thousandsofdollarsover thelifeofthemortgageGenerally home owners refinance for a few reasons to lower their

monthlynotetotaptheaccumulatedequityintheirhomeforspendingonwantsandneedsortoswitchfromonetypeofmortgagetoanothermaybetradinganadjustable-ratemortgageforafixed-ratemortgageRefinancing however is not a cost-free proposition You must pay

variousfeesandclosingcostsonthenewmortgageYoumustalsotakeintoaccounthowlongyouexpecttoliveinyourhomeIfyourexpectedremaining time is fairly short the savings you generate with a less-expensive mortgage might still not equal the costs of the refinancingitselfInthatcaseitmakesmoresensefinanciallytokeepyourcurrentpayment despite its loftier monthly burden If you plan to remain inyourhomeformanyyearsthenrefinancingtoevenamarginallylower-ratemortgagewillultimatelysaveyouthousandsofdollarsThe simple worksheet on the next page will help you determine

whether itbenefitsyourpocketbook to refinanceat currentlyavailableinterest rates or whether themortgage you already have remains thebetterdeal

THEOLDCOLLEGETRYSAVINGFORACHILDSEDUCATION

The first thing to remember about paying for a childs collegeeducation is this You dont necessarily have to pay for itmdashfor several

reasons

ScholarshipsgrantsandaidDuring the2003ndash4academicyearstudents nationwide received more than $122 billion for collegeexpensesanaverageofabout$10500perstudentEssentiallyalotofmoneyexistsouttherethatyoucantapintoWork Theres no rule that says students cant work before andduring college to help pay for or defray the costs of their owneducationAndtheyhaveafullworkingcareerafterschooltopayoffstudent loanstheycantakeouttocovertuitionandbooksandsuchRetirementAs inyourownHeartlessas itmight sound savingfor your years in retirement are far more important than savingevery last penny for your childs college degree As noted abovekidscanworkandpursuescholarshipsgrantsandloanstopayforschoolNo onewill offer you scholarships and grants to live yourretirementmdashanddoyoureallywanttoworkthroughretirementjusttoaffordyourlife

Without question college is costly For the 2004ndash5 school year theaveragefour-yearpublicschoolcostabout$11400fortuitionandroomand board Head to a top-flight state school like the University ofCaliforniaLosAngelesortheUniversityofMichiganandcostssurgetobetween $17000 and $35000 depending on residency status Privateschools can cost $40000 or more And remember those are per-yearamountsmeaningafour-yeardegreecanrubupagainst$150000Butifyouredeterminedtopayforallorpartofyourchildscollege

dontletthebignumbersintimidateyouPeoplerarelypaycashforbigpurchaseslikecarsandhomesandcollegeisnodifferentForonethingyoull likely be able to afford some of the expense right from yourpaycheck College costs generally coincide with parents peak earningyearssoyourelikelytobeinbetterfinancialshapethanyouwerewhenthe kids were first born You no longer have child-care costs oreducational expenses for instance freeing up some income you can

earmarkforcollegecostsFormostparentshoweverpreparingforcollegemeanssaltingawaya

littlemoneyeverymonthformanyyearsWhilethereareallmannerofways to savemdashfrom CDs to savings bondsmdashthree key savings optionsstand out custodial accounts Coverdell Education Savings Accountsand 529 College Savings Plans Like everything else in the personalfinanceworldeachhasitsstrengthsandweaknessesCustodialaccountsmdashalsoknownasUGMAandUTMAaccountsmdashallow

parentsgrandparentsoranyonetomakeanirrevocablegiftofcashtoaminor Remember This is irrevocable you cannot reclaim the moneyonceitsintheaccountThatwillhaveramificationswhenthechildhitsthe age ofmajoritymdasheither eighteen or twenty-one depending on thestateAtthatpointthechildhascompletesayovertheaccountandhowthemoneyisspentThatmeansifJuniorwantstobuyaPorscheinsteadof using the money on a pre-law degree theres nothing you can doaboutitlegally

Youcanestablishacustodialaccountatanybrokeragefirmmutual-fund company or bank The key advantage You can save as muchmoneyasyoud likeThekeydisadvantagesAlongwith losing controlover the cash at a certain point the earnings are taxed every yeardepletingtheamountofmoneyyouhaveforcollegecostsCoverdell Education Savings Accounts were formerly known as

EducationIRAsTheseallowyoutosaveandwithdrawmoneytax-freesolongasthedollarsareusedforqualifiededucationexpenses(seethechartonpage84)ThekeyadvantagesAlongwithtax-freegrowthandwithdrawalsyou

cantapaCoverdelltopayforachildsprivateschoolingbeforecollegeThekeydisadvantageParentscanonlysave$2000perbeneficiaryperyear So thatmeans if grandparents contribute say $1500MomandDad can only kick in an additional $500 Even over eighteen years ofsaving$2000annually just isnt going togetyou into theballparkofwhat youre likely to need ultimately Also at certain income levelsparents ability to contribute to a Coverdell account phases outAdditionallyyouhavealimitedabilitytochangebeneficiariesandthemoneymustbedistributedbyagethirty529CollegeSavingsPlansalsoallowyoutosaveandwithdrawmoney

withoutpayingtaxesifthecashisusedforqualifiededucationexpensesTheyre offered by state governments through financial advisorsbrokerage firms banks and others and with roughly $50 billion inassets in 2005 have become one of themost popular personal-financeaccountsaroundThe key advantages You can save substantial amounts ofmoney a

cumulative$250000 likely tobeplentyenough forcollegeYoudontrelinquishcontrolofthemoneyiftheoriginalbeneficiarydoesntattendcollegeor receives a full-ride scholarship you can switchbeneficiariesandevennameyourselfthebeneficiaryifyoudliketousethemoneyatsome point maybe return to school in retirement The keydisadvantages investmentoptionsare limited togenerallya few selectmutual funds and the tax advantages are scheduled to expire onDecember312010thoughwithsomanyAmericanfamiliesrelyingonthe529planastheircollegesavingsvehicleofchoiceCongressislikelytomakethetax-freestatuspermanent

HOWMUCHTOSAVE

Thatsthe$64000questionmdashand$64000probablywontbeenoughThe worksheet on page 88 will help you determine howmuch youneedtosavebutbeforeyouattackitthereareafewthingstorecognize(visit wwwWSJcomBookTools for an interactive version of thisworksheet)

1 DontassumethatexpensiveschoolsareautomaticallyoutofyourpricerangeThatsthebiggestmistakeparentsmakeTheamountoffinancial aid a student qualifies for is relative to the cost of thechosen school School financial-aid officers look at a familys so-calleddemonstratedfinancialneeddefinedasthecostofattendingtheschoolminusthefamilysexpectedfinancialcontributionSoforinstanceifyourfamilycanaffordjust$2000ayearyetyourchildwants to attend a $30000-a-year school your demonstratedfinancialneedis$28000mdashandthatsthefiguretheaidofficersworktowardthoughthatdoesntnecessarilymeantheyllbeabletocomeupwiththeentireamountStill thepoint is thatyoullqualify for

more money at an expensive school than at a much cheapercommunitycollegesimplybecausetheneedisgreater

2 DontassumeyourassetsdisqualifyyoufromreceivingaidWhileassetsarecertainlyapartofthefederalfinancial-aidformulasthoseformulasare largelystructuredaroundcurrent incomeTheidea isthatyoucandrawuponyourincomeonapay-as-you-goapproachwhile your child is enrolled in school Moreover those formulasrecognize that parents must save for other obligations namelyretirementAlsomostmerit scholarshipsdont take intoaccountafamilysfinancialsituationTheyrebasedonwellmeritAndmeritdoesnt mean academic merit only numerous organizations offercashbasedonmusicalartisticandathleticprowessaswellascivicactivitieswithin a communityTheHenkelCorporation theAvonOhio maker of Duck-brand duct tape even awards $5000 everyyeartothehighschoolcouplethatfashionsthenattiestpromattireentirelyfromducttape

Donotpayanycompanythatguaranteesfor

afeeofafewhundreddollarsthatitcanfindcollege

financialaidforyouItisascamSuchcompaniesgather

basicfamilyfinancialdataanddumpitintoaFree

ApplicationforFederalStudentAidmdashaso-calledFAFSA

formthatallschoolsusetocalculateaideligibilitymdashand

thenobtainforyouthesame$1000youcouldhave

obtainedfillingouttheFAFSAformyourselfIfyouhave

troublefillingouttheformaskacollegeaidofficertheyll

neverchargeyouapenny

Thecollege-fundingworld is filledwithmillionsof scholarshipsFastWebcom lists roughly 600000 on its continuously updatedonline database Sign up for free plug in a host of educationaldemographicathleticandcivic informationandFastWebfindsallthe scholarships a studentmight be eligible for And as new ones

comeintheWebsitealertsyouviaemailAlsoSLMCorporationcommonly knownas SallieMae offers a free-scholarship database(CollegeAnsweratcollegeanswercom)withinformationonabout24million scholarships worthmore than a combined $14 billionannually

3 Dont forget about state scholarship programs Numerous stateshave inplace scholarshipprograms for localhigh-school kidswhoenroll in statebased schools both public and private Thesescholarships generally cover tuitionmandatory fees and often abookallowanceTheydonttypicallycoverroomandboardInformationonthevariousstatescholarshipprogramsisavailableonline at each states higher-education agencyWeb site The USDepartment of Educationmeanwhile operates a database of stateaid agencies that lists contact information The site is located atstudentaidedgov look for the state-aid link under the ldquoFundingrdquotab

DontoverlookthefinancialbenefitofAdvancedPlacementtestsManystudentstakeAPtestsandusethecreditstoplaceoutoflow-level collegecoursesbut thenultimatelypursue the samenumberof credits But youdont have todo it thatway ifmoney is tightHigh school students can earn enough credits throughAP tests toentercollegeassophomoreseasilysaving$10000ormoreThatsgoodvalue given that anAP test costs about $82 and local highschoolswilloftenpaythatfee

AP tests are offered once a year usually in the spring but manyuniversitiesalsoofferCollegeLevelExaminationProgramtestsso-calledCLEPtestsYougenerallyhaveto foot the$75feeyourselfbut theresnosettestingdatejustcalltheschoolaskiftheyofferCLEPtestsandsignuptotaketheonesyouwant

Afteryoudeterminethecostsyoumightbewonderinghowtoinvestyour savingsbasedon theageofyourchild rightnowThis chartwillgiveyouafeelforhowyoushouldallocateyourmoney

BUYINGACAR

Cars are expensive Ten thousanddollars for themost basicmodelsTensofthousandsforthehot-sellingmodelsandthepopularsportutilityvehiclesFifty thousandormore for luxury sedanshigh-end roadstersandimportedsportscarsFormanyconsumerssuchpricetagsmeanoneoftwooptionsborrowmoneytobuywhatyoucanaffordorrelyonaleasetoputyourhandson thewheel ofwhat you reallywant todrivebut cant afford tobuyusinganautoloanEitherwayyourefinancingthetransactionandthathasrepercussionsonyourwalletManyfinancialprosarguethatfinancingacarmakesnosensebecausethe asset depreciates the instant you drive it off the lot Its not likeyoure borrowing money to buy a house that over time will likelyincreaseinvalueandwhichprovidesvaluabletaxbreaksTheresmerittothatargumentbutitisshortsightedandDraconianCarsareinmostAmerican cities a necessityAnd anyonewho thinksAmericandriversaresimplygoingtoowntheleastexpensiveridetheycanfindislivinginafinancialNeverlandSothistakeonautomotivefinanceisbuiltonthepremisethatyouregoingtobuyacarevenifyoudonthaveeverypennysavedandyoure

probably not going to rush out and logically buy the cheapest mostutilitarianvehicleyoucanfindThatsjusttherealityoflifeIfyouregoingtobuythenrecognizethisItsnotalwayscheapesttopaycashSometimesthefinancialimpactonyourlifeislessonerousifyou finance the purchase This is typically the case when automakersprovidespecialincentivelowratefinancingInthosesituationsitcanpayto do the math shown on the following worksheet since borrowingmoneytobuyacarinsteadofpayingallcashmeanslessmoneyoutofyourpocketintheend

By the same token it doesnt always make sense to jump at theultralow-rate financingeven the0 financing thatautomakersuse tolureyouintotheshowroomConsiderforinstancethatatonepointin2005 the Ford Motor Company offered buyers of its economy-pricedFocusanincentive$2000cashbackor0financingover36monthsBut pay attention to the ldquoorrdquo in the middle of that sentence Car

companies typically dont offer the lowrate financing and the rebateChoosetousethecarmakersmoneyforfreethrough0financingandthedealerisntlikelytocutyouanyslackonthesalespriceLookhowthisreal-lifesituationactuallyplaysoutAssumingyouputin$2000ofyourownmoneyasadownpayment

that2005Focusat0financingmeantamonthlynoteof$312forthreeyearsButtakethe$2000rebatealongwithyouroriginal$2000downpaymentandpay29forthesame36months(realisticat thetime)yournoteisjust$268mdashamonthlysavingsof$44ornearly$1600overthelifeoftheloanThemessageRunthenumbersbeforeyouruntothedealerFinancing

at0isntalwaysascheapasitsounds

THEINSANDOUTSOFAUTOLEASES

Beforeyourushouttoleasethattop-of-the-lineJaguarthatseemssoenticingly affordable at $250 amonth for the next 17 years take thetimetounderstandthefactorsthatdetermineamonthlyleasepaymentsothatyourenotcarjackedbyanautodealerusingyourlackofinsidersknowledgeagainstyouThefirstquestiontoaskyourselfiswhetheritmakessensetoleasein

thefirstplaceorwhetheryourebetteroffbuyingSobeforeyoujumpinto a lease jump into theworksheet on page 97 to determinewhatsbestforyourpocketbookAssuming youve determined you want to pursue a lease the most

importantnumber toknow is thedepreciatedvalueof thevehicleyouwantThatvaluespreadacrossthenumberofmonthsinvolvedinyourlease determines your monthly payments Just as with buying a caroutrightmanyofthecomponentsofanautoleasearenegotiablesoyouwanttoknowthenumbersthedealerisrelyingontocomeupwiththedepreciatedvalueandultimatelythemonthlynoteThree numbers establish everything capitalized cost residual value

and the so-called money factor These three factors plugged into the

worksheetwillallowyoutoeffectivelycomparison-shoptheautoleasesdifferentdealersareoffering

Capitalizedcostistheagreed-uponsalespricewhichyoucannegotiatejustasyouwouldthestickerpriceofanycaryoubuyResidualvalue iswhatthedealerexpectsthecarsvaluewillbewhen

youreturnitattheendoftheleasetermYoudonthavedirectcontroloverthisbutmanyautoWebsiteslistwhichcarsretaintheirvaluethebest That gives you some control in choosing cars that retain theirvalueThegreatertheresidualvaluethesmallerthedepreciatedvalueandthusthemoreaffordableyourmonthlynoteThemoneyfactor is thecostofborrowing leasingsequivalentof the

interestrateattachedtoaconventionalloan

TURNINGAMONEYFACTORINTOANINTERESTRATE

One of themore confusing components to auto leases is themoneyfactor the numerical value the auto dealer plugs in to determine howmuchyourleasepaymentwillbeafteryouagreeonthecostofthecarThe money factor basically serves as the interest rate would in aconventionalloanmdashitisthecostofborrowingCalculating the interest-rate equivalent of themoney factor requires

nothingmorethanalittlemathMultiplythemoneyfactorby24

Soifadealertellsyou(morelikelyyoullhavetoask)thatthemoneyfactoronaparticularleaseis003854wellyoucanwhipoutapencilorcalculatorandquicklydeterminethatyourepayingtheequivalentofa925loanrateThisisaprimereasonitpaystodoyourhomeworkbeforeyouwalk

into a showroom If you know that interest rates on car loans at yourlocal creditunionorbankare7 theresno reason in theworldwhyyoudwant topay substantiallymorewithanauto lease (By thewayalwayscarryacalculatornotepadandpencilwhenshoppingforacarleaseThatwayyoucandoallyourcalculationsandshowthesalesmanyouknowwhatswhat)

Thecapitalizedcostandthemoneyfactorare

bothnegotiableThatmeansyouhavethepowertopushfora

lowerstickerpriceonthecaryouwantandacostof

borrowingthatisinlinewithwhatyouwouldgetthrough

conventionalfinancingThoseeffortswillsaveyouthousandsof

dollarsoverthelifeofthelease

COMPARINGLEASES

Dontassumetheleaseyoureofferedatonedealerisprettymuchthesame as youd get at another dealer Just as youd shop two or moreshowroomswhen buying a car outright you should shop for the bestdealyoucannegotiatewhenleasingacarortruckTheworksheetonpage101willmakethatprocesseasierPluginthe

capitalizedcostresidualvalueandmoneyfactorandyoucancalculateyourmonthly leasepayment todeterminewhichdealer isofferingyouanacceptabledealSomelastnotesofcautionwithautoleases

Inmoststatesso-calledlemonlawsdontapplytoleasedvehiclesThese laws mandate that a carmaker provide a remedy forconsumers who buy vehicles that fail tomeet certain quality andperformancestandardsmdashsuchasacarthatrepeatedlyisintheshopforthesamerepairissueAllfourtiresmustmatchifyoureturnthecartothedealeratthe

endof the lease If theydont youll pay for a set of new tires toreplacethemismatchedtiresIf you exceed the cumulativemileage limit of typically between

10000and15000milesannuallyyoullpayafeeof10to20centsfor everymile over the limit This alone generallymakes leases abaddeal fordriverswhoput lotsofmilesontheircarsduringtheyearInsurancecanbeabearSomelendersrequirethatyoucarrya$0

deductible on your comprehensive and collision coverage whichraises your rates dramatically And if you total the car yourinsurance wont pay for lease payments taxes or fees youll stillowe Thatmeans youll need ldquogap insurancerdquo to pay off the leaseandtheresidualvalueofthecarThataddstotheoverallmonthlyoperatingcostsFinally leases are legal contracts that can be difficult if not

impossibletogetoutofifyouultimatelydecideyoucantaffordthenotesordontlikethecarYourelikelytobehitwithsizablefeesif

youback out of the contractDonot enter into a lease lightly orjust because it helps you afford a car you otherwise couldnt buywithyourcurrentfinances

heresonelastaspectofbuildingyourfinancialbasethatyouneedto pursue preparing yourself for any potential emergency that

mightariseeverythingfromplanningforthedayyouloseyourwallettokeeping track of all your financial accounts to knowing where theimportantpaperworkisintheeventofatragedyordeath

THEWALLETREGISTER

ToborrowanadvertisinglineWhatsinyourwalletAll of us carry some sort of billfold pocketbook coin pursemoney

clip or wallet to corral our currency a few family photos a driverslicense likelya fewtoomanycreditcardsahealth-insurancecardanATMordebitcardandmaybeourSocialSecuritycardNowjustimaginelosingyourwalletorhavingitstolenIfeitherhas

ever happened to you you know the instantaneous panic that sets inOKsoyoulosethecashthatsinyourwalletyouremadbutthatsnotsobadmdashunless of course youwere travelingoverseasand lost all themoneyyoubroughtonvacationYouundoubtedlyfeelatugofnostalgic

sadnessatlosingkeepsakeslikethephotosormaybethatluckydollaryour son gave you when he was five But what really pumps theadrenaline is that fear that some neer-do-well is suddenly living thegood life on yourMasterCard Youve got to get to a phone pronto tocancelyourcardsmdashwaitwhatarethephonenumberstoMasterCardandAmericanExpressWhatsmyVisanumberAndwhichcardsdidIhaveinthereanywayKeeping tabs on the inventory in your wallet is a form of financialplanningthatcanpayoffifeveryourwalletgoesmissingInthateventyoullquicklyknowwhatyouwerecarryingaroundandwhotocall tocancelandreplacecreditcardsThusthiswalletregisteronthenextpageFill in the worksheet on page 105 and keep it in a safe placepreferablyalockboxorfamilysafeathomeYoucankeepasecondcopyinabanksafedepositboxsothatifanythinghappenstoyouwhoeverischargedwithhandlingyouraffairswillknowwhatyoumighthavehadin your wallet that needs to be addressed in some fashion Butremember Youllwant fast access to this data if yourwallet vanishesandtheresnopromise thatwillhappenonlyduringbankinghoursSokeepacopyinasecurespotathomeVisitwwwWSJcomBookToolstoprintcopiesoftheregister

FINANCIALACCOUNTS

ChancesareyouhavemorethanacheckingorsavingsaccountYoumight have a certificate of deposit and probably a 401(k) or similarretirement plan fromwork Youmight have opened a traditional IRAyearsagoormaybearolloverIRAormaybeaRothIRAMaybeyoudoabitofconsultingor freelanceworkon thesideandyouvebeenwiseenoughtopumpabitofthatincomeintoaKeoghaccountoraSEP-IRAPossiblyyouownUSTreasurysthroughTreasuryDirectgovorhaveafull-servicebrokerageaccountatMerrillLynchandadiscountbrokerageaccountatCharlesSchwabDoyouhavea life-insurancepolicyWhataboutanannuity

Aswith the inventory in yourwallet youneed to keep trackof thevariousfinancialaccountsyouhaveAndunlessyoureafinancejunkiecheckinginontheseaccountseverydayortwoonlineyoumighthaveatough timerememberingall thedetails likeaccountnumbersandWebaddresses andpasswords and suchA safebet is that if youremarriedyour spouse probably doesnt keep upwith allmdashmaybe evenmostmdashoftheseaccountseitherAll this information is important data though particularly in asituation where something happens to you and a spouse or familymemberneedstoknowwheretofindthefamilysassetsquickly

What you need is a personal-finance record keeper to catalog yourfinancialexistenceKeeptheworksheetonpage107verysecuresinceitlistsallthedatanecessarytotapintoeachaccountSomesecuritypros

mightblanchatputtingonpaperwhatisessentiallythekeytounlockingyourentirefinanciallifebuttherealityisthataspouseoraparentorachildora sibling isgoing tohave toknowwhataccountsexistwheretheyre located and how to access them if you die or becomeincapacitated to such a degree that you cant help yourself There issome level of risk involved in keeping this list but that risk can bemitigatedwithalittlecommonsenseFirst keep the list where no one can get to it except you and the

people who need access to it in an emergency This doesnt meankeepingitonyourcomputermdashparticularlyalaptopmdashsincethosecanbecompromised Similarly dont keep it in a portable lockbox at homeThosetoocanbefairlyeasilyinfiltratedInstead keep this list in a home safe or better yet in a safedeposit

box at the bank Justmake sure that your spouse your partner yourparentsyourlawyerorwhoeveritisthatmightultimatelyneedtoseethis document knowswhere it resides and has access to it in times ofnecessityThelastthinganyoneneedsinanemergencyisthefrustrationofnotknowingwheretofindcrucialfinancialinformation

SAFEDEPOSITBOXES

Mostfolksstashintheirsafedepositboxjustabouteverythingofvalueorperceivedvalueor importance be it the family-heirloom jewelry (agoodselectionforasafedepositbox)orawill(abadselection)Butdontconsiderasafedepositboxadumpinggroundforeverylife

and family-finance document that hits your mailbox Some paperscertainlydeservetobestoredthereothersmostassuredlydonotTomakelifeeasieronyouandyourfamilykeepfamilydocumentsin

the correct location and keep a list that specifies what document iswhereThisisalistyoudonotwanttokeepinthesafedepositboxBecauseif

its there the people you designate to manage your affairs in anemergencyor in theeventyoudieorbecome incapacitatedmdashaspouse

parents sibling your childrenmdashmay not be able to get into your boxuntilalawyerfilesthelegalpapersnecessaryNotethatwhilelawsvarybankstypicallyrequireadeathcertificatebeforetheyllgrantpermissionfor a nonowner to remove contents from a safedeposit box and thatcould take a few days to obtainmdashthough some banks may grant youaccesstoatleastphotocopysomedocuments

Instead keep the family-documents worksheet on page 112 in alockbox at home Since this document does not list passwords andfinancial-account numbers its utility is narrow to would-be scofflawsOnceagainmakesurethattheappropriatepeopleinyourlifeknowthatthisdocumentexistsandwheretofinditAsageneralruledocumentsyoudonthavereasontoreferenceoften

or which you wouldnt need in an emergency are fodder for asafedepositboxManyofthesecanbereplacediftheyrelostThiswouldinclude

BirthanddeathcertificatesMarriagecertificatesDivorcedecreesBaptismalrecordsPropertydeedsAutomobiletitlesStock and bond certificates (although if you have a full-servicebroker and you want to keep the certificates in your name youmightwanttokeepthemonfilethereYourbrokerwillneedthemfairlyquicklyifyouoryourheirswanttosellthosesecurities)Home-improvement records Heirs will need these to documentthe cost basis of your home Unlike the other papers listed herethese documents are usually receipts and they exist in only oneplacetheycantbereplacedsoyouneedtoprotectthem

Thedocumentslistedonpage113areonesyoushouldnotkeepinasafedepositboxManyoftheseyouaspouseorotherfamilymemberswilllikelyneedtoaccessquicklyinanemergencyInsteadkeeptheseinasafeorfireprooflockboxhiddeninyourhomeWhilethesetoocanbereplaced youdontwant to subject yourself or familymembers to theaddedstressofhavingtofindaduplicatecopyquicklyoratoddhoursVisitwwwWSJcomBookToolstoprintasmanycopiesasyouneed

WillsTrustsPower-of-attorneyPassportLife-insurance policies and annuity contracts You could keeptheseinasafedepositboxhoweverifyoudokeepinthelockboxacopyofthepolicynumberthenameonthepolicythenameoftheinsurer and informationwhich is often a Social Security numberInsurers generally dont require the policy itself to pay on thecontractbut theywillneedall the identifyingdata so itsbest tohave thathandy in the event that accessing the safedepositbox isinconvenientorimpossibleatagivenmoment

In a digital age when scanning all manner of documents takes justseconds storing the important papers electronically on a computerseemsagreatwaytokeepthemallhandyandinstantlyaccessibleatanyhourofthedayornightThatthoughisntthebestideaForonecomputerscanbestolenor

hackedandallyourvitalinformationcanbeusedtoraidyourfinancesMoreover when it comes to many of these documents you cant justprintthemoutandusethemBirthcertificatesautotitlesandothersallneed that raised seal indicating that the document is the originalScanningdoesserveoneusefulpurposeItmakesreplacingtheoriginalsubstantiallyeasier sinceyour scannedcopywillhaveall the relevantinformationonit

fbuildingyourfinancialbaseisallaboutthepresentbuildingyourassets is all about the future And the future promises to be an

expensiveplaceTheres college to think about for anykids youmighthaveandofcoursethetremendouscostsofretirementtofinanceonceyoustopworkingforalivingandstartlivingonwhatyouworkedforallyour lifeThatswhatbuildingyourassets isallaboutAfterall ifyouonlyhadtodaytoworryaboutyoucouldspendwhatyouearnandbefineButyouhaveyour futureaheadofyouTherearecars tobuyattens of thousands of dollars each There are houses costing at least$100000 likely more to buy You face college costs if you havechildren and plan to pay for their educationmdashand thats tens ofthousandstohundredsofthousandseachdependingonwherethekidsenrollAnd then theres your retirement Mind-boggling it is to think you

could have in retirement possibly as many years as you had in theworkforce Thats decades to survive only on what youve saved andwhat you receive each month from Social Security assuming SocialSecurity survives in its current formby the time you retire That longamount of timemeans you could needmore than $1million to live alifestylesimilartowhatyoulivedbeforeretirementTothegreatconsternationofmanysuccessinsavingforeachofthose

expensesislargelyaboutinvestingPartofthereasonpeopleshyawayfrominvestingisbecausetheyface

such a wide and sometimes confusing array of possibilities preciousmetals options futures commodities exchange-traded funds and

annuitiesThelistgoesonButaverageindividualinvestorsneedgonomoreexoticthanthethreebasicinvestmentsmdashstocksbondsandmutualfundsInallhonestymostpeoplearewellsuitedtostickingexclusivelywithmutualfundssincewiththoseyoullbeabletobuildaninstantlydiversified portfolio of various types of assets efficiently and costeffectivelyInvestingisntvoodooItisntscaryItisnthardItisntaboutluckIthasnothingtodowithldquohottipsrdquoorldquoinsideinformationrdquoThoughldquoassetallocationrdquo might sound like so much jibberish youll soon learn justhow simple it can be to distribute your moneymdashknown as allocatingyourassetsmdashbetweenvarious stocksbondsormutual fundsAfterallmillionsofindividualinvestorsofallagessuccessfullymanagetheirowninvestmentsandtheydosoeventhoughtheyspendtheir9-to-5hoursworking as mail carriers and electricians and nurses and pilots andferryboatcaptainsandlawyersandhellipthepointisthatyoudontneedtobeamoneymaventosurviveWallStreetInfactyoudontevenhavetothink aboutWall Streetmany very goodmutual funds are basedwellaway fromNewYorkCity inplaces likeHoustonTexasandStPaulMinnesotaSodontbeintimidatedbythetermWallStreetThe truth is the definition of ldquoinvestorrdquo is someone who investsmoneymdash simple as that And you dont really even need muchinvestment knowledge or experience to be an investor All you reallyneedtodoisdecidethatyouwanttoinvestinsomethingassimpleandstraightforward as a Standard amp Poors 500-stock index fund in your401(k)planSuddenlyyourean investormdashandyoudontevenneed toknowwhatStandardampPoorsisorwhatstockscomprisethe500All you need is the gumption to get going and a little guidance onwhat youre doing how to pick what to own and knowledge aboutwhereyoureultimatelyheadedAllofthatstartswiththebasicsmdashyournetworth

DETERMININGYOURNETWORTH

Youve probably seen at some point those thermometer-shaped signs

around town thatdepicthow far along someparticularblooddriveormoneydrivehasprogressedWellthatsyournetworthmdashatemperaturegaugeofyourfinancesItpinpointswhereyouareatanygivenpointinyour life information necessary to figure out howmuch you need tosave to get to where you think you want to go If your goal is themetaphoricalfinishlinethenyournetworthisyourcurrentlocationonthe trackVisitwwwWSJcomBookTools for an interactive version oftheworksheetonthenextpage

InbasictermsyournetworthisameasurementofhowmuchyoureworthifyouaddupalltheassetsyouownandsubtractallthedebtsyouoweTheformulalookslikethis

Withassetsofsay$500000andliabilitiesof$300000youhaveanetworthof$200000Thiscalculationformsthebasisofmanymeasurementsofwhoyouarefinancially Banks want to know this stuff when you take out a loanmortgagecompanieswanttoknowthiswhenyoubuyahomeYouneedtoknowwhatit is fromtimetotimejusttomakesureyoureontracktowardyourfinancialgoalPlan on calculating your net worth once a year maybe around thebeginningofeachnewyearsothatyoucangaugeyourprogresstowardyour personal finish line wherever that is Use the worksheet on thepreviouspageandupdateitasyourlifeprogresses

RATINGYOURTOLERANCEFORRISK

Before you set foot onWall Street you have one exercise youmustundertakeassessingyourpersonaltolerancefortheebbsandflowsthatcontinuallymovethroughstocksandbondsandjustaboutanyassetyoucanimagineInotherwordsWhatsyourtoleranceforriskWhen it comes to investing the word risk flies around like anettlesome gnatmdashits everywhere Its part of the disclosure documentsyou sign to open a brokerage account Its part of the research WallStreet brokerage firmspumpout Its inherent in anymutual fundyoubuyButwhatexactlyisriskInsimpletermsitsthepossibilitythatyoucanloseallorpartoftheprincipalyouinvestinsomeparticularassetAsaninvestoryoumustbecertainthatyoucanhandlethedegreeofriskeachindividualinvestmentharbors and they all harbor some level of risk For instanceTreasurybondsTheyreconsideredthesafestinvestmentintheworldbecausetheprincipalyouinvestandtheinterestyouareduearebackedbythefullfaith and credit of theUnited States governmentwhich isnt likely todefaultonitsdebtYetthatdoesntmeanTreasurysecuritiescarrynoriskTheycertainly

do While youll never lose money if you hold your Treasury until itmatures thevalueof theTreasurybondsbills ornotes that youowncanmdashanddomdashfallinvaluebasedonbroaderinterestratesandeconomicmovements That means if you sell before the security matures youmightgetbacklessthanyouoriginallyinvestedThatdefinesriskSome risks are greater than others Treasurys are less risky than

municipalbondswhichare less risky thancorporatebondswhichareless risky than bluechip stocks which are less risky than start-uptechnologystocksandsoonThatcontinuumlookssomethinglikethis

TosucceedasaninvestoryoumustknowwhereyoufallontheriskspectrumintermsofyourinvestmentobjectiveAreyouseekinggrowthof your investments meaning you can live with the high degree ofvolatility theyexhibit in return for long-termappreciationOrareyoumore comfortable just to preserve your capital because you cantstomachthethoughtoflosingallorapartofyourinvestmentinadownmarketHereswhattheinvestment-objectivecontinuumlookslike

During bull markets investors forget risk exists because stocks onlyknowonedirectionmdashupInbearmarketsinvestorspaymyopicattentiontorisksurethatanythingtheybuyiscertaintosinkBothofthoseareprecisely backward since the height of a bull market generallyrepresents the riskiest moments onWall Street while the depths of abearmarketoftenpresenttheleastriskyopportunitiesInvestorreactionhappens this way time and again however because behaviorallyspeaking people are irrational when it comes to money and riskConsiderthisSomeoneoffersyouasure$50orontheflipofacointhepossibility of winning $100 or winning nothing What do you doResearch shows that youre likely to take the $50 Conversely assume

someonepenalizesyou$50fromthestartandthenoffersyouacoinfliptorecoverthe lossor lose$100This timeyouremuchmore likelytotakethecoinflipHeres the catch Each situation is statistically identical Yet humans

tend to view the possibility of recouping a loss even if it means apotentiallygreater lossas farmore important than thepossibilityofagreatergainThe trick for any investor then is to understand risk and to know

yourown tolerance for risk so thatnomatterwhatmarket conditionsexistatanygivenmomentyoucancomfortablymanagethelossesthatcould materialize in your portfolio without panic Because when yourushtosell inemotionalmomentsyoulockinadecisionthat inmorelogical moments you probably would not make That can assure anunnecessarylossorcutshortanevenlargerpotentialgainThe worksheet on the following page excerpted from aWall Street

Journalarticlethatraninmid-2000justafterthebelovedbullmarketofthe late 1990s cracked poses a series of questions to help you gaugewhereyou fallon the risk spectrum Itsonlyeightquestions longbutitsbackedbyempiricalstudiesThinkaboutwhatanswerstrulyfityourpersonalitydontjustpicktheanswerthatyouthinkisgoingtoputyouinto a certain category that you assume you should fall into BethoughtfulwithyouranswersandyoumightbesurprisedatthetypeofinvestoryoureallyareVisitwwwWSJcomBookToolstoprintcopiesofthisworksheetNomatterwhattypeofinvestoryouaretheworstthingyoucandois

swingforthehomerunswitheveryinvestmentyoumakeWallStreetattimescanseema landofeasyrichesbutbelievingyoucanturneveryinvestmentintoimmediatewealthbypickingstocksthatonlygoupisafoolsgambleThoughthishasbeensaidmanytimesbeforetheclicheacutesaresometimesrightSlowandsteadywinstherace

SHORTTERMLONGTERMSOMETHINGINBETWEEN

Beforewe get to the point where you open a brokerage account orstartmanagingthemoneyinyour401(k)youneedtoknowalittlebitabouttimehorizons

Inotherwords youneed toknow thedifferencesbetween investingfortheshorttermthelongtermortheintermediatetermEachservesadifferent purpose and each has its own set of risks that youmust payattentiontooryourisklosingmoneyyoucantaffordtoornotgainingasmuchasyouotherwisemightTheresnothingatalldifficulthereitsreallysimpleTheshorteryour

investmenthorizon themoreconservativeyouwant tobeThe longeryour investment horizon the more risk-tolerant you can be TherationaleisequallysimpleShort-terminvestingisformoneyyouexpecttoneedinthenextyearorthreeforanexpensesuchasadownpaymenton a new house or upcoming college expenses you dont want short-termmoneyinriskyassets likestocksthatcouldlosevalueandleaveyou short of the necessary money you need Conversely if youre

investingforthelongtermmdashsayaretirementthatistwentyyearsawaymdashyou most certainly dont want all your cash in conservativeinvestments like savings bonds and certificates of deposit since thosewontkeeppacewithinflationleavingyouwellshortoftheamountofmoneyyoullneedtoliveonlaterThischartprovidesasenseofwhattypesof investmentsmatcheach

timeframe

COMPOUNDINGTHEMOSTPOWERFULFORCEINTHEUNIVERSE

Albert Einstein once claimed that ldquothe most powerful force in theuniverse is compound interestrdquo Its easy to see why thats so all themoneyyouputtoworkearnsinterestandallthatinterestearnsinterestand all the interest that the interest earns earns interest And so oneverydayeverymontheveryyearThatshugepowerInterest compounds in cash accounts like checking and CDs With

stocksannualreturnscompoundsothatifyoustartwith$1000anditearnsonaverage10ayearcompounded(theaverageannualreturnforthemarketgoingbacktothe1920s)thenafterfiveyearsyoudhavenearly $1611 Of course to be fair about it all stockmarket returns

dontmoveinanaverageannualfashioneachyearmdashmeaningtheydontgo up 10 a year Some years themarket is up 18 some years itsdown7Youmight investanentire lifetimeandneveractuallyseeayearinwhichstockswereupexactly10thoughifyousmoothoutallthose ebbs and flows over your investment career you would haveearnedtheequivalentof10annuallyThebestwaytoreallygraspcompoundingistoseeitinaction

Just remember There is no average annual year So dont assumeyouregoingtoearnsomeparticularreturninanygivenyear

FIRSTTHINGSFIRST

Formovie buffs theres a line inComing toAmerica in which EddieMurphyscharacterannouncesthatldquoonecannotflyintoflyingOnemustfirst learn to walkrdquo The same sentiment holds true with investingBefore you dash off tomake your fortune onWall Street you need afoundationThat foundation begins with building the emergency fund discussed

earlierintheworkbookYouremergencysavingsisthebufferyouneedtoprotectyourfamily intimesofcrisisorurgencyandassuch is the

mostimportantbuildingblocktoachievingfinancialsecurityFrom there you want to save for retirement either through a

companysponsoredretirementsavingsplansuchasa401(k)or ifyoudonthaveaccesstosuchaplanatworkthenthroughanIRAWiththisstepyourebuildingfinancialsecurityforthefutureatimewhenallthemoneyyouhaveisallthemoneyyoullgettoliveoutyourdaysRecognizethatyoucandothesefirst twoat thesametimeYoucan

save for retirement with each paycheck and build your emergencyaccountIfforinstanceyoudetermineyoucansave$200amonththensplit that down the middle saving $100 in your retirement fund andputting the other $100 in your emergency savings Keep that up untilyouvebuiltyouremergencyaccounttotheappropriatesizethenfunnelthefull$200intoyourretirementplanSaving for a house should be third on your listmdashassuming you

ultimatelywanttobeahomeownerBuyingahomeisntnecessarilyforinvestmentpurposes since youpurchase ahouseprimarily for shelterStillahomeistypicallythelargestpurchaseanyonemakesandthusistypically the largest asset most people own and over time real-estatepricestendtoescalatealongsidetherateofinflationroughly3ayearonaveragehistoricallyThatwillserveyouwelllaterinlifewhenyoucaneithertakeoutareversemortgageonyourhousetocreateincometoliveoffofinretirementorifyouopttosellyourhomeanddownsizetoasmallerhouseinwhichcaseyoullhaveleftoverprofitsthatcangoalongwaytowardaffordingyourlifeinretirementMoreoverbecauseofthetaxbreaksyougetfromhomeownershipmdashtheabilitytowriteoffthemortgage interest and property taxes you paymdashthe government ishelping you buy your house Thats a good deal So saving for andultimatelybuyingahomeisthethirdlegofbuildingfinancialsecurityThe final leg is investing outside your retirement plan Heres the

thing You dont want all of your investment money in variousretirement accounts Remember retirement accounts generally forbidyoufromtouchingyourmoneyuntilyourefifty-nineandahalfunlessyoupayapenaltyYoudontwanttobeinasituationwhereyouneedaccesstocashforwhateverreasonbutcantgetatitwithoutlosingpartof it to a penalty because youre not old enough to tap into yourretirementaccountyet

For that reason youwantmoney invested inabrokerageormutualfund account This ismoney thatwill grow over time at a rate fasterthan inflation and that youwill have access tomdashwithout penaltymdashforwhatever purpose that arises in life All of whichmeans you need toknowaboutbrokerageaccountswhattypesexistandwhichoneisbestforyourcircumstances

BROKERAGE-FIRMBASICS

Youdontjustgotothecornermarkettobuysharesofstockormutualfunds You dont ring up the New York Stock Exchange and tell theoperator youre looking to buy some IBM and a little Pfizer You gothroughabrokeragefirmofsomesortWhat typeof firmyouchoosedependsonwhat typeof investoryou

aremdasha do-it-yourself investor or one who needs or wants a littlehandholding Either way the options are numerous You havetraditional fullservice brokers such as Merrill Lynch Morgan StanleyAG Edwards Raymond James Prudential and others and you havediscount online brokers such as Fidelity Charles Schwab TradeBrownCoScottradeandmoreBothtypesofbrokeragefirmsdoessentiallythesamethingmdashexecute

yourorders tobuyandsell stocksbondsandmutual fundsHowevereachappealstoadifferentsortofinvestorWhattypeofaccountyoullwant depends entirely on what you need from a brokerage firmmdashinvestmentadviceandotherservicesoraccesstoinexpensivetrading

FULLSERVICE

With these firmsyourehiringabroker toexecute trades foryou tocallyouwithstockrecommendationsandtoprovidein-houseresearchproducedbythebrokeragefirmsteamofresearchanalystsFullserviceaccountsarerightforinvestorswhoneedadvicechoosing

individual investments want access to the proprietary research needhelpcreatingaportfolioorhavespecialneedsformanaginganaccountHowever you generally need a fairly substantial account $50000 to$100000ormoresincemanyfullservicefirmsdontwanttheirbrokersspendingtimetryingtosqueezerevenueoutofrelativelysmallaccountsIf you want or need fullservice amenities but dont have such deeppockets consider a smaller or regional fullservice firm such as AGEdwardsRaymondJamesorEdwardJonesTheyremorelikelytowantyourbusinessNo matter which you choose however you will pay more for theadded handholding Fullservice firms charge fees based on two basicplatformscommission-basedandfeebased

CommissionbasedYoupayacommissionforeachtransactionyouoryourbrokerinitiatesandthosecommissionscanbe$75to$150eachCommissionbasedaccountsarebestfor investorswhodonottradealotbutwhowantallthevariousservicesabrokeragefirmoffers These accounts are not right for investors who tradefrequently the commissions will amount to a hefty sum Butbeware the biggest knock against commission-based accounts isthattheyreripeforabusebydishonestbrokersSincecommissionsare paid only when a transaction is initiated brokers have beenknown to ldquochurnrdquo these accounts meaning they trade frequentlyoftenwithouttheaccountownersconsent tocreateacommissionforthemselvesChurningisillegalFeebasedWith these accounts you pay a flat fee each year thatcovers just about everything including all transactions nomatterhowoftenyou tradeTheannual feededucted fromyouraccountquarterly typically ranges between 1 and 2 of the assets youhaveondepositintheaccountThesizeofthefeesdependsonyourassets-under-managementorhowmuchmoneyyouhaveondepositwith the firm As your account grows the size of the chargetypicallydecreasesYoumightpayabout2ayear or$2000 ifyouhave$100000ondepositbutonly1or$10000ifyouhave$1million

Brokeragefirmspushtheseaccountsovercommission-basedaccountsbecause theygetpaidnomatterwhatyoudoeven ifyoudonothingand no matter if your account is up or down for the year Generallyspeaking feebased accounts align a brokers interest with yours sincethebrokerspayincreasesonlywhenyouraccountvalueincreasesIfyourenotanactivetraderordontrequirelotsofserviceshoweverfeebasedaccountscanbeawasteofmoneysinceyouenduppayingforservicesyourenotusingBrokeragefirmsaresupposedtomonitoryouraccount to ensure that youare in an appropriate account if youdonttrade frequently the firm should steer you into a commission-basedaccountwhereyourannualcostswouldbemuchless

DISCOUNTFIRM

These firms are Internet-based and geared toward do-it-yourselfinvestors who make their own investment decisions who dont wantunsolicitedphonecallspitching100sharesofsomeflea-bittencompanyandwhowanttoexecutetheirtradesthemselvesBasicallydiscountersareprovidersofutilitariantradeexecutionservicesandtheirkeydrawispricecommissionscanbeaslowas$195plus12centpershareByandlargemostofthebigwell-knowndiscountfirmsmdashsuchasCharlesSchwabFidelityandTrademdashchargebetween$10and$15pertradeThoughyoucancallatoll-freenumberandtradeoverthephoneyoudontdealwithbrokersandadiscountfirmsemployeesdonotworkoncommissionNor do these firms employ research analysts to track andissueldquobuyrdquoldquosellrdquoorldquoholdrdquorecommendationsonindividualcompaniesmdashalthoughSchwabdoes issuerecommendationsbasedonaschool-likegradingsystemofABCDandFWhile discount firms began as no-frills investment shops providingbasictradeexecutionsinrecentyearsalmostallofthemhavebeguntoresembleinsomefashionthefullservicebrokeragehousesThebreadthof products they offer now extends well beyond stocks bonds andmutual funds and into options certificates of deposit annuities lifeinsuranceandsoonTheyoffercollegeandretirement-planningservices

providecheckingaccountsandcreditcardsandinmanycaseshavetag-teamedwith a fullservice firm or two to offer clients online access tostock-marketresearchreportsMoreoverdiscountersofferanabundanceof stock andmutual-fund screening capabilities aswell as news alertsandevenelectronicbill-paymentservicesSomewillevenmanageyourportfoliosolongasitsatleast$50000Theydochargeadditionalfeesfor this typically ranging between 025 and about 1 of assetsthoughthatfeescaleismuchlowerthanyoudfindatafullservicefirmBecause of the cost savings discounters are the best option forinvestorscomfortablewithmanagingtheirownaccountdoingtheirownresearch or who dont trade frequently Then again if you do tradefrequently discounters are still a better option since many specialtyonlinefirmsprovideveryfasttrader-orientedWebsitesallowingyoutotrade directly in the market instead of routing your orders through amiddleman the route taken by most traditional stock transactionsMoreover they offer steep discounts on commissions for frequenttraders

WALLSTREETINWORDSANDFORMULAS

Like lawyers speaking legalese investorshave their ownpatois thatunless youre in on the game can sound if not foreign at least likesomethingthatrequiresadecoderringtodecipherIntruththewordsofWallStreetareeasytounderstandAndyoudoneed aworking knowledge of them if for no other reason to at leastgraspwhatfinancialprofessionalsaretellingyouwhentheyreprovidinginvestment services In other situations theyll help you betterunderstandwhatthemarketpunditsjabberaboutonthebusinessnewsshows theyll help you better analyze the individual investments youmightbe interested inorhelpyouslipeffortlessly intoastock-marketconversationatthenextcocktailpartyThere are a tonof thesewords andphrases that theStreet relies onwhenspeakingthelanguageoffinanceYoudontneedtoworryaboutthe vast majority of them unless you want to be a committed stock

investorAndifyoudothereareverygoodbooksthatspecificallyfocuson those intricacies including TheWall Street Journal Complete Moneyand Investing Guidebook For the average person however there are afewbasicconceptswithwhichyouatleastwanttobefamiliarForinstancePEratioThistermisbandiedaboutinreferencetojustabout every stock ever mentioned This is the ubiquitous price-to-earning ratio a very simple-to-derive measure of how expensive aparticularstock is relative to thecompanysearningsAstocksprice isnothingmorethanareflectionofhowdearlyorcheaplyinvestorsvaluetheunderlyingcompanysabilitytoearnprofitsmdashtheprimaryreasonanycompanygoesintobusinessandtheprimaryreasonaninvestorwantstoownsharesofstockIn general companies with high PE ratios are those that investorsexpectwillcontinuetoreportrobustlygrowingearningsalsoknownasnetincomeorprofitCompanieswithlowPEratioshavemutedgrowthexpectationsTheformulatocalculatethePEis

So if a companys stock price trades for $20 and the company hasearnedinthemostrecent12months$125persharemdashandwellexplainldquopershareearningsrdquoinamomentmdashthenithasaPEratioof16(20divide125=16)Since that number by itself doesnt really say much investorstraditionallylookatthePEincomparisontoacompanyshistoricalPErangeIfthissamecompanyhistoricallytradesinarangeof8to12andits now at 16 well the shares might be overvalued at the momentConversely if the historical range is 20 to 25 then the shares mayrepresentgoodvalue

NETPROFITMARGIN

Thenetprofitmargin flowsdirectly from theproverbialbottom linebecausenetincomeistypicallythelastmdashorbottommdashlineonacompanysquarterlyandannualincomestatementsExpressedasapercentagethisrepresentshowefficientlyacompanyhasturnedsales intoprofitsafterpaying all the costs of business such as salaries production expensesmarketingtaxesandthelikeNetprofitmarginsarealloverthemapdependinguponthecompany

andtheindustryManytechnology-intensivecompaniessuchassoftwaremakers and pharmaceutical firms boast of very healthy margins near20 and above That means 20 cents of every dollar in sales flowsthroughtonetprofits theearningswhichultimatelydrivesthestockspriceOthercompaniessuchasthoseinlowtechcommoditybusinessessuchasgrocerystoreshavemarginsofjust1or2orsoThisdoesntmake themlousybusinesses thats just thenatureof their industryAswithmanyinvestmentmeasuresnetprofitmarginsarebestexaminedincomparisontoacompanyshistoryandincomparisontotheindustryinwhichthatcompanyoperatesTheformula

Both ldquonet incomerdquo and ldquonet salesrdquo are found on the ldquoincomestatementrdquosometimescalledastatementofearnings

YIELD

Whenyouowncertainstocksandbondsyouearnincomeintheformof dividend payments (stocks) and interest payments (bonds) Thosepaymentsexpressedasapercentageofthecurrentpriceofthestockorbond represent theyieldwhich is always expressedonanannualizedbasisHerestheformula

Soifamythicalcompanythattradesfor$20asharepaysyou$1pershare inannualdividendpaymentsyoureearningayieldof5(1divide20=05)

BOOKVALUE

Remember the discussion earlier about calculating your net worthWellbookvalue isacompanysnetworth it represents theremainingcashvalueif thecompanysoldoffeveryassetandpaidoffeverydebtThisisoftenexpressedasaper-sharevaluesuchasabookvalueof$13ashareTheformula

Youwillfindldquoshareholdersequityrdquoandldquototaloutstandingsharesrdquoonacompanysbalancesheet

Bookvaluecanbeoverstatedorunderstated

dependinguponallmanneroffactorsmdashinnocuousand

malevolentmdashthatcompaniesemployButingeneralcompanies

thattradebelowtheirbookvalueareoftenseenasbargainson

thetheorythatyoucoulddismantlethecompanyandcreate

morevaluethanthestockiscurrentlyworthConversely

companieswhosebookvalueissubstantiallyabovetheshare

pricemdashmultiplesofsayfiveandabovemdashareverypriceyButas

withthePEratioyouneedtoknowthehistoricrangeto

understandthecurrentbookvalueincontext

PEGRATIO

ThismeasuresacompanysPEagainstitsgrowthratetheldquoGrdquointhePEGratioThetheoryCompanieswhoseearningsgrowthrateisbiggerthan the stocks PE ratio may represent a bargain If earnings aregrowing faster than investors are giving the company credit for (andremember that aPE ratio is themarkets estimationof thevalueof acompanys earnings) then it stands to reason that the stock priceultimatelywillmovehighertocatchuptotheearningsgrowthOn the other hand if the earnings growth rate iswell ahead of the

PE then you have an indication that investors are pricing perfectioninto the stockandanyperceivedor real slip-upcould send the sharessomersaultingsouthwardTheformula

YoualreadyknowhowtocalculatethePEForthegrowthrateyoucan use one of two numbersmdashhistoric or expected To use historiccalculateacompanysyear-over-yearearningsgrowthmeaning lookatthe most recent earnings compared to the earnings from the samequarterayearearlierThatformula

Oryoucango toMorningstar (atwwwmorningstarcom)plug inastocksymbolandundertheldquoKeyRatiosrdquo linkfindtheldquoGrowthRatesrdquotab that will reveal a variety of shortand long-term earnings growthratesIf youwant touse expected earnings youll need to find the rate at

whichWallStreetanalystsexpectacompanysearningstogrowYoucanfind that online at Yahoo Finance (at financeyahoocom) under theldquoAnalystEstimatesrdquolinkYahooevenshowsthePEGratiomdashifyoudontwanttocalculateityourself

CALCULATINGYOURRATEOFRETURN

WhatdidIearnInvestors ask themselves that question each time they sell an

investment The calculations necessary to reach the answer differdepending uponwhether you own a stock a bond or amutual fundHereshowtocalculateyourreturnoninvestment

Soletssayyoubuy100sharesofLMNOPWidget

Technologyfor$10ashareandyoupayacommissionof$15

toyourdiscountbrokerYourtotalpurchasepriceis$1015

[(100times$10)times$15]

Andthenyousellthosesame100sharestwoyearslater

for$1675apieceandpayanother$15incommissionfortotal

salesproceedsof$1660[(100times$1675)=$15]Alongthe

wayyoureceivedeightquarterlydividendpaymentsof$008

pershareorincomeof$64[(100times$008)times8]

Thustheformulalookslikethis

Divide$709by$1015andyouget6985Andthatis

yourtotalrateofreturn

OKthisformulalookssubstantiallymorecomplicated

thanitreallyisBasicallytherearethreevariablesyouneedto

know

1 ThebeginningNAVorthenetassetvalueyoupaid

pershareorifyourecalculatingtheannualreturnon

sharesyouhaventsoldtheNAVatthebeginningofthe

year

2 TheendingNAVorthenetassetvalueatwhichyou

soldeachshareOrforannual-returncalculationsthe

valueofthesharesattheendoftheyear

3 Thedividendsandcapitalgainsdistributions(both

long-termandshort-term)youreceivedalongtheway

SoletssayyouboughtsharesintheWinBigMutualFund

at$12eachpayingnocommissionasiscommonYour

BeginningNAVis$12

Ayearlateryouselloffallyoursharesinthefundat

$1543pershareagainpayingnocommissionYourEnding

NAVis$1543

Alongthewayyoureceived$027pershareindividends

and$066pershareincapital-gainsdistributions


Divide$436by$13715andyouget318whichis

yourrateofreturn

ButdontgettoohunguponreturnstheyreonlysignpostsalongthewayWhetheryoubeatthemarketmatchthemarketorunderperformthemarketwithanygiven investmentor inanygivenyear really isntterribly important The goal always remains the same prudentinvestments that you own for the long haul in a well-diversifiedportfolio If you follow that simple rule your return whatever itultimatelyiswillhaveservedyouwellintheend

Publiclytradedcompaniesarerankedbytheirsizelarge-

capmid-capsmall-capandmicrocapwhereldquocaprdquoisshortfor

capitalizationorthecumulativemarketvalueofallthe

companyssharesWhenSeattle-basedbankingfirmWashington

Mutualtradedat$42pershareinspring2005andhad88405

millionsharesoutstandingithadaso-calledmarket

capitalizationof$3713billion(42times88405million)Thats

largeThusthebankknownasWaMuisalarge-capstock

Professionalinvestorshavevariousdefinitionsofwhat

dollarvaluedefineslargemediumsmallandmicroButin

generallarge-caprepresentsacompanyinwhichthesharesare

worthacumulative$5billionormoremid-capisgenerally

between$500millionand$5billionsmall-capis$50million

to$500millionandmicrocapis$50millionorlessIngeneral

large-capsgrowmoreslowlybecauseoftheirsizewhile

microcapsoftengrowmorerapidlyThetrade-offlarge-caps

tendtobemorestablewhilemicrocapstendtobeasvolatileas

acanofshakensoda

Evenformutual-fundinvestorsthesedistinctionsare

relevantsincemutualfundsareratedandcomparedagainst

oneanotherbasedonthecategorytheyfitintomdashandthose

categoriesaregenerallydifferentiatedonthebasisofthesizeof

companiesthefundowns

Bythewaytherearealsopennystockswhichdont

literallyhavetosellforpenniesasharethoughmanydoIn

generaltheyrestockspricedbelow$5asharethathavea

limitedtradinghistoryandwhichdonttradeonamajor

exchangeliketheNewYorkStockExchangeorNasdaqMany

tradeonthePinkSheets(wwwpinksheetscom)anelectronic

bulletinboardnotanexchangewhereinvestorsessentially

posttheirinterestinbuyingorsellingsharesofvariousunlisted

stocksToconfusethematternotallPinkSheetsstocksare

pennystockssometradeforthousandsofdollarsashare

INDEXINVESTINGNOEFFORTREQUIRED

Ifyouwanttobeaninvestoryetyoudontwanttoputanyeffortintoresearchingstocksorbondsoranalyzingwhatmutual fund is right foryouthenherestheansweryourelookingforindexfundsWith a single investment you own the Standard amp Poors 500-stock

index Then you can get back to fishing or crocheting or creating thecureforthecommoncoldThe Fidelity Spartan 500 Index Fund (symbol FSMKX) and the

Vanguard 500 Index Fund (VFINX) are both ultralow-cost index fundsthattracktheSampP500OwnthemandyouownthemarketWhateverthe SampP does over timemdash and over long periods of time it marcheshighermdashisessentiallywhatyoulldoovertimeThatsallittakestobeaninvestor

EXCHANGE-TRADEDFUNDSMINIMALEFFORTREQUIRED

One stepup froman index fund is an exchange-traded fund knownsimplyasanETFTheseareessentiallyindexmutualfundsonlytheytradelikesharesof

stockThatmeansthatinsteadofbuyinganindexfundfromamutual-fundcompanyyoubuyanETFonWallStreetsincemostETFstradeontheAmericanStockExchangeETFs offer some benefits over index funds First you have more

controloverthepriceETFstradethroughoutthedayjustlikesharesofstockMutual funds are priced once a day after themarket closes soyouneverknowatwhatpriceyourebuyingandsellinguntilafter thefactWithanETFyoucanestablishthemaximumyourewillingtopaytobuyand theminimumyourewilling toaccept to sell throughwhatareknownasldquolimitordersrdquoOfcoursetheresnoguaranteetheETFwilleverhityourlimitAlso for so-calledbuy-and-hold investorsor thosewhoplan toown

theinvestmentforalongtimeETFfeesaregenerallysmallerthanwithmutual funds though that is not universal For ETFs with lower feesinvestors save thousands of dollars over timemeaning you ultimatelyhaveabiggerpotofmoneyFinallyETFsofferabroaderselectionofindexestochoosefromwith

newonescroppingupallthetimeETFsindexeverythingfromtheSampP500totheRussell2000small-capstockindextothepriceofgoldtoavarietyofindividualcountriestothepriceofabarrelofcrudeoilForarmchairinvestorswhowanttodiversifyandbuildaportfolioof

severalindexesETFsofferthebestoption

DOLLAR-COSTAVERAGING

Ifyouwanttobeslightlymoreactiveinyourinvestingandifyouregoingtobuyindividualstocksandmutualfundsdollar-costaveragingisa conservative approach to building assets over time The strength ofdollar-costaveragingisthatitimposesfiscalprudenceandrequiresthatyouinvestconsistentlymdashbothofwhichwillserveyouwelloverthelongrunNoinvestorknowsifaparticularstockormutualfundwillbeworth

moreorlesstomorrowthanitistodaymdashandanyonewhotriestosellyou

a system todo that is rippingyouoffMoreover if you spentall yourtime trying to divine that answer youd be so paralyzed by indecisionthat youd never get around to actually investing yourmoney Dollar-costaveragingtakestheguessworkoutofinvestingsinceyouroutinelyinvestafixedamounteachmonthinaparticularstockormutualfundregardlessofpriceeverymonthorquarterOvertimeyouareinmostcasesloweringtheaveragepriceatwhichyoubuyyourinvestmentThestrategyworksthiswaybecauseyoubuymoreshareswhenthepriceislowerandfewershareswhenthepriceishigherovertimethenyouraveragecostpersharewilltypicallybelessthanhadyouinvestedyourentiresumatonceHereshowitworksYoulikeaparticularcompanybutyourenotsureifthestockisgoingupordownandyoudontwanttostickyourentire$10000nutintothecompanyssharesallatoncesinceiftheyfallyoullbe able to affordmore Of course you dont want tomiss out on thecurrentpriceintheeventthesharesmovehigherCaughtbetweengoingallinorsittingonthesidelinesyouoptforamiddlegroundYouinvest$2500 every quarter for the next year This is what your purchaserecordmightlooklike

Hadyou investedyour$10000 lumpsumtobeginwithyouwouldhave lost money over the year since the shares were $1 lower 12monthslaterHoweverthroughdollar-costaveragingyouactuallyhavea profit of $349 a share ($25 = $2151) because the lower-pricedpurchases along the way reduced your overall per-share cost in thestockDollar-cost averaging works best with companies that allow you tomakeadditionalpurchasesofstockbysendingacheckinonamonthly

or quarterly basismdashthis is known as a Direct Stock Purchase plan orDSP This keeps you from having to pay additional brokeragecommissions with every purchase A Dividend Reinvestment Plan orDRiP works similarly in that your dividends are automaticallyreinvestedinthecompanysshareseachquarterDirectInvestingcom (wwwdirectinvestingcom) lists the companiesthat offerDSP andDRiP options It also provides services to help youenrollelectronicallyintheplansinwhichyouwanttoparticipateTodollar-costndashaverageinamutualfundyoucaneithersendachecktothefundonaregularbasismaybemonthlyorquarterlyoryoucanarrange for the fund to routinelydrawapredetermined sumofmoneyfromyourbankaccountonapresetscheduleNearlyevery fundoffersthisoptionThe one chore with dollar-cost averaging comes at tax time whenyoullneed toknowyouroriginal costs in the stockormutual fund inorder to accurately determine the size of your gains or losses Thisexercise can be particularly grinding if you have invested over manyyearsthroughaDRiPsincethepurchaseofadditionalshareswithyourdividendpaymenteachquarteropensanewtransaction thatyoumusttrackTohelpkeepupwithallthisusetheworksheetonthenextpageFill in thedataeach timeyoubuyastockormutual fundusingeitherthedollar-costaveragingmethodorwithaDRiPorDSP

ormostpeoplethisiswhatinvestingisallaboutpreparingforthatday you retire and live the rest of your life off themoney youve

accumulatedGettingtothatdayofcourse isadauntingthoughtSoexpensive it

promises tobe that its hard to really fathom themagnitudeofmoneyyouneedtoamassWhenyouearn$30000to$50000ayearandyourealize youmight need$1million ormore you laugh to yourself andsayldquoRightAndwherestheguidebooktosuccessfulbankrobberyrdquoWithoutquestion thatwillbeachallengeButachallenge isnotan

impossibility its a very real possibility that just takes planningcommitmentandexecutionJustrememberIfyoufailtoplanthenyouplantofailmdashandyouwillsufferintheendUltimatelyarrivingatthedestinationyouenvisionstartswithwhatis

formostpeople themostdifficult part of theprocess determining thefinishline

HOWMUCHWILLINEEDINRETIREMENT

This is the finish linemdashthe rough estimate of howmuch youll needafteryouretiretoliveouttherestofyourlifeinthelifestyleyouwantTheestimate is roughbecause itsbasically impossible toknowwithgreatcertaintyexactlywhatyourlifewillcostinthefutureSufficeittosay that retirement is the single largest expensemost peoplewill eversaveforAhouseiscertainlyexpensiveandisoftenthebiggestsinglepurchasepeopleevermakeAndcollegecostscanbeatremendousdrainonyoursavingsandincomeButtheyarewancandlelightincomparisontothefloodlight required to brighten your retirement Depending upon thestyleoflivingyoureaccustomedtoandhowlongyouenduplivingafteryouleaveworkretirementcouldeasilycostintothemillionsofdollarswhenitsallsaidanddoneBut what goal should you be saving toward specifically Thats theunknown that stymies somanypeopleWhoknowswhat lifewill costdecades fromnowWhoknowshowyour incomewill change throughthe years Who knows what level of returns your savings andinvestmentswillgenerateWhoknowswhatinflationwilldoAllofthosefactorsweighonwhatyouultimatelywillhavetoliveoninretirementandhowmuchthatretirementwillcostHonestly tryingtoplan for that future is a guessing game because the goal you thinkyoure shooting forcouldbewell shortofwhereyoureallyneed tobeonceyouarrivemdashoritcouldbewellbeyonditStillpreparingforwhattomorrowmightbring ismagnitudes smarter than justwinging itonahopeandaprayerthatallwillworkoutOKSoyouprobablywanttostartsavingnowTheworksheetonpages147ndash152 isdesigned togiveyouan ideaofhowmuchmoney you need to accumulate to cover the basics of liferatherthantheamountofmoneyyoullneedtoreplaceyourstandardofliving(VisitwwwWSJcomBookToolsforaninteractiveversionoftheworksheet)Manyretirementplansstartwiththeideathatyouneedtoreplacebetween70and100ofyourincometoliveinretirementasyoudo inyourworkingcareerThats fineBut thereare flaws in thatapproachFirsttheldquoincomerdquocomponentofsuchaplanisbasedonyourincomejustpriortoretirementandguessingatwhatthatwillbemdashand

inturnwhatyourstandardoflivingwillbemdashisliketryingtopredictin2005 the winner of the 2027 World Series Second that income-replacementrule-of-thumbpresumesyouwantorexpectthatsamestyleoflivingthoughsomepeopleexpecttoscalebacktheirlifewhileothersexpecttorampitupsubstantiallyBasic expenseshowever arewell basicTheydont changeall thatmuchasidefromrisingovertimebecauseoftheeffectsofinflationbutyoucanadjust for that inyourplanningYourenotgoing toeatmorefoodwhenyouretire

Youre not going to consume sharply more kilowatt hours ofelectricity Your housing costs assuming you havent paid off yourmortgagewillbeinthesameballparktheyweretwodecadesearliermdashandifyourhouseispaidoffthenyoucanstillbudgetthatamountintoyourplanning tocoverunexpectedlyhighermedicalorpharmaceuticalcosts or whatever The point is that if you aim to cover your basicsyoullnothavetoworryaboutkeepingthelightsonwhenyoureoldorhavingtoskimponfoodbecauseyourmonthlyincomeistoosmallAndonceyouknowwhatyouneed to save toaffordyourbasicneedsyoucan choose howmuch to save above that in order to affordwhateverrealisticretirementlifestyleyouenvisionOnceyouhaveagoaltoshoottowardyourereadytostartfashioningtheportfolioyoullneedtogetyouthere

ASSETALLOCATIONROCKETSCIENCEFORBEGINNERS

Thisisthepointwherelotsoffolksgiveuponinvestingbecausetheyfigurethattryingtodeterminewhattoinvestinandhowtochoosefrom

amongthousandsuponthousandsofstocksbondsandmutualfundsisjusttoodaunting

Studieshaveshownthatmorethan90ofa

portfoliosoveralllongtermsuccessdependsnotonwhatyou

ownbutonhowyouallocateyourmoneyThatmeansyour

mixofassetsmdashtheassortmentofstocksbondscashrealestate

etcthatyouownmdashismorevitalthantheindividual

investmentsthemselves

YetassetallocationisasimpleconceptDifferenttypesofassetsmoveindifferentwaysandtobeproperlydiversifiedyouwantamixofthosedifferenttypesofassetssothatwhenoneassetismovingdownanotherismoving up Stocks for instance generallymove based on corporateearningsandtheoutlookforthegeneraleconomybondsgenerallymovewith interest rates gold moves on geopolitical tensions and currencywoesoilmovesonwaxingandwaningfearsofsupplyshortagesandtheebbandflowofglobalenergydemandsInvestors who owned nothing but stocks when the bear marketgrowled to life in 2000 sufferedmightily But thosewhomixed in anappropriate dose of bonds never fretted because bonds performedadmirablyduringthatperiodFor individual investors asset allocation is no more complex thanfollowing your basic tiramisugrave recipemdashit seems challenging and time-consuming if youveneverdone it but onceyou start folding togetherthemarscaponeandmeringueyou realize itsnot sodifficultafterallanditdoesnttakemuchtimeThe basic rule is this The younger you are the more money youshould allocate to stocks The older you grow themore you increaseyourexposuretobondsTherationaleYoungerworkersneedintheirearlieryearsthegrowththat stocks provide while older savers need the safety of high-gradecorporateandgovernmentbondstopreservetheirnesteggbeforetheyretire If thestockmarket tankswhenyoureyounger the lossesmight

hurtbutyoustillhavemanyyearsmdashdecadesactuallymdashtorecoupyourmistakes and rebuild your account Investing toomuch in bonds earlyonhowevermeansyourisknotearningenoughofareturnthroughtheyearstoaccumulateanadequatelysizedretirementaccountConversely if youre older and nearing retirement when the stock

markettanksyouwonthavenearlyenoughtimetoreplenishwhatwaslost That will ultimately crimp your lifestyle in retirement Puttingincreasingamountsofyourportfoliointobondsasyouageprotectsyoufrom just such a disaster since the price of high-quality federalmunicipalandcorporatebondsdontfallthatfareveninarottenyearStill you need some money in stocks because the returns that stocksgenerate over time will help your portfolio keep ahead of inflationOtherwiseyouriskthatinflationerodesthevalueofyournestegg

ASSETALLOCATIONMODELS

Themostgenericwaytoinvestyourmoneyisthesocalled60-40splitinwhich60ofyourdollarsgointothestockmarketwhile40goesinto the bond market That middle-of-the-road allocation provides forgrowth (via stocks) yet also provides a buffer against volatilitywhileprovidingconsistentincome(viabonds)Thisisoneofthoseyou-wont-lose-sleep-at-night portfoliosmdashbecause while you wont generategunslinger-likereturnsofanaggressiveinvestoryoualsowontsee90of the value of your portfolio disappear when those same aggressivestocksflameoutThestockcomponentisofteninvestedinanSampP500indexfundsuch

as the ones offered by Fidelity and Vanguard both of which areultralow-cost The bond component meanwhile is typically in USTreasurybondsthesafestbondinvestmentintheworldgiventhatthemoney is backed by the full faith and credit of the US governmentSomeinvestorsusemunicipalbondsorhigh-gradecorporatebondsbothof which can provide slightly beefier returns though with marginallymorerisk

High-gradecorporatebondsarethoseratedBBB

andabovebyStandardampPoorsorBaaandhigherbyMoodys

InvestorsServiceTheseratingsaregiventocompanieswiththe

lowestriskofdefaultingontheirobligationtorepayinvestors

likeyou

For a slightly more personalized approach a widely used rule ofthumbsuggestsyousubtractyouragefrom100mdashoreven120ifyourewilling to be more aggressivemdash and stick that percentage of yourportfolioinstocksTheremaindergoesintobondsSoifyouhappentobesay39yearsoldthenyoudwanteither61or81ofyourmoneyinstocksdependingonyourtolerancefortheupsanddownsyouwillinvariablyexperienceinthestockmarketThisapproachismuchmoresensitivetoyourworkingcareersinceit

assuresthatasyouageyouautomaticallyscalebackyourstockexposureandincreaseyourbondholdingsPlusitalwayskeepsyouinstockstosomedegreemdashwellunlessyoulivepast120

OwningabondisnotthesameasowningabondfundA

bondfundcarriesgreaterrisks

Whenyouholdabondtomaturityyoureguaranteedto

getbackyourprincipalassumingthebonddoesntdefault(and

defaultratesarenegligibleamonghigh-qualitycorporatebonds

andthevastmajorityofmunicipalbondsandUSTreasurys

neverdefault)Whileabondspricewillgoupanddownover

timeyouwillultimatelygetbackyourprincipal

ThatsnotnecessarilytruewithabondfundAbondfund

ownsnumerousbondsandportfoliomanagerscontinuallybuy

andsellbondsinthefundThusthefundhasnosetmaturity

datesincethebondsarentbeingheldtomaturityinmany

cases

Thishasthebiggestnegativeeffectoninvestorsamid

risinginterestratesWhenratesrisethevalueofanexisting

bondfallsThatsbecauseinvestorswouldratherownanew

bondpayingabiggerinterestratethananolderbondpayinga

lowerrateSotheolderbondspricefallsInvestorswhoown

bondsdirectlycanholdthebonduntilmaturityandneverbe

hurtbytheshrunkenpricewhereasbond-fundinvestorshave

nomaturitydatetolookforwardtoThusbond-fundinvestors

havenoguaranteeofrecoupingtheiroriginalinvestmentat

somespecificpointintime

Retainingsomestock-marketexposureisimportantStocksprovidethefuelaportfolioneedstokeepyourmoneygrowingAfterallyoudontknowifyoullhavefouryearsinretirementorfortyandyoudontwantyourcashtoexpirebeforeyoudoThese rules sound pretty simplistic for the highfalutin world of

investing But they work and for a very simple reason You arediversifying your investments and that doesnt require anything morecomplicated than putting a little bit here and little bit there andunderstandingwhyyouredoingso

WHEREDOIINVEST

OksoyouvedeterminedhowtosplityourmoneybetweenstocksandbondsNowwhatWellifyoureinvestingina401(k)planthatsallgoingtodependon

what options youhave available since each plan is different from thenextintermsoftheinvestmentchoicesofferedIfyoureinvestinginanIRA or in a standard brokerage account you basically have the entireworldofinvestmentoptionsopentoyouEitherwayunlessyouwanttodelve into the nitty-gritty of individual stock selection youll probablywant to stick with mutual funds since youre getting professionalmanagementandinstantdiversificationatfarcheaperpricesthanyoudpaytodoitonyourownSowhilethisisostensiblyaboutpickingfundswithintheframeworkofa401(k)thesameprinciplesapplytoanyotherinvestmentaccountLikely your plan offers several stock and bond funds and probably

some specialty fundsAnd if its anything like the typical 401(k) planyou can choose between twelve and seventeen different optionsincludingacompany-stockfundifyouworkforapubliclytradedfirmbutmoreonthatinamomentThatshouldbeplentyenoughchoicestoallocateyourassetsproperlyandbuildaportfoliothatsuitsyourneeds

STEP1

GetalistofallthefundsyourplanoffersYoullfindthisinformationin your human resources department or possibly online if yourcompanyprovidesWeb-basedaccesstoyour401(k)account

STEP2

VisitwwwmorningstarcomtoresearchthefundstowhichyouhaveaccessinyourplanHereswhatyourelookingfor

FundsthathavealonghistoryofsuccesswithintheirpeergroupThis means at least a five-year track record of regularlyoutperforming the ldquocategoryrdquo and the ldquoindexrdquo against which aparticular fundbenchmarks itsreturnsOne-andthree-yearrecordsaretooshortanddonttypicallycapturechangingeconomiccyclesldquoCategoryrdquo designates what type of companies a particular fundowns suchas large-capvalueor small-capgrowthYoull find theperformance information at Morningstar (wwwmorningstarcom)undertheldquoTotalReturnsrdquotabforeachindividualfundFundswith low expenses Fees are the internal costs of runningthefundandspanawiderangebaseduponthecategoryinwhichafund invests Again Morningstarcom will detail the fees a fundcharges(undertheldquoFeesandExpensesrdquotab)andshowshowthatfeecompares to the category average The higher the fees the moremoneyyourepayingtoownthefundandthesmalleryournesteggis in return And even though the difference in fees can seemminimalmdashlike say 1mdashthat money compounds and adds up torealdollarsovermanyyearsFunds that stick to their knitting If you invest in a small-capgrowthfundyoudontwanttofindthatithasmigratedovertimeinto large-cap value stocks The reasonYou likely alreadyhave alarge-capvaluefundandyoudontwanttoendupwithaportfoliooverloadedinoneareabecauseofafundthatdoesntsticktowhatit claims to be doing Morningstars ldquoSnapshotrdquo page shows thefundsstatedmissionintheldquokeystatsrdquosectionwhilejustbelowtheldquoportfolio analysisrdquo determines what style the fund is pursuing atthemomentbasedonthemakeupof its investmentsYouwanttoseethatthesetwogenerallymatchtoensurethatyoureinvestinginthe typeand sizeof companies thatmeets your risk-tolerance andasset-allocationneedsFundsforwhichthemanagerondutyisthemanagerresponsiblefor the track recordMutualfund portfoliomanagers change fairlyfrequentlyandafundcanoftenlosewhatevermojoithadwhenanewmanagerstartsreconfiguringtheportfolioandbasingbuyandselldecisionsonadifferentviewofthemarketTheldquoManagementrdquotab at Morningstar reports when the current managers tenure

began allowing you to look at the funds track record over thattimeLookformanagerconsistency

Putintoasinglesentencewhenitcomestopicking

mutualfundsyouwantfundsthatroutinelybeattheir

peersorindexwhichchargefeesbelowthecategory

averagewhichsticktotheirstatedstyleandwherethe

manageryoureinvestingwithistheoneresponsiblefor

thereturns

ToputallofthisintopracticemeansyouultimatelyhavetomakeinvestmentdecisionsonyourownIfyourethetypewhowantstogetyourhandsintothemixandresearchmutualfundsyourselfyoucanfindavarietyofinformationatYahooFinanceandparticularlyatMorningstarIfthatsortofresearchsoundsasfunasdentalsurgerywithouttheanesthesiaheresacheatsheettohelpIf you have access to an SampP 500 Index fund thatswhere youwanttostickthelargestportionofyourstock-marketallocationAll401(k)plansgenerallyhaveoneoftheseIfyouownnootherstock-marketexposurea fund that shadows theSampP500will serveyouwellovertimesinceoverthelongtermtheUSstockmarkettrendsupward because of the ever-growing economy Plus the internalfees with index funds are some of the lowest in the mutualfundworldIfyourplandoesnotofferanSampP500fundorsomesimilarbroad-marketfundthengowiththebestlarge-companystockfundamong the selections you havemdashwith ldquobestrdquo being determined byyourresearchfromabovePutasmallpercentageinsmall-companystocksHistoricallythishas been a top-performing fund class over long periods But youdontwant to overdo it small-company stocks are very aggressiveandrisky since small companiesnotonlygrow fast they implodefastYoumightfindinyour401(k)planasmall-capindexfundthattracks theRussell 2000 thats the best bet If not youll probably

haveasingleactivelymanagedsmall-capfundasyouronlychoiceBeggarscantbechoosersVentureabroadMost401(k)plansofferaninternationalfundofsome sortPuta smallportion (nomore than20)ofyour stock-market allocation into international stocks They are risky nodoubt They are volatile But they actually improve the overallstability of your portfolio and enhance the returns Thats becausetheUS is rarely the best-performingmarket in theworld in anygivenyearanyofnumerousothermarketsaroundtheglobeclaimthatdistinctionPlusowning justAmericancompanies limitsyourgrowth prospects since the world is filled with very good veryprofitable companies that do not trade on the New York StockExchange Some 401(k) plans will offer any of a variety ofinternational index funds somewill offer activelymanagedfundsIn this instance actively managed funds are often betterInternational indexfundstypicallyownthebiggestcompanies inaparticular country thats fine butmany of those companies haveeconomic ties in some fashion to the US marketplace Goodinternational-fundmanagersarebetteratlookingpasttheobviouslarge companies and finding the solid smaller local companiesresponsible formuchof a countrysunderlyinggrowth andwhicharenttiedtoUSconsumersinanyrealwayBuysomerealestateNotthekindyourhousesitsonmindyoubut rather an index fund built of real estate investment trusts orREITs Not all 401(k) plans offer such an option though thenumbers are increasing Statistically real estate provides acounterbalance in a portfolio since it has very little correlation tothe movements of the stock and bond markets That means realestate largelymoves independentlyof stocksandbondsprovidingadded diversification to a portfolio All you need is 5 of youroverallportfolioinREITsharesandyourefineOwn an intermediate-term bond index fund if your plan offersoneThisisafundthatownsbondswithmaturitiesofbetweenfourand ten years such a fund is often in the sweet spot of the bondmarket Ifyourplandoesntofferabond-index fund thengowiththebond fund thathasanldquoaveragedurationrdquo in the five-to-seven-

year range or something close to that You can find that averageduration number in the funds prospectus though going toMorningstar plugging in the funds five-letter ticker symbol andreadingaboutthedetailsontheldquoSnapshotrdquopageisfareasierGowith a TIPS fund if you have access to one TIPS stands forTreasury Inflation-Protected Securities US government securitiesdesigned toprovidea return thatalwaysbeats inflationYoucantgowrongstayingaheadofinflationsinceitmeansyourdollarsaregrowingfasterthanthepriceofbreadatthecornermarketSkip sector funds Individual investors often gravitate to fundsthatspecializeinonecorneroftheWallStreetmarketparticularlytechnologyhopingtoscoreabigreturnTheyoftenwindupgettingburned insteadbecause sector funds tend tobemorevolatile andaggressivemdashbasically riskymdashthan are plain-vanilla broad-basedmutualfundsTheresnoreasontogamblewithyourfuturesimplyto try to squeeze a marginal bit of additional return from yourportfoliobytakingonsubstantiallymoreriskFinallyifyoudontwantthehassleoftryingtofigureoutanyofthis stickyourentire401(k)balance ina lifecycle fundamutualfund built to be a one-stop shop for investors who dont want tohave to think about owning anything other than a singleinvestmentLifecyclefundshavetargetedmaturitydatesasmuchasthirtyorfortyyearsintothefutureAssuchtheychangewithyouasyouagegrowingincreasinglyrisk-averseasyougrowolderandthe targeted maturity date draws nearer Equally important Youarent likely to rack up big losses since the funds are diversifiedacross different types of investments These funds are growingincreasingly popular in retirement plans because with oneinvestment decision youre adequately diversified and properlyallocatedinstantlybasedonyouragemdashnowandinthefuture

WHATMIGHTADIVERSIFIEDPORTFOLIOLOOKLIKE

This iswhere all your research and calculations come together You

havetofigureoutwhattoinvestinPullingthattriggercanbethemostterrifyingpartoftheprocesssincenoonewantstomakeabaddecisionsandpossiblylosemoneyTo get an idea of what kinds of mutual funds you might look forexamine the chart on the next page These selections are based onMorningstar data from mid-2005 and are not recommendations butsimplyanillustrationofhowtodesignvarioustypesofportfoliosbasedupontheasset-allocationmodelthatyoudeterminebestfitsyourneedsInsidea401(k)youarentlikelytofindallofthosefunds(thoughyoullhave access to them if your 401(k) plan offers a socalled brokeragewindowthatletsyoutransactinabrokerageaccount)StillyourelikelytohavesimilarfundsinyourplanIfyouinvestinanyofthevarioustypesofIRAsyoullhaveaccesstothese funds aswell as thousandsmoreYouregoal isnt tonecessarilymimic the funds listed here since performance can lag andmanagerschangeandfunds losetheir focusmdashthoughthatsprobablynotgoingtohappentoanyrealdegreewiththeindexfundsThegoalinsteadistomimictheoverallthemeoftheindividualportfoliosshown

COMPANYSTOCKBUYSELLORHOLD

Youmight think your employer is the best in theworld Youmightthink that because you work there you have a good feel for the

companysstabilityitsfutureprospectsanditsabilitytocontinueasasuccessfulongoingfirmYoumightthinkthatbecauseyouknowallofthisfromaninsidersperspectivethenitmakessenseforyoutoloaduponcompanystockinyourretirementplanortobuyasmuchofitasyoucanthroughpayrolldeductioninanemployeestockpurchaseplanRightAndworkersatEnronCorporationfelttheexactsamelevelof

confidenceinthemonthsbeforethatHoustonenergyconcernimplodedinoneofthebiggestfinancialfraudandaccountingscandalsonrecordAtthetimeEnronwaspartoftheStandardampPoors500-stockindexitscompany debt was highly rated by all the ratings agencies In shortEnron on the surface was amodel corporate citizenmdashthat ultimatelyrobbedmanyofitsworkersoftheirretirementwhenafterthefinancialshenanigansbegantounravelthevalueofthestockplungedtopenniesasharefrominexcessof$90Thepoint is thisDonot invest toomuch incompanystockFroma

prudent investors viewpoint you are taking on excessive single-companyriskEvenifthesharesdont implodeasEnronsdidyoustillfacethepotentialforfinancialheartbreakifthepriceofyouremployersshareslikethoseofsaydruggiantSchering-Ploughfallsfrom$60intothelowteensonweakcorporateperformanceWhat defines ldquotoomuchrdquo company stock depends on your tolerance

fortheinherentrisksButbymoststandardsofprudencenomorethanabout10ofyouroverallportfolioshouldbeinvestedinasinglestockmdashandthatincludesyouremployersstock

THEABCSOFIRAS

IRAsorindividualretirementaccountsaretax-advantagedretirementsavings accounts Themoney you invest comes fromdollars that havealready been taxed so unlike with a 401(k) contribution you get noimmediatetaxbenefitHowevertheearningsgroweithertaxdeferredortax-freedependingonthetypeofIRAyouownandagaindependingonwhich IRAyouownyoumaybeeligible todeduct all or aportionofyourcontributiononyourannualtaxreturn

That seems simple enough The challenges arise from the fact thatthere are several different types of IRAs and each has different limitsand restrictionsandeligibility rules thatcanmake investing inan IRAmind-numbingly complex at times Indeed the rules governingtraditionalIRAsalonecanseemasclearasthetechnicalexplanationsforprogrammingaVCRHeresagraphicalrepresentationofIRSPublication590whichdetailswhocandeducttheirannualIRAcontributionsontaxreturns This is for the 2004 tax year the income limits increase overtime

Unlike a 401(k) plan youmight have access to at work and whichgenerallyoffersalimitedselectionofinvestmentsIRAsallowyoutobuyjust about any sort of investment you come across including severalnontraditionalassetssuchaspreciousmetalsandrealestatemdashthoughformost investorsmutual funds are usually the best bet since they dontrequirenearlythesamedegreeofattentionthatsomeotherinvestmentsdemandAswithmosttax-advantagedretirementsavingsplansifyoudipinto

your IRAbeforeyouretireorbeforeyoure fifty-nineandahalfyoull

paytaxesatordinaryincomeratesonboththeoriginalcontributionsandanyearningsplusyourehitwithapenaltyequalto10oftheamountofmoneyyouwithdrawUndercertainsituationstheIRSallowsyoutowithdrawIRAmoneyearlywithoutpenaltyThosereasonsthougharevery narrow including distributions made because of your total andpermanent disability distributions made to an ex-spouse as part of alegalorderdistributionsmadetopayformedicalinsuranceforyourselfyourspouseandyourdependentsbutonlyifcertainconditionsapplydistributions of $10000 or less made for the first-time purchase of ahomedistributionsmadeforqualifiededucationalexpensesOnce you pass fifty-nine and a half withdrawals from an IRA are

taxedatwhateveryourordinaryincometaxrateisatthetimewithoutpenalty And once you hit seventy and a half you face mandatorywithdrawal whats known as an annual ldquorequired minimumdistributionrdquoFail todothatandyoufaceasteeppenalty50of theamountofmoneyyoushouldhavewithdrawn(TherulesdifferwithaRothIRAwhereyouhavenorequireddistributionofcourseyoualsodontgettodeductyourcontributioneachyear)ThequestionyoumustaskyourselfWhichIRAisrightformeThechartonpage163willhelpyoudeterminethatbasedonwhere

the money is coming from that you want to contribute and otherretirementsavingsaccountsthatyoumightbecontributingtoalready

ANNUITIESGREATFORSOMELOUSYFORMANY

Thoughannuitiesare investments theyrealsoa formof insurancemdashinsurancethatmostpeopledontunderstandanddontuseproperlyToomanybuyersstuffmoneyintoanannuityliketheywouldabank

certificate of deposit they invest then reclaim theirmoney in a lumpsumafewyearslaterYoucandothatsurebutthatslikebuyinganewsports car just to drive two blocks once a week to the corner groceryourenotreallytappingintowhatthepurchasehastoofferWith an annuity thatmeans youre skippingout on the very reason

annuities exist a guaranteed base of income In retirement thatguarantee can mean a lot particularly since the income can bestructured to last for as long as you livemdashno matter how long thatultimatelyisSuchanarrangementcanrelieveatremendousamountoffinancial stressyoumightotherwise feelprovidinganassured levelofmonthlycashflowtopayforlifesnecessitiesfreeingupSocialSecurityandothersourcesofmoneytopayforhealthcareormedicinesortravelandleisure

Plugthiscalculationintoanyfinancialprogram$100

investedonthefirstofeverymonthfor30yearsatanaverage

annualreturnof10

Theansweryoullgetis$22793253

MathematicallythatstrueButdontbelieveit

Thechancesyouactuallyreachthatleveldependonany

numberofvariablesincludingthedirectionofthestockand

bondmarkettheimpactofinflationonthemarketsandthe

sequenceofreturnsyougetinthemarketfromoneyeartothe

next

Inshortwhenitcomestoplanningyouneedtoknow

thatthissortofABCanalysisissimplisticandcandishupan

unwarrantedsenseofsecuritysinceinmostcasestheend

resultovershootstheamountyoulllikelyhave

ThereasonAsidefromfixed-rateassetssuchassavings

accountsCDsandbondsheldtomaturityinvestmentreturns

donotmoveinldquoaverage-annualrdquostepsStockshistoricallyhave

returnedabout10ayearbutthosereturnshaveneverbeen

inastraightlineSomeyearsareup1somearedown20

Youmayneverexperienceanactual10returninyour

portfolioThefactisyouhavenoideawhatrangeofreturns

youllgetandinwhatsequenceyoullgetthem

Soneveracceptfromafinancialadvisormdashoracomputer

financial-planningprogrammdashanycalculationthatprojectsa

futureportfoliovaluebasedonanaverage-annual-return

model

Amoreusefulbarometerisafuturevaluedetermined

throughMonteCarloanalysismdashamathematicalmodelthatgrew

outoftheManhattanProjectthatbuilttheatomicbombinthe

1940sNamedfortheEuropeancasinocapitalMonteCarlo

describesmuchlikeaweatherreporttheprobabilityof

achievingsomeresultbasedondozenshundredsoreven

thousandsofvariablesallmixinginrandomfashionMonte

Carlomodelsrunhundredsorthousandsormillionsof

iterationseachtimerandomlydippingintoapreassignedpool

ofpossiblevariablesthenplottingtheresultsUltimatelya

bell-shapedcurveresultswiththemostlikelyoutcomes

clusteringnearthebellsdomeandincreasinglylesslikely

resultsrunningdowneitherside

TheideaisthisWhatsmoreusefultoyouasaninvestor

mdashknowingthat$100investedmonthlyfor30yearsat10

annuallyis$22793253orthatbasedonallthevariablesthat

historicallyhaveimpactedthemarkettheresonlya50

chancethatyoullactuallyreachthatlevelIfyoure

comfortablewiththatriskfinemdashsolongasyourealizethat

yourportfoliomayormaynotachievesomelevelyouassumed

itwouldyearsagobasedonanaverage-annual-return

calculationIfyouwantagreaterassuranceofreachingthat

levelthenmaybeitmakessensetosavealittlemoreeach

monthorchangeyourassetmixtoincluderiskierassetswith

thepotentialforgreaterreward

RetirementincomecalculatorsrunbyTRowePrice

(wwwtrowepricecom)andFinancialEngines

(wwwfinancialenginescom)amongothersrelyonMonte

CarloanalysisTRowePricesisfreeFinancialEnginescharges

afeethoughtheinformationismoredetailed

ButbeforeyouinvestinanyannuityunderstandwhatyourebuyingandwhyyourebuyingitandmakesureyourebuyingtherighttypeofannuityforyourneedsAllannuitiesarebuiltaroundthesamebasicstructuretheyarehybrid

investmentinsurancecontractssoldbyinsurancecompaniesForasumof cash they generate a guaranteed monthly payment that can beginimmediatelyoratsomepoint inthefutureandcanlastas fewas fiveyearsorstretchovertheremainderofyourlifespanwhatisknownasthelifetimeincomeoptionThereareallmannerofwaystostructureanannuity payout You could for instance take the largest payoutavailableforthenumberofyearsyouthinkyoullneeditbutifyoudiebeforethefinalpaymenttheinsurerkeepsyouroriginalinvestmentandyourheirsreceivenothingOryoucanarrangeitsothatthepayoutsareguaranteed to continue for a set number of years going to yourdesignatedbeneficiaryifyouexpirebeforethepaymentsdoForpeopleseekingincomeanannuitywillalwaysprovidemorethan

acertificateofdepositevenifthesizeoftheaccountandthereturnsareidenticalThatsbecausewhileaCDreturnsinterestincomeanannuityalsoreturnsaportionoftheoriginalprincipalyouinvestedTheupshotof thatWhentheCDmaturesyoustillhaveyouroriginal investmentwhentheannuitycomestoanendyoullhavenoremainingvalueintheaccount since you consumed it along the way Of course with a CDyoullhavetocontinuallyrollthemoneyoverintoanewCDwhenthecurrentonematuresandyouneverknowifinterestrateswillbehigherof lower the next time around meaning your income could be lowerthanyouneedifratesfallsharplyashappenedtomanyretireesinthe1990sandintotheearly2000sWithanannuityyoucanlockinyourmonthlyincomeforfifteenortwentyyearsorlongerVariations on annuities are legion and each has different bells and

whistles thatprovideallsortsofadditionalbenefitsatadditionalcostsButessentiallyannuitiesbreakdown into twomajor typesmdashimmediateanddeferredWithimmediateannuitiesyoutradeaone-timelumpsumofcashforarecurringstreamofincomethatbeginsimmediatelyorwithintheyearOnceyoubuyanimmediateannuityyoucannotretrievethatlumpsumortheremainingportionof it ifyoudecideyouneedthecashatsomepoint Instead your money is returned to you over a predeterminedperiodortheremainderofyourlifeDeferred annuities meanwhile have two phases the accumulationphase inwhichyourprincipalgrows invalueovermanyyears andadistribution phase inwhich you can reclaimyourmoney plus all theearnings throughaone-time lump-sumpayoutoramonthlystreamofincomeThebiggestpitfallwithdeferredannuitiesisthatmostofthemimposesocalled surrender penalties charges you must pay if you decide youwantyourmoneybackbeforeacertainamountoftimehaselapsedThattime ismeasured in years usually somewhere between seven and tenyearsthoughinsomeinstancesitcanbemuchlongerThechargescanbe onerous anywhere from 8 to 10mdashor moremdashof the contractsvalueBothimmediateanddeferredannuitiescanbeeitherfixedorvariableA fixedannuity pays a fixed rate of return just like a CD The returnsinside a variable annuity depend entirely upon the performance of themutualfundndashlike sub-accounts that you choose and which invest ineverythingfromcashtostockandbonds

WHICHANNUITYISRIGHTFORME

HeresaveryshortquiztoanswerthatquestionAreyouretiredIfldquonordquoisyouranswerthenyouwantavariableannuityWhileyourestill in the workforce your variable annuity will have many years to

grow(adecadeortwoisbest)duringaperiodinwhichyoudontneedthemoney to live onThen at somepoint after you reach retirementyoucanannuitizetheaccountbalanceandcreatethatguaranteedbaseofincometosupplementwhateverotherincomeyouhaveIf ldquoyesrdquo is your answer then youwant an immediate annuityOnceyoure in retirement youre generally not as concerned about growingyourassetsasyouarewithgeneratingenoughincometoliveyourlifeThatspreciselytherollofanimmediateannuitymdashtogenerateincomeAvariable annuity tends to be a poor choice for retirees since retireesgenerallydonthave the timenecessary to letavariableannuitygrowThatsparticularlytrueofolderretireesthoseintheirlateseventiesandeighties who are often targets of unscrupulous annuity sellers WhenyoureolderyoualmostassuredlydonotwantyourmoneylockedawayfromyouforyearsatatimeyoumayneedthatcashforanemergencyandyouregoingtohatehavingtopayasurrenderchargetoreclaimitYoungerretireeswhomightwanttoassureacertainlevelofincomeinlater years can get away with putting some money into a variableannuitysolongasitsalow-costannuitysuchastheLifetimeVariableSelect sold by New York retirement-services giant TIAA-CREF theVanguardVariableAnnuitysoldbythemutualfundcompanyVanguardGroup in Malvern Pennsylvania or the Fidelity Personal RetirementAnnuity sold by Bostons Fidelity Investments Each of those annuitiescharges some of the lowest fees in the industry and none impose asurrenderchargemeaningyoucanreclaimyourmoneyifnecessaryatanypointwithoutrelinquishingachunkofittotheinsurer

ATAXINGMATTER

Youmust understand how the IRSwill tax your annuity before youdecide to buy one since you could unwittingly and substantiallyincreasethetaxesyouoryourheirsowethegovernmentEarnings from an annuity are taxed as ordinary income which isusually a higher rate than the capital-gains rate at which stocks andmutual funds are taxed Moreover annuities receive no ldquostep-up

provisionrdquo(moreonthatinamoment)whichcancreateamuchlargertaxobligationonheirswhomightinheritanannuityyouleavebehindHereshowitallshakesoutWithanimmediateannuitytheportionofyourmonthlypaymentthatrepresents earnings is taxed as ordinary income The portion thatrepresentsareturnofyouroriginalprincipalisnottaxedWithdeferredannuitiesyoupaynotaxesontheearningsifanythataccumulate each year Like a 401(k) or IRA account these annuitiesgrowtaxdeferredHoweveryouwillpaytaxesonceyoubegintodrawonthemoneyaseitheralumpsumoramonthlypayoutAndyoullpayatthehigherordinaryincomeratesNowwheredeferredannuitiesreallystabtheunpreparediswiththatstepupprovisionWithstocksandmutualfundsthevalueoftheassetatthe timeofyourdeathbecomesyourheirs costbasisMeaning Ifyouown $100000 worth of a mutual fund that originally cost you say$10000 your heirs wont pay capital-gains taxes on the $90000 inprofits you amassed For tax purposes their clock starts running at$100000With an annuity however heirs will pay taxesmdashat the higherordinaryincomeratesmdashonallofthe$90000inprofitsForthatreasonretirees inparticularshouldbeveryleeryoftradingstocksandmutualfundsinwhichtheyhavebigprofitsforanannuityIndoingsoyourecreatingtaxeswherenoneexist

Reallywasthatsobad

YoumadeittotheendandsurvivedallthemathAndwithalittleeffortyouhavetakenthestepsnecessarytobecomeabetterstewardofyourmoneyandtoinvestwithgreaterconfidenceinyourownabilitiestoadequatelyallocatetheassetsinyour401(k)planandIRAYouknowaPEratiofromyourhighschoolPEclassandmoreimportantyouknowhowtocalculateitandseveralotherWallStreetnumbers

Youknowhowtodeterminewhatamountoflifeinsuranceyouneedtoproperlyprotectyourassets and your family you know how much money you need in your emergency savingsaccount howmuchyouneed to save eachmonth to reachyour retirement requirements andwhythat0financingdealyourcardealershipispitchingisntnecessarilyasrosyasitseems

Inshortyouvebecomemoreself-sufficientwiththemoneythatflowsthroughyourlifeandmore capable in managing the finances of living for to-day while saving and investing fortomorrow

Butperhapsmost important ishopefully the realization thatpersonal finance isnot suchadifficultsubjectafterallandthatyoureallydoalreadyhaveallthetoolsneededtosucceedinthe gameofmoney Its not scary Its not hard It canbe empowering to take charge of yourfinancesAndsometimesitcanbefun

Evenifitdoesrequireabitofmath

JEFFDOPDYKEisafinancialreporterwhohascoveredinvestingandpersonalfinanceforTheWallStreetJournalforthepasttwelveyearsHeisalsoacolumnistforTheWallStreetJournalSundaysupplementwritingtheLoveampMoneycolumnthatissyndicatedinroughlyninetypapersnationwideandwhichexploresthenexusofpersonalfinanceand personal relationships Opdyke is the author of Love ampMoney The Life Guide toFinancialSuccessPriortojoiningtheJournalin1993OpdykewasastaffwriterfortheOrangeCountyRegister in SouthernCalifornia and theFortWorth (Tex)Star-TelegramHe spent a nine-month sabbatical as an analyst and trader for a Dallas-based hedgefund Opdyke is a graduate of the Louisiana State University Manship School ofJournalism He lives in Baton Rouge Louisiana with his wife Amy and their twochildren

Copyrightcopy2006byDowJonesampCompanyTheWallStreetJournalmacrisaregisteredtrademarkofDowJonesandisusedbypermission

AllrightsreservedPublishedintheUnitedStatesbyThreeRiversPressanimprintoftheCrownPublishingGroupadivisionofRandomHouseIncNewYorkwwwcrownpublishingcom

LibraryofCongressCataloging-in-PublicationDataisavailableuponrequest

eISBN978-0-30749889-2

v30

Cover

Other Books By This Author

Title Page

Contents

Introduction

Part 1 - Building Your Financial Base

Chapter 1 - Budgeting

Chapter 2 - Banking Checking Savings and Certificates of Deposit

Chapter 3 - Planning Preparing for the Worst

Chapter 4 - Borrowing Accumulating and Managing Debt

Chapter 5 - Be PreparedmdashIts Not Just a Motto for the Boy Scouts

Part 2 - Building Your Assets

Chapter 6 - Investing

Chapter 7 - Retirement Planning Feathering the Nest Egg

Conclusion

About The Author

Copyright

INTRODUCTION

PART1

BUILDINGYOURFINANCIALBASE

CHAPTER1BudgetingThePersonalBudgetTheSpendingPlanPayYourselfFirstEmergencySavingsTheAnnualBudget

CHAPTER2BankingCheckingSavingsandCertificatesofDepositCheckingAccountsCertificatesofDepositmdashandWhenBreakingOneMakesSenseBuildingaCDLadder

CHAPTER3PlanningPreparingfortheWorstInsuranceDoINeedInsuranceHowMuchInsuranceDoINeed

CHAPTER4BorrowingAccumulatingandManagingDebtWarningSignsYouCarryTooMuchDebtIsYourDebtTooHighPayingDownDebtBuyingaHomeRentingVersusBuyingWeighingtheTrade-OffsHowMuchCanYouAffordShoppingforaLoanTaxSavings


PARTII

BUILDINGYOURASSETS




















THEPERSONALBUDGET














THESPENDINGPLAN









PAYYOURSELFFIRST


















addedcosts








fromyournestegg











EMERGENCYSAVINGS
















THEANNUALBUDGET























CHECKINGACCOUNTS







wwwWSJcomBookTools







thestatement








byyourbank





































worksheet











valueofyourmoney











in2005




levels

BUILDINGACDLADDER







INSURANCE



DOINEEDINSURANCE





AUTOCOVERAGE





HOMEOWNERSCOVERAGE











LIFEINSURANCE









future
































ISYOURDEBTTOOHIGH


PAYINGDOWNDEBT



















aboutyourefforts







thinkingabout






BUYINGAHOME







HOWMUCHCANYOUAFFORD

















SHOPPINGFORALOAN





TAXSAVINGS






















likethis









TOREFINANCEORNOT







reasons












HOWMUCHTOSAVE





















BUYINGACAR



























COMPARINGLEASES











THEWALLETREGISTER





FINANCIALACCOUNTS







SAFEDEPOSITBOXES








































timeframe






FIRSTTHINGSFIRST













FULLSERVICE





DISCOUNTFIRM







NETPROFITMARGIN




YIELD



BOOKVALUE













PEGRATIO























know




year








BeginningNAVis$12



NAVis$1543





yourrateofreturn



















acanofshakensoda





























































likeyou















cases













WHEREDOIINVEST




STEP1


STEP2









thereturns













THEABCSOFIRAS














annualreturnof10







next
















model






































ATAXINGMATTER



Reallywasthatsobad










eISBN978-0-30749889-2

v30

Cover


Title Page

Contents

Introduction










Conclusion

About The Author

Copyright


PARTII

BUILDINGYOURASSETS




















THEPERSONALBUDGET














THESPENDINGPLAN









PAYYOURSELFFIRST


















addedcosts








fromyournestegg











EMERGENCYSAVINGS
















THEANNUALBUDGET























CHECKINGACCOUNTS







wwwWSJcomBookTools







thestatement








byyourbank





































worksheet











valueofyourmoney











in2005




levels

BUILDINGACDLADDER







INSURANCE



DOINEEDINSURANCE





AUTOCOVERAGE





HOMEOWNERSCOVERAGE











LIFEINSURANCE









future
































ISYOURDEBTTOOHIGH


PAYINGDOWNDEBT



















aboutyourefforts







thinkingabout






BUYINGAHOME







HOWMUCHCANYOUAFFORD

















SHOPPINGFORALOAN





TAXSAVINGS






















likethis









TOREFINANCEORNOT







reasons












HOWMUCHTOSAVE





















BUYINGACAR



























COMPARINGLEASES











THEWALLETREGISTER





FINANCIALACCOUNTS







SAFEDEPOSITBOXES








































timeframe






FIRSTTHINGSFIRST













FULLSERVICE





DISCOUNTFIRM







NETPROFITMARGIN




YIELD



BOOKVALUE













PEGRATIO























know




year








BeginningNAVis$12



NAVis$1543





yourrateofreturn



















acanofshakensoda





























































likeyou















cases













WHEREDOIINVEST




STEP1


STEP2









thereturns













THEABCSOFIRAS














annualreturnof10







next
















model






































ATAXINGMATTER



Reallywasthatsobad










eISBN978-0-30749889-2

v30

Cover


Title Page

Contents

Introduction










Conclusion

About The Author

Copyright



















THEPERSONALBUDGET














THESPENDINGPLAN









PAYYOURSELFFIRST


















addedcosts








fromyournestegg











EMERGENCYSAVINGS
















THEANNUALBUDGET























CHECKINGACCOUNTS







wwwWSJcomBookTools







thestatement








byyourbank





































worksheet











valueofyourmoney











in2005




levels

BUILDINGACDLADDER







INSURANCE



DOINEEDINSURANCE





AUTOCOVERAGE





HOMEOWNERSCOVERAGE











LIFEINSURANCE









future
































ISYOURDEBTTOOHIGH


PAYINGDOWNDEBT



















aboutyourefforts







thinkingabout






BUYINGAHOME







HOWMUCHCANYOUAFFORD

















SHOPPINGFORALOAN





TAXSAVINGS






















likethis









TOREFINANCEORNOT







reasons












HOWMUCHTOSAVE





















BUYINGACAR



























COMPARINGLEASES











THEWALLETREGISTER





FINANCIALACCOUNTS







SAFEDEPOSITBOXES








































timeframe






FIRSTTHINGSFIRST













FULLSERVICE





DISCOUNTFIRM







NETPROFITMARGIN




YIELD



BOOKVALUE













PEGRATIO























know




year








BeginningNAVis$12



NAVis$1543





yourrateofreturn



















acanofshakensoda





























































likeyou















cases













WHEREDOIINVEST




STEP1


STEP2









thereturns













THEABCSOFIRAS














annualreturnof10







next
















model






































ATAXINGMATTER



Reallywasthatsobad










eISBN978-0-30749889-2

v30

Cover


Title Page

Contents

Introduction










Conclusion

About The Author

Copyright

the wall street journal. personal finance workbook

Documents