Investing is a lifelong process. The sooner you start, the better off you'll be in the long run. It's best to start saving and investing as soon as you start earning money, even if it's only $10 a paycheck. The discipline and skills you learn will benefit you for the rest of your life. But no matter how old you are when you start thinking seriously about saving and investing, it's never too late to begin.

The first part of a successful lifelong investment strategy is disciplined savings habits. Regardless of whether you are saving for retirement, a new house, or just that extravagant dining room set, you will need to develop rigid savings habits. Regular contributions to savings or investment accounts are often the most productive; and if you can automate them, they are even easier.

Factors That Affect Your Investment Decisions

Once you begin saving on a regular basis, you'll soon have to decide how to invest the money you are saving. Regardless of what financial stage of life you are in, you will have to decide what your needs are and how comfortable you are with risk.

Growth or Income

What do you need the money for? The answer to this question will help determine whether you want to put your savings into investment products that produce income for you, or that concentrate on growing the value of your investment. For instance, a retirement fund does not need to produce income until you retire, so your investing strategy should focus on growth until you are close to retirement. After you retire, you'll want to draw income from your investment while keeping your principal intact to the extent possible.

Time and Risk Tolerance

All investing involves a certain amount of risk. How well you tolerate price fluctuations in your investments will need to be balanced against your required rate of return in determining the amount of risk your investments should carry. An offsetting factor to risk is time. If you plan to hold an investment for a long time, you will probably tolerate more risk because you have the time to make up any losses you may experience early on. For a shorter-term investment, such as saving to buy a house, you probably want to take on less risk and have more liquidity in your investments.

Chart illustrates sample portfolio asset allocations: Low Risk (those nearing or in retirement); Moderate Risk (middle-aged investors); Aggressive Risk (younger investors).

Allocations are presented only as examples and are not intended as investment advice. Please consult a financial advisor if you have any questions about how these examples apply to your situation.

Sound Strategies for Everyone

Everyone lives his or her life differently, and everyone has complicated emotions about money, so investment decisions are highly personal and unique to each person. But there are some basic rules that apply to most investors.

• To provide liquidity for emergencies, you should probably always have a cash reserve in a money market fund 1 or traditional savings account or CD, no matter what your life stage.
• Also, if you can tolerate even a little risk, you should probably always have some portion of your portfolio in stocks to help protect your savings from being devalued due to inflation.
• Another good idea is scheduling annual reviews of your investments with a financial advisor. This habit will keep you up to date on your investments and help spot potential problems in your investment strategy.
• Finally, every investment decision should include tax considerations. Investments can be taxable, tax deferred, or tax free. You should be aware of the taxable status of your investments and take that into account when setting up and reviewing an investment strategy.

Investing for Life Stages

Although everyone's attitude toward investing and money is different, most investors share some common situations throughout their lives. For instance, where you are in your life cycle certainly affects how you invest for retirement, but what about other life stages that aren't so closely related to age?

Let's say you're 40 and expecting your first child. You'll need to decide how to balance your finances to account for the additional expenses of a child. Perhaps you'll need to supplement your income with income-producing investments. Moreover, your child will be entering college at about the time you're ready to retire! In these circumstances, your growth and income needs most certainly will change, and maybe your risk tolerance as well.

The following are some major life events that most of us share, and some investment decisions that you may want to consider:

When you get your first "real" job:

• Start a savings account to build a cash reserve.
• Start a retirement fund and make regular monthly contributions, no matter how small.

When you get a raise:

• Increase your contribution to your company-sponsored retirement plan.
• Invest after-tax dollars in municipal bonds that offer tax-exempt interest.
• Increase your cash reserves.

When you get married:

• Determine your new investment contributions and allocations, taking into account your combined income and expenses.

When you want to buy your first house:

• Invest some of your non-retirement savings in a short-term investment specifically for funding your down payment, closing, and moving costs.

When you have a baby:

• Increase your cash reserves.
• Increase your life insurance.
• Start a college fund.

When you change jobs:

• Review your investment strategy and asset allocation to accommodate a new salary and a different benefits package.
• Consider your distribution options for your company's retirement savings or pension plan. You may want to roll over money into a new plan or IRA.

When all your children have moved out of the house:

• Boost your retirement savings contributions.

When you reach 55:

• Review your retirement fund asset allocation to accommodate the shorter time frame for your investments.
• Continue saving for retirement.

When you retire:

• Carefully study the options you may have for taking money from your company retirement plan. Discuss your alternatives with your financial advisor.
• Review your combined potential income after retirement and reallocate your investments to provide the income you need while still providing for some growth in capital to help beat inflation and fund your later years.

Discipline and a Financial Advisor Can Help

One of the hardest things about investing is disciplining yourself to save an appropriate portion of your income regularly so that you can meet your investment goals. And if you're not fascinated with investing, it's probably also hard to force yourself to review your financial situation and investment strategy on a regular basis. Establishing a relationship with a trusted financial advisor can go a long way toward helping you practice smart money management over your entire lifetime. Points to Remember

1. The first step in a successful lifelong investment strategy is to develop disciplined savings habits.
2. Throughout life, you should assess your need for growth or income.
3. You will have to determine your overall tolerance to risk and regularly reassess your tolerance. Education and a long-range investment goal can help raise your risk tolerance.
4. An offsetting factor to risk is time.
5. You should probably always have a cash reserve in a money market fund, traditional savings account, or CD.
6. You should probably always have some portion of your portfolio in stocks to help protect your investment from being devalued due to inflation.
7. Increase regular investment contributions when your financial situation improves.
8. Start separate investment funds for specific purposes, such as a fund for college or the down payment for a house.
9. Schedule annual reviews of your investments.
   

1An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.

© 2011 McGraw-Hill Financial Communications. All rights reserved.

June 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Jim Oliver, a local member of FPA.

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The key to determining your needs is to assess how much you would be required to spend during each week or month that you would be unable to earn your normal pay.

Your best defense against a financial catastrophe brought on by long-term illness or injury may be the purchase of a disability income insurance policy with enough coverage to compensate for your lost wages. Disability insurance provides you with cash that you can use for paying your mortgage or rent, buying groceries and meeting other ongoing living expenses.

Putting Policies in Perspective

For most people, there are two main forms of disability income insurance to consider: employer-sponsored policies (called "group" policies) and private insurance policies. Group policies are relatively inexpensive and generally remain in effect for as long as the individual remains with the employer. But there are often significant limits on the benefits provided by these policies, so it's important to determine whether coverage is adequate for your needs.

Private insurance policies, paid for by individuals, typically are more expensive than group policies but may also provide a higher level of coverage. In certain instances, those with a group policy may want to consider purchasing a private policy to fill in the income gaps frequently associated with group-only coverage.

How Much Disability Income Insurance Do You Need?

The key to determining your needs is to assess how much you would be required to spend during each week or month that you would be unable to earn your normal pay. For example, if you would need 80% of your pretax earnings but your group policy would only pay an amount equal to 60%, then you may need additional coverage.

Disability Defined

The way in which an insurance policy defines disability can determine your eligibility to receive benefits. The following is a quick overview of three basic definitions:

• Own-occupation. The most comprehensive definition of disability, it states that you are unable to perform the duties of the occupation you were performing at the time of the disability.
• Income replacement. Policies with income replacement coverage define disability as sickness or injury that doesn't allow you to perform the duties of your occupation and typically stipulates that you are not currently engaged in any other occupation.
• Gainful occupation. These policies define disability as the inability to perform the duties of your occupation or any occupation that you are considered to be reasonably qualified for by way of your education, skills or training.

A qualified insurance professional can help you assess your need for disability income insurance and find a policy that is most appropriate for you.

Because of the possibility of human or mechanical error by Financial Communications or its sources, neither Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.

© 2011 McGraw-Hill Financial Communications. All rights reserved.

June 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Jim Oliver, a local member of FPA.

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Summer is a great time to tackle home improvements - and, happily, it's not too late to receive a tax credit when making your home more energy efficient. Although significantly reduced from 2010 levels, energy-efficiency tax credits are still available in 2011.

The home energy credit applies to energy-related improvements, such as adding insulation, energy-efficient exterior windows, and energy-efficient heating and air-conditioning systems to an existing home that is your primary residence. The tax credit is not available on rental properties or new construction.

The tax credit is 10% of the cost of the home improvement, up to a maximum of $500. There is a lifetime limit of $500, so if you took a $500 credit in 2010, you do not qualify in 2011. The tax credit expires December 31, 2011.

The credit on some items have been reduced below $500:

• Windows limited to $200; Energy Star qualification.
• Air conditioners, water heaters, and biomass stoves limited to $300.
• Furnace and boiler improvements limited to $150 and must meet certain standards.
• $50 credit for advanced main air circulating fans.
  

Further, the Residential Energy Efficient Property Credit is a nonrefundable energy tax credit that helps individual taxpayers pay for certain alternative-energy equipment, such as solar hot water heaters, geothermal heat pumps, and wind turbines. The maximum amounts for a credit equal 30% of the cost of qualified property, with no upper limit. This credit expires on December 31, 2016, and is available for new and existing homes, whether primary or second. Rentals do not qualify.

We're happy to help you sort out the tax credits available for your home improvements this summer. Just give us a call or send us an email.

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Home ownership is the cornerstone of the American Dream. But before you start looking, there are a number of things you need to consider. First, you should determine what your needs are and whether owning your own home will meet those needs. Do you picture yourself mowing the lawn on Saturday, or leaving your urban condo for the beach? The best advice is to look at buying a home as a lifestyle investment, and only secondly as a financial investment.

Even if housing prices have recently fallen in many areas, buying a home can be a good financial investment over time. Making mortgage payments forces you to save, and after 15 to 30 years you will own a substantial asset that can be converted into cash to help fund retirement or a child's education. There are also tax benefits.

Like many other investments, however, real estate prices can fluctuate considerably. If you aren't ready to settle down in one spot for a few years, you probably should defer buying a home until you are. If you are ready to take the plunge, you'll need to determine how much you can spend and where you want to live.

How Much Mortgage Can You Afford?

Most mortgages today are resold in the secondary markets. The Federal National Mortgage Association (Fannie Mae) is a government-sponsored organization that purchases mortgages from lenders and sells them to investors. Mortgages that conform to Fannie Mae's standards may carry lower interest rates or smaller down payments. To qualify, the mortgage borrower needs to meet two ratio requirements that are industry standards.

The housing expense ratio compares basic monthly housing costs to the buyer's gross (before taxes and other deductions) monthly income. Basic costs include monthly mortgage, insurance, and property taxes. Income includes any steady cash flow, including salary, self-employment income, pensions, child support, or alimony payments. For a conventional loan, your monthly housing cost should not exceed 28% of your monthly gross income.
How Much Home Can You Afford?

Bob and Janet's combined income is $50,000 a year, or $4,166 a month. Their housing expense ratio of 28% yields a monthly maximum of $1,166 for mortgage, insurance, and taxes ($4,166 x 0.28 = $1,166).

Their total debt ceiling of 36% is $1,500 ($4,166 x 0.36 = $1,500). Their monthly debt payments include a $200 car payment, credit card payments of $100, and student loan payments of $200. Subtracting this total of $500 from the $1,500 permitted leaves $1,000 in monthly housing payments.

The total obligations to income ratio is the percentage of all income required to service your total monthly payments. Monthly payments on student loans, installment loans, and credit card balances older than 10 months are added to basic housing costs and then divided by gross income. Your total monthly debt payments, including basic housing costs, should not exceed 36%.

Many home buyers choose to arrange financing before shopping for a home and lenders may "prequalify" you for a certain amount. Prequalification helps you focus on homes you can afford. It also makes you a more attractive buyer and can help you negotiate a lower purchase price. Nothing is more disheartening for buyers or sellers than a deal that falls through due to a lack of financing.

In addition to qualifying for a mortgage, you will probably need a down payment. The 28% to 36% debt ratios assume a 10% down payment. In practice, down payment requirements vary from more than 20% to as low as 0% for some Veterans Administration (VA) loans. Down payments greater than 20% generally buy a better rate. Lowering the down payment increases leverage (the opportunity to make a profit using borrowed money) but also increases monthly payments.

Costs of Buying a Home

Many home buyers are surprised (shocked might be a better word) to find that a down payment is not the only cash requirement. A home inspection can cost $200 or more. Closing costs may include loan origination fees, up-front "points" (prepaid interest), application fees, appraisal fee, survey, title search and title insurance, first month's homeowner's insurance, recording fees, and attorney's fees. In many locales, transfer taxes are assessed. Finally, adjustments for heating oil or property taxes already paid by the sellers will be included in your final costs. All this will probably add up to be between 3% and 8% of your purchase price.

Ongoing Costs

In addition to mortgage payments, there are other costs associated with home ownership. Utilities, heat, property taxes, repairs, insurance, services such as trash or snow removal, landscaping, assessments, and replacement of appliances are the major costs incurred. Make sure you understand how much you are willing and able to spend on such items.

Condominiums may not have the same costs as a house, but they do have association fees. Older homes are often less expensive to buy, but repairs may be greater than those in a newer home. When looking for a home, be sure to check the actual expenses of the previous owners or expenses for a comparable home in the neighborhood.

Choosing a Neighborhood

Before you start looking at homes, look at neighborhoods. Schools and other services play a large part in making a neighborhood attractive. Even if you don't have children, your future buyer may. Crime rates, taxes, transportation, and town services are other things to look at. Finally, learn the local zoning laws. A new pizza shop next door might alter your property's future value. On the other hand, you may want to run a business out of your home.

Look for a neighborhood where prices are increasing. As the prices of the better homes increase, values of the lesser homes may rise as well. If you find a less expensive home in a good neighborhood, make sure you factor in the cost of repairs or upgrades that such a house may need.

Finding a Broker

If you are a first-time home buyer, you will probably want to work with a broker. Brokers know the market and can be a valuable source of information concerning the home buying process. Ask lots of questions, but remember that most brokers are working for the seller, and in the end, their primary obligation is to the seller and not to you. An alternative is a so-called buyer's broker. This individual does work for you, and therefore is paid by you. Seller's brokers are paid by the seller.

Brokerage commissions average 5% to 7% and are split between the listing broker and the broker that eventually sells the home. Don't be surprised if your broker is eager to sell you their own listing since they would then earn the entire commission.

Home Buying Costs

Down Payment                                        0% - 20% of purchase price

Home Inspection                                     $200 - $500

Points                                                      $1,000 and up for 1% - 3%

Adjustments                                            3% - 8% of purchase price

Once you've determined a price range and location, you're ready to look at individual homes. Remember that much of a home's value is derived from the values of those surrounding it. Since the average residency in a house is seven years, consider the qualities that will be attractive to future buyers as well as those attractive to you.

Although it can be difficult, try to remember that you will probably want to sell this home someday. The more research you do today, the better your decision will look in the years to come.

Points to Remember

1. For many, a home represents their biggest asset and long-term investment.
2. Think carefully about how much you can afford to spend and consider borrowing guidelines like those used by Fannie Mae.
3. Prequalifying with your lender is a good way to determine how much house you can afford.
4. You will need cash for a down payment and closing costs. Generally speaking, the higher the down payment, the lower the interest rate and monthly mortgage payment.
5. In addition to your mortgage payments, you will also need to consider the other costs of home ownership.
6. Schools, taxes, services, crime rates, transportation, and zoning are important considerations when selecting a neighborhood.
7. Brokers usually represent the seller, but they can be valuable sources of information for buyers as well.
8. Remember to consider resalability when buying your home.
   

© 2011 McGraw-Hill Financial Communications. All rights reserved.  

June 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Jim Oliver, a local member of FPA.

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