A death brings with it many responsibilities for the family of the deceased. The family needs to make funeral arrangements, call family members and deal with the funeral and burial among other things. One thing that a family shouldn’t have to deal with is the distribution of the possessions of the diseased. Everyone should have a will in their name, regardless of their assets or age.

Many adults postpone writing a will when they are younger; however, the simple fact is that death doesn’t wait for anyone. Others postpone creating a will because they are unsure how to start the process while still others avoid creating a will because it may a few hundred dollars – but this is a worthwhile investment.

Wills are important because they allow you to not only dictate who receives your material objects, but they also decide more important issues after your death. One of the most important issues typically addressed in wills is the future of any of your children who are still minor. You can specify in your will, for example, to have your best friend take care of your children in the event of a tragic accident that leaves your children without parents. Otherwise, if a will is not on file, the courts may be left to decide who takes guardianship.

Even in the event you die leaving your spouse behind, the distribution of your assets may not be according to your wishes if you lack a will. Think that your spouse will simply get all your property? Wrong: depending on the state you live in, your spouse may have to share the estate with any adult children, parents or even siblings in the absence of a will.

By using a will you can avoid the state defining where your assets are distributed. The government has very specific guidelines as to how assets are divided and any deviations must be made in a will. For example, in some states if you have a wife and two kids, the government will allocate half of what your assets to your wife and half for your children to split. If you want to leave more money to your wife or money to someone or something else, this must be specified within your will. With a will, you are free to distribute your assets to anyone and any organization you want.

Equally important is being able to assert who gets what particular assets. Assets may be split by the government but it is often difficult for them to decide who receives what assets. For example, will your wife receive your automobile or will the children? This could result in your family engaging in a legal battle with each other over particular assets – a beloved watch for instance - a problem that can be avoided through the creation of a will.

Ultimately, it is always smart to have a will on file to protect your wishes as well as your family from unnecessary turmoil. While it certainly will take a little bit of extra time, effort, and money right now, the peace of mind of having a will far outweighs the cost.

Don’t let the government and people you don’t know decide who gets your assets and even children and don’t leave your family in limbo regarding your assets after they have finished mourning your death. Stop making excuses and create a will because unfortunately you never know when you might need it.

Information on investing can often be somewhat dry and technical, but when your money is on the line, you should always be informed about your options. This article will explain to you, in plain language, two of the most popular forms of investing: index funds and mutual funds - as well as tell you which one you really should probably use.

Index funds and mutual funds can both be thought of as baskets filled with various stocks or bonds – but here we will focus on funds containing stocks. Now, a stock is simply a piece of a company. A stockholder is no different than a partial owner of a company, except that in most cases a stockholder owns a tiny piece of the company and for that reason doesn’t get to be involved in everyday decisions about the company’s operations, like a normal owner would; however, because stockholders are partial owners, like owners, their piece of the company increases with value when the company is doing well and decreases in value when the company is not.

So, index funds and mutual funds really just own pieces of other companies, they themselves don’t actually do or make anything, other than decide which stocks to buy, and it is here that the difference between index and mutual funds shows itself.

Index funds are so named because they attempt to mimic the performance of a specific financial index. A financial index is just a number that is derived from combining the values of whatever composes the index. To illustrate the point, when a news anchor says, “The market was down 15 points today,” he is often referring to the S&P 500.

The S&P 500 is an index containing the stock of 500 large corporations. When, on average, the value of these corporations decreases, so does the value of the S&P 500 index. If you bought an index fund that was based on the S&P 500, its movement would replicate almost exactly the movement of the S&P 500. The original idea behind an index fund was literally to be the S&P 500 – except that investors could purchase a piece of it. Of course, you can purchase index funds tied to numerous different indices besides just the S&P 500, such as the Wilshire 5000 and FTSE 100 among others.

Mutual funds are much different. It is easier to understand what they do, but harder to understand how they do it. Now, bear with me. A mutual fund is managed or controlled by a group of people. These peoples’ entire job consists of deciding what stocks to buy. Unlike an index fund, a mutual fund does not need to mimic a particular index, and therefore a mutual fund is free to buy stocks based on different investment strategies. So in other words, the group of people that manage a particular mutual fund buy stocks they like for the mutual fund, it is that easy. However, why they like certain stocks and not others is hard to explain and often doesn’t seem to have a real explanation.

Some groups of people who run mutual funds do “value investing;” they only buy stocks that seem to be a great deal. Others do “growth investing;” they only buy stocks that are in a business that is really booming. Others combine both methods… and the list goes on.

For the purpose of this article, the particular investing style a mutual fund uses doesn’t matter much because in the end they are mostly wrong. That’s right, most mutual funds underperform the market, and since you can basically receive market returns through an index fund, an index fund makes more sense.

There are two main reasons index funds make you, the investor, more money. First, in all honesty picking winning stocks, stocks that are going to go up in value faster than the average stock, is really quite hard on as large a scale as mutual funds need having millions of dollars to invest. Very few people are able to analyze and interpret data about a company’s orders, costs, debt, outlook, management, macroeconomic issues as well as countless other variables.

Now, if picking winning stocks is that hard both index funds and mutual funds should do about the same because it is all luck anyway and they both have some stocks - and who knows how any particular stocks are going to do, right? Well, because it is so difficult to determine what stocks are going to do, that argument would be right except remember that group of people I talked about who decide what stocks a mutual fund buys? Well, those people want to get paid, in fact they want to get paid a lot.

According to data, the average mutual fund manager makes almost a half million dollars a year and these high salaries are reflected in higher fees for mutual funds. Also, the buying and selling of stock carries associated costs which are more likely to occur with a mutual fund. These differences show up in the comparison between index funds and mutual funds time and time again.

In fact, according to most reliable data, index funds outperform some 80% of mutual funds on both a before and after tax basis. That means 8 out of 10 times you are better-off being in an index fund than a mutual fund. So the next time you see an add for a mutual fund, consider whether you would like to bankroll some fund manager’s million-dollar lifestyle or your own? If you choose your own, choose an index fund.

Retirement is the phase of your life where you should be doing the things you always wanted to but never got a chance to do. When working 9-5, there is seemingly nothing people look forward to more than getting to retirement – but surprisingly, many people retire and don’t know what to do with themselves.

Here are some ideas for how to fill your newfound free time after retiring:

1. Spend time with family. With hectic work schedules, it is often difficult to make time for the people closest to us. Now that you’re retired, make a real effort to enjoy time with your loved ones. Whether it is traveling and staying with your grown children for a few weeks or just spending more time with your spouse at home, reconnect with your family.
2. Learn something new. It seems obvious, but really sit-down and think about it. Is there an instrument you always wished you could play? Or maybe you have always had an interest in cars. Whatever it is, delve in by taking lessons or reading about it. You may just find a new passion.
3. Join a group based around your favorite hobby. Whether you enjoy chess, reading, bridge, knitting, or gardening – whatever it is you can probably find an interest group. Not only is it a great way to grow your knowledge in the area, you can meet great people and expand your social circle.
4. Take charge of your health. Make a real effort to become knowledgeable about your health and keep your fitness-level high. Join a walking group or a health club. Looking and feeling great will only make retirement that much more enjoyable.
5. Explore your town. You don’t need to travel the world to find new and exciting things. Sometimes, just spending time a few miles from where you live will allow you to discover new and interesting things you never had time for when working.
6. Plan a vacation. If you can afford it in your budget, see a place you’ve always dreamed about. 
7. Revive your skills. If you were a good cook but rarely had the time as you moved-up the corporate ladder, try some new recipes.
8. Connect with old friends. Though it may have been years since you’ve spoken, make an effort – you might just find a new best friend.
9. Get a pet. A pet can add volumes of energy to your household and keep you young.
10. Indulge yourself. This is the time to do things for yourself with the money you have been saving all this while. Get a makeover, get a massage, or try an expensive restaurant.
11. Get active in your community. Whether you want to participate in local politics or join a volunteer association, it is a great way to make a difference.
12. Relax, relax, relax. After years of working, it can be hard to sit-back and enjoy peace and quit. Give it a try.
    

Retirement is not a phase when you need to have less activity in your life – it is just a phase where the one activity that used to monopolize your time is gone: work. Make the most of your new freedom and enjoy, you’ve earned it.

Thinking of taking a new loan? Wondering where you can find the best possible terms? The truth is that so-called ‘family loans’ may be the best option to get away with minimal or no interest charges; however, these types of loans are notorious for causing complications with those closest to you. It is important to carefully weigh the risks and benefits before committing to any loans, especially those with family members. This article will introduce the advantages and disadvantages of family loans and discuss ways to minimize complications.

First, it is very important to properly document the transaction as actual loan. This involves taking down the terms of payment along with any assets pledged as securities to back the loan. This will help prevent complications later when it comes to justifying the position to the IRS. Moreover, this will make income taxes much easier for your lender. There are two ways to approach the documentation process: (1) approach a lawyer to draw up the documentation or (2) simply do it yourself. Some of the most convenient options available can be found online in family legal software which provide templates for a number of situations. A properly documented loan can not only help resolve any disputes as to the numbers between family members but also keeps things legal with the IRS.

The IRS imposes several restrictions on family loans. It is important to specify that the loan is not a gift and that the lender is expecting you to return the money within a particular time period. Any interest payments received by the lender are considered income and are taxable by the IRS. If interest is not charged the IRS can still levy a tax on the interest that should be being charged. This complicated “imputed tax” basically means that if this is truly a loan, and not just a gift, there should be interest payments – and the IRS is going to tax the lender for these interest payments whether or not he is actually receiving them.

One of the other major tax implications to consider involves loans going towards mortgages. After all, one of the most common types of family loans is a loan to finance the down payment on a house. It is best to secure this note with your new house as it will help you take advantage of a whole range of tax deductions later, as interest payments are deductible. Additionally, trying to hide the source of income for your down payment could get you into major trouble with the authorities. Consequently, it is extremely important to bring this issue up when applying for a home mortgage.

Entanglement with the IRS’ crazy imputed interest can generally be avoided if the total loan amount of the loans between the two parties is less than $100,000. To explain, the $100,000 rule comes into play when the cumulative balance of all the loans between the concerned parties, including interest, is less than $100,000. This rule allows the imputed interest to be zero for the purposes of income tax if the borrower’s net income from investments within the given year is not more than $1,000. In almost all cases of family loans, the person borrowing the money is probably lacking significant investment income – so the lender should be safe from imputed interest tax.

In the end, it is often advisable to contact a tax lawyer before you enter into a large family loan because the tax implications can be complicated. You can avoid all the above hassles by simply legitimately charging interest on the loan that you give because and declaring the interest as taxable income.

Though in all this talk about tax troubles, we haven’t really taken the family relationship into account yet, but bad family debts can significantly impair if not ruin family relations. Carefully consider what each person is getting into before rushing into a family loan, and if you decide to go through with it draw up proper papers and keep your business and personal relationship distinct. There have been countless instances of families being torn apart over a good-natured loan – don’t become one of them.

In our world of fast, easy credit you may have the power to buy the car of your dreams, but if you’re not careful you could end up in a debt nightmare. This article concentrates on the mistakes that you are likely to make while taking a loan for your car – often the single purchase people are most likely to fixate on and daydream about.

Though it is seemingly obvious, it is worth repeating: carefully think about your options and your needs. How often have you heard people say that they’ve always wanted a particular car? Very few purchases are so obsessed over or seen as a status symbol by so many and this is a combination that can lead to impulsive, uncalculated purchases.

The most common error made while buying a car is seeing it as a short term investment and hence being casual about it. The significant price of a new car will certainly have an impact on your budget, so make sure your budget has an impact on your choice – carefully consider your options but above all pick a car that is right for you and that you can truly afford.

To aid in this, it is imperative to decide what car you want to purchase and how much you are willing to pay before beginning in depth discussions with salespeople at a car dealership. Do not get carried away by the persuasion of the dealer into making decisions that you are going to regret later – whether by buying the wrong model or agreeing to too high a price or too many fees.

Almost any new car is going to look great on the lot and seem great when the salesperson talks about it, so try to get an unbiased perspective on the performance and reliability of various models from trustworthy publications first.

After choosing an affordable model that fits your needs, you still have to get an auto loan to actually pay for it. Regardless of whether you finance through a bank or car dealership, following these steps will help you get the best possible deal:

• Carefully go through your credit report and FICO score (it’s the score that most lenders use to assess your credit risk), so that you can rectify any possible errors in order to qualify for the best loan terms. Also, being confident about your credit history prevents unscrupulous lenders from lying about your credit in an attempt to charge you higher interest rates.
• Never focus solely on one term of the loan. Do not allow a low monthly payment or a seemingly great interest rate cloud your big-picture view of the loan’s terms. Always keep the actual price of the car and length of the loan in mind because a seemingly incredible rate or monthly payment can often be a hook for a loan that is a very poor deal for you overall.
• Cars are commodities that depreciate in value very quickly so it is always a good idea to opt for the shorter length, higher payment car loan. Very few cars are good investments, and a higher payment loan truly makes you examine what models are in your price range. Unlike a mortgage, where at the end of the loan you are have a property that is generally worth more than your purchase price, cars lose most of their value with age and use - even driving a new vehicle off the lot significantly decreases its worth. Focus on this sobering fact to avoid getting carried away with financing your auto purchase. Also, choosing a shorter term loan gets you a lower interest rate which means you actually pay less for your car.
• Finally, always keep in mind that even if you have spent long hours pursuing a particular deal, you are not obliged to seal it. Retain an objective outlook and the ability to walk away. Sometimes, car dealerships count on the fact that people are either too invested or feel too guilty to stop the process. If you don’t like the way the deal is shaping up, leave before it is too late.
  

Retirement as a concept is not very old. It can largely be traced back to the creation of Social Security in 1935. At this time Social Security was used to guarantee a fixed basic income for older workers so that they would leave their jobs and create vacancies for younger workers.

Now that retirement is taken for granted, most people wonder if they are saving enough to take care of their needs when they stop working. Though there is a lot of dispute regarding the issue, many financial experts believe that you need approximately 70% of your pre-retirement income to allow you to continue living your same lifestyle after retirement.

The ability to live the same general lifestyle on 30% less money hinges on decreased expenses that come with retirement and an increase in age. According to a study by the U.S. Census Bureau from 2002, people between the ages of 45 and 54 spend approximately $15,000 on housing while people 75 and older spend only about $8,000. Also people between 45 and 54 spend more than $9,000 every year on transportation while those above 75 and older spend only about $3,000. This reflects a drop not only in the cost of buying a vehicle but also maintaining one - the money spent on gas and repairs – which often comes with not having to commute to work among other things.

Though retirement does not bring only savings, people between 45 and 54 spend $2,550 on healthcare a year while those above 75 spend $3,584 on average.

Significantly, this same study points out that income before taxes for a household kept by a 45 to 54 year old person is $64,974 while for people 75 and above it is only $23,890. The ability for many retirees to survive on a significantly reduced income points to other fundamental, or sometimes forced, changes in expenses.

As a person gets older there is a decrease in the number of dependents in the household which leads to a reduction in food costs and other household expenses. Also, with the kids moved out, maintaining a large house is not only an extra expense but also impractical. Many retirees downsize their homes and can use some of the excess proceeds to add to their savings.

The money that you spend on entertainment in retirement is difficult to predict or find reliable statistics on (though the Census Bureau does report on it – its methodology is too vague). Some people end up spending more because they have more time and the freedom to do what they please with it. The only difference might be that your definition of entertainment might undergo a transition. You might now be going to yoga classes instead of a concert – or you might go to more concerts and less yoga (now that the stress of work is gone)! But these are largely personal choices and difficult to speak generally on, but if you plan on traveling the world when you retire, save accordingly.

The only real answer to the question of how much you need to retire is “how ever much you plan on spending.” The answer depends on how you intend to spend your time as a retiree. Examining these important categories, you can see that generally retirement comes with some inherent savings related to not having to go to work any more as well as usually no longer have children in the house; however, there are those that retire and actually spend more money than before. How you plan on living during retirement is a uniquely personal choice – perhaps you are planning on taking advantage of the time to take the trips you’ve always wanted or maybe you are content to read the great novels you never had time for before. Both choices sound great but each comes with very different financial costs.

Whatever your vision of the perfect retirement is, start planning for it sooner rather than later - because you do not want to reach your golden years only to find that you do not have enough gold to live the years comfortably.

An emergency fund is a certain amount of money you tuck away only to be used in case of a crisis. The idea is to refrain from digging into your emergency fund for whims and luxuries, say to buy a new car or a video game console for your kids. It is to be used only in the case of a real financial emergency.

At this point, setting hard earned money aside for a rainy day might not sound fun, but it is very necessary.  From medical expenses to losing a job, any number of unforeseeable scenarios can wreak havoc on your budget. Without emergency savings it can be hard to cope with unexpected events, at least without accumulating debt in the process. This is why everyone, even college students and retirees, should have emergency savings.

There is no ideal, universal amount that should be in your emergency fund. Expert opinions vary from three month’s worth of your total family expenses to all your expenses for a year. The right amount is probably something in between but only you can decide the exact figure you need.

You have to take a thorough assessment of your possible needs and then balance this with your earnings to decide how much you should - and can afford to - set aside. Unfortunately, estimating your possible needs is difficult because an emergency fund is for unexpected circumstances, but by keeping in mind obvious things, such as a single person will need less than a married couple with three kids, you can try to formulate a rough figure. Decide how much will ensure your peace of mind while not so much that you must cannibalize other savings, such as retirement plans, to accumulate it.

It is advisable to keep emergency savings in a place that is not too easy to get to, like a high interest savings account. This is especially true for those of us who are easily tempted to dip into the account for non-emergency expenses, like that plasma screen TV. If the account is difficult to access you will think twice before making a withdrawal. Remember that an emergency here means something that practically threatens your financial survival. The reason why many people end up unnecessarily spending their emergency funds is that they think unfulfilled desires are emergencies!

An emergency savings has to be somewhat difficult to access but still liquid and secure; meaning stocks aren’t a good choice because there is a risk of losing your emergency savings with a poor investment. At the same time, setting aside money for emergencies without earning interest on it would actually cost you money because of inflation, so burying it in the backyard is not recommended.

Here are some of the better ways to keep your emergency savings:

1. Bonds:  buying a bond means that you are lending a particular amount of money to the entity that has issued the bond. In return for this money you get a rate of interest at regular intervals or at the time when the bond matures as well as the return of your initial investment. With emergency savings the security of your investment is a priority, so only invest in government bonds or highly rated corporate bonds. Also, invest only in short-term bonds because you never know when you might need to access your emergency fund.
2. Certificate of Deposit (CD): a type of deposit account which offers a higher rate of interest than a traditional savings account. The idea is that you invest a fixed amount of money for a fixed duration of time to earn a fixed rate of interest. An added advantage of investing in a CD is that it is covered by the Federal Deposit Insurance Corporation (FDIC) for up to $100,000. On the downside, a CD can offer a higher interest rate than a traditional savings account because there is a penalty if you withdraw your money before the CD expires – which may be very necessary in an emergency. For this reason, it you choose a CD, try to look for a “no penalty” CD. A no penalty CD can be cashed, without penalty, prior to the maturity date as long as it has been kept for a fixed period of time. This minimum time varies from one institution to another but sometimes can be as little as a week.
3. Money market account: a savings account that offers high interest because it requires a minimum balance, often limits the number of withdrawals and check writing, and imposes a monthly service fee for low balances. It carries FDIC insurance like a traditional savings account and a CD.
4. Money market fund: a kind of mutual fund that invests only in high quality debt. These funds combine interest rates that are comparable to CDs with the ability to withdraw your money at any time without penalty. The catch is that the FDIC does not insure money market funds; however, this kind of investment is normally incredibly safe.

At times April 15th seems to so far away, but it always seems to creep up very quickly. That is why it is never too early to begin thinking about organizing your taxes – you don’t want to be in the position of scrambling for receipts and other paperwork come April!

Some advanced planning will help make the process of filing less stressful and help avoid the unpleasant surprises people are often plagued with when going through the process. Getting an early start will give you time to research some of the latest regulations and tax rule changes that may affect your return.

One of the first steps in getting your taxes prepared is to collect all of the necessary information. One of the most important, but overlooked until you are actually doing your taxes, pieces of information are Social Security Numbers. You will obviously need your own, but if you file jointly or have dependents you will need theirs as well.

As to the actual documents you need to report your income, you will need your W-2 from your employer, 1099-INT forms showing interest income from different sources, and 1099-DIV forms for any dividend earnings from mutual funds, stocks or money market funds. Finally, taxable earnings from the sale of stock or other broker transactions will be listed on 1099-B forms that will be sent to you.

As if that weren’t enough, you will also need tax documents related to your mortgage interest or any other deductions you are planning on taking.

Once you have gathered the information, you should determine what IRS forms you will need to complete the tax filing. If you are self-employed, you will need additional forms. You may also need supplemental forms if you have made complex investment income.

If you have made major investments or experienced any major fluctuation in your income, such as a large inheritance, it may be wise to hire a professional. Be sure to know when the job may be too complex to do yourself while still receiving the maximum number of deductions and reporting your income accurately. However, if you simply just need a little coaching to get you through the process, a good computer tax preparation program goes a long way.

The sooner you make the necessary calculations for your taxes, the sooner you will know whether Uncle Sam owes you or you owe him. If you are lucky enough to get tax refund, you can expect a check from the government much more quickly if you file your return before April 15th. If you are in the unfortunate position of owing money, the more quickly you finish your taxes the more time you have to sit down and think of how you will make the payment.

You have the option of paying in installments or by credit card, but before using a credit card, you should your budget can handle it. If it looks like you will not be able to come up with the money that Uncle Sam is demanding, you may be able to file for an extension. To use an installment plan or get an extension, you must submit the proper forms before April 15th – which early preparation allows you to do.

Once you have completed your taxes for the year, you should take some time to review what you could do differently for the following year. For instance, you may have spent way too much time tracking down your tax documents this time. Perhaps you could create a filing system for important documents that will make it easier the next go around. If you start using a system and stick to it, everything will be at your fingertips next year.

Finally, if you owed a significant amount of money this year you could consider adjusting your withholding amounts on your paychecks. The same should be considered if you are receiving a huge return. In a perfect world, you would not owe any money or get any back.

Some consider it a great windfall to get a big check back from Uncle Sam, but in essence you have been loaning the government money at zero interest. If you are in the business of loaning money for free, give me a call. Otherwise, adjust your withholdings and start preparing for next year – after all, April 15th is never more than a year away.

Adjustable-rate mortgages, as the name suggests, are mortgages that do not have a fixed interest rate. Instead, the interest rate changes, or adjusts, at fixed intervals based on the market interest rate.

If you are in the market for a mortgage and are considering an adjustable-rate, make sure you understand the terms and what they mean to how much you’ll pay.

Though it can be intimidating at first, here is an explanation of the lingo surrounding adjustable-rate mortgages:

• Initial rate: basically an introductory interest rate that is fixed for a given period of time at the beginning of the mortgage. During this introductory period, the adjustable-rate mortgage does not adjust. The initial rate can remain in effect for a wide range of time, from as little as a month to five years or more, and during this time payments also remain fixed.
• Adjustment period: how often the mortgage’s interest rate is updated after the initial rate period. For instance, a 1 year adjustable-rate mortgage (ARM) can have a change in the interest rate and payment once every year.
• Index: the measure that the mortgage lender is using to adjust the interest rate on the ARM. Indexes can vary and because the index choice affects the interest rate the ARM charges, investigating what index an ARM uses is very important.
• Margin: though the index is used to adjust the interest rate on the ARM, a mortgage lender does not lend money at cost. The margin is the amount, in addition to the index, the ARM will charge as interest. The margin amount is fixed for the loan, so any fluctuation in interest rate still comes from the index.
• As an example, if the margin on a loan is 3.5% and the index is at 5%, the ARM’s current interest rate would be 8.5%. If the index rises to 6%, when the ARM’s adjustment period comes, the interest rate would increase to 9.5%.
• Rate caps: a rate cap, or interest rate cap, places a limit on the amount the interest rate of the ARM can change. There are two kinds of interest rate caps:
• Periodic adjustment caps: limits the amount the interest rate can change from one adjustment period to the next. The periodic adjustment cap does not apply to the first adjustment, however, made after the initial rate period ends.
• Lifetime caps: create a maximum amount the interest rate of the ARM can ever increase.
• Carryover: an effect of periodic adjustment caps, where the ARM interest rate increases more than the index. This is best illustrated by an example.
  

Assume a margin of 3% and a periodic adjustment cap on the ARM of 2.5%. The index rate was at 4%, so the ARM was charging 7% interest (the index rate plus margin).

Now, the index rate has risen 7% and the adjustment period on the ARM arrives. Without a periodic adjustment cap, the new interest rate on the ARM would be 10% (the new 7% index rate plus the constant 3% margin); however, because of the periodic adjustment cap the interest rate cannot increase to 10% from 7% because it exceeds the limit of 2.5%. Instead, the interest rate could only increase by 2.5% to 9.5% - the cap reduced the interest rate by 0.5% in this case.

However, this is not the end of the story. If at the next adjustment period, the index rate is still at 7%, the ARM’s interest rate still changes. That’s right, even though there is no change in index – the only measure that normally affects the interest rate charged – the rate increases by 0.5% to 10%. This additional 0.5% has been carried-over from the last adjustment period when it could not be applied to the rate because of the adjustment cap.

• Payment caps: like interest rate caps, payment caps limit the amount the payment amount of an ARM can increase from any adjustment period to the next, excluding the first adjustment period. The limitation is a percentage amount, for instance, 8%.
• Negative amortization: payment caps are not without a cost. If the ARM payment should have increased more than the payment cap allowed, the difference between the amounts can actually be added to the principal of the mortgage. This is referred to as negative amortization. In certain instances, negative amortization can actually lead to the balance of an ARM being greater than the original amount of the loan despite timely payments.

Have you ever been audited? If so, you know it was one of the most annoying and unpleasant experiences you’ve had to go through, requiring a great deal of effort and causing a great deal of stress.

Even if you’ve never been audited, chances are you don’t want to join the club. In an effort to prevent a first-time or repeat audit, here is a collection of 10 “secrets” people claim will help you dodge the audit bullet.

Though some are only popular rumors, when it comes to avoiding an audit they can’t hurt.

1. Prepare your tax return using a computer tax suite. The IRS is more inclined to believe that computer-generated returns are free of errors than those calculated by hand. After all, if an audit does not produce any results, meaning mistakes by you, it has been a waste of IRS time.
2. Refrain from using the online filing program that the IRS offers. Many believe that putting your name into the system directly and so quickly only increases your chances of having your name pulled for an audit.
3. Request an extension even if you have your taxes prepared by April 15th. Some professionals in the industry claim that the IRS tries to fill an audit quota each year. They are more likely to meet their quota by pulling from the earliest filings.
4. Avoid using pre-printed address labels for the same reason you should not use the electronic filing system that the IRS offers. You being first in line supposedly makes you more likely to get audited.
5. Any unusual deductions should have evidence attached to the back of your return to avoid suspicion. For example, if you had your computer stolen, your home office burglarized or are claiming any other type of theft as a loss on your return you should attach a police report that references the incident.
6. Never file your tax return late. You should at least file an extension as mentioned above. According to statistics, those that have late filings are more likely to be audited.
7. If it can be afforded, have your tax return prepared by a professional for the same reason that using a computer suite is beneficial. The IRS knows that most CPAs and are much less likely to make mistakes on returns.
8. Never write any ridiculous comments on your return such as “The IRS sucks” or “I hate taxes.” These are not amusing in the least to the IRS, and you never know - they may see this as an invitation to get a “special review.”
9. Do not forget to include the new IRS form for reporting home office deductions on your tax return if it is applicable. They may see this as an amateur mistake and it may lead them to believe you have made crucial mistakes elsewhere.
10. Keep good records and do not worry so much about an audit. Did you know that less than one percent of American tax payers will be audited this year?
    

Besides an audit, it is also good to worry about whether you are overpaying your taxes. Many inexperienced self-filers miss out on some of the deductions they are allowed. So as a follow-up to secrets to avoiding an audit, here are the top four most frequently overlooked tax deductions:

Educational expenses

It is almost imperative to have an education nowadays, and the government encourages this pursuit by allowing you to take deductions on tuition, textbooks, supplies, and other educational related fees so long as the classes maintain or improve your skills in your present occupation. This can apply both to self-employed and those that have an employer.

Volunteer expenses

Everyone knows that you can deduct charitable contributions, but many overlook the expenses that many charitable contribution takes. For example, you can deduct supplies, travel expenses, and even refreshments that you have donated to a valid charitable organization. Or if you have used your car in your volunteer work, you can deduct twelve cents per mile.

A warning: despite what some believe, you cannot deduct an hourly wage for time volunteered. That’s why it is called volunteering and not working.

Bad debt

If someone owes you money and you are having a difficult time or simply cannot collect the money from the individual you can file a deduction on it. The loss has to be based on the inability to collect the debt after having taken reasonable steps to resolve the issue. But make sure you reported any interest income to the IRS from the loan previously because if you attempt to write-off a loan that they have no record of you having ever given, they may want to have a chat with you (see the first 10 tips of the article to try to avoid this).

Casualty losses

If your property has been destroyed or even damaged you may be able to deduct part of the loss. Some examples include fire, weather-related catastrophes, vandalism, theft or even an accident.

Less than one percent of individuals receive a notice from the IRS that they are being audited; however, nothing seems to fill people with as much dread as the prospect of being targeted. If it happens to you, do not panic.

One of the most common misconceptions about the auditing process is that they are “out to get you,” In reality, it could mean something as simple as a computer randomly selecting you for an audit.

The Best Defense Is a Good Offense

The best way to cope with an audit is to always be ready for one. By keeping meticulous records you can justify any number the IRS may question on your return. This level of organization will help your audit process go quickly and hopefully painlessly as you will have records to support your claims.

If you are past this point, though and the auditor is knocking at the door right now, here are some tips:

1. Be polite. It is a stereotype to not like the taxman, and you are probably not happy you are being audited – but being rude will not get the IRS to leave you alone, and it could make the situation worse. Make it clear that you want to be cooperative and resolve the audit quickly for both your sake and the IRS agent’s. Failure to cooperate with an audit can lead to an expansion of its scope because the IRS agent assumes you have something to hide – or the IRS agent can even conduct the audit without you and effectively pick numbers based on whatever limited documentation he has. As an aside, do not enter a heated argument with an IRS agent over any items. It will not serve to help your cause.
2. Answer questions honestly, but never volunteer any information that is not necessary. Avoiding idle conversation will help. Why be so sparring with your words? Often times an auditor is only interest in a particular item on your return, but you could accidentally offer an auditor hints to other areas that should be examined – effectively expanding the scope of your audit. This is why you should not be hostile to your auditor while keeping in mind that he is not your friend.
3. Never give an IRS agent the only copy of a document or the original. If the document is verifying a claim on your return, make copies and keep the original in a secure place. Though an IRS agent should not have malice, they are only human and can misplace paperwork just like anyone else. The difference here is if they misplace your only copy of a document, you will be the one to pay – literally.
4. Know your rights. If an auditor is being unreasonably hostile or you disagree with his decision, you have the right to go to a supervisor. Furthermore, if you are not satisfied with the supervisor, you can go the office of appeals. Finally, as a very last resort there is the U.S. Tax Court.

Two-thirds of undergraduate students have some college loan debt at graduation, but despite being so commonplace there is still a lot of confusion regarding the various loan options and their terms.

Let’s quickly look at government sponsored loans. There are four basic types:

Stafford Loans

Stafford loans are borrowed by the students themselves. A fixed interest rate of 6.8% is levied on all loans given after July 1, 2006. The maximum loan amount is fixed at $2,625 for the first year, $3,500 for the second year and $5,500 for the third, fourth and fifth year of undergraduate education while $8,500 is available for each year in graduate school.

Undergraduate students can borrow up to $23,000 total while the total limit for graduate and undergraduate borrowing for any student is $65,500.

Some students also have the option of getting their loans subsidized, meaning while in school the government pays the interest amount due. The students start paying off the loan, without having accumulated interest during school, six months after graduation.

Perkins Loans

Perkins loans are solely a government subsidized student loan. They have a stable interest rate currently at 5% which is suspended from when students are in school until nine months after they graduate. Undergraduate students can borrow up to $4,000 yearly while graduate students can borrow $6,000 yearly. A student can borrow no more than $20,000 as an undergraduate and $40,000 total including graduate school.

PLUS Loans

PLUS loans are loans the government gives to parents for use in their child’s education. The rate of interest applicable on PLUS loans is 8.5% after July 1, 2006. The advantage of this kind of loan is that there is no existing upper limit for the amount parents can borrow; however, parents have to start paying the money back immediately - though some lenders also allow the students to pay back the loan.

Besides not having an upper limit, meaning a parent can borrow the full cost of education including books and room and board, the IRS allows tax deductions on the interest paid on these loans.

Despite these benefits to the PLUS loan and even if you want to pay for your child’s education, have them take Stafford or Perkins loans before you take a Plus loan. Financially it makes much better sense because your child can defer the payments until after graduation and will also be charged lower interest rates.

Graduate PLUS Loans

These loans are available only to graduate and professional students, and allow the student to borrow up to the full cost of their education excluding financial aid. The general terms of the PLUS loans for undergraduates apply, except here the student borrows the money instead of the parents.

If instead you’ve decided on going through a private lender to finance college, look at the terms carefully to get the best deal. Here are some of the most important questions to ask:

• How frequently is the interest on the loan calculated? The more often the interest is calculated the bigger the loan will be when it comes time to start paying because all the interest is just tacked on to principal while the student is still in school.
• Are there any payment rewards? Often lenders offer incentives for payments that are made on time with education loans – from reduced interest rates to lowering the original principal itself.
• Is there a consolidation plan?  Though loan consolidation is rightly viewed with suspicion in general, it is a very good way to save money after graduating with college loans.

Identity theft is when someone acquires your personal financial information like Social Security Number, date of birth, and credit card numbers in order to take on your identity for financial gain. It is one of the fastest growing crimes today, particularly with technological advances that make stealing your personal information much easier.

Identity theft can happen in a number of ways:

A criminal can open credit card accounts in your name and then quickly max out the cards. The charges will turn up on your credit report, often ruining your credit. To avoid detection, criminals often change the billing address on the credit card so you don’t find out about the charges and they can open more accounts in the meantime.

More advanced identity thieves will even get ATM or debit cards for you existing accounts in order to withdraw your money directly.

Finally, and most frightening, there are instances of identity thieves using Social Security Numbers to obtain duplicate birth certificates. Once in possession of this key item, they can get a new driver’s license with their picture but in your name. Now the criminals can take personal loans under your name and even get benefits from the government.

Identity theft is a very acute problem because unlike your car being stolen, it can often take months to find that you have been victimized. Also, once you have discovered the crime it is a long agonizing process to try to rectify your credit. There is no worse feeling than reporting identity theft yet still being hounded by creditors who believe the debts are legitimate.

Unfortunately there is no magic bullet to prevent identity theft, though there are simply ways to make yourself a harder target. Always stay alert in matters concerning your personal information. People who are unsystematic and muddled about their private financial transactions are more likely to become prey to identity thieves.

Here are a few simple steps to make you less vulnerable to identity theft:

Protect Your Personal Information

Be paranoid about divulging personal information to people. Ask yourself, why is it necessary? Never give out personal information over the phone unless you are the one who originated the call. Also, your Social Security Number is your most sensitive piece of private information, so be most concerned about parties asking for it.

Shockingly, many people still carry their Social Security Card in their wallet! If you do this and lose your wallet, a thief now has all the information he needs to steal your identity. Do not write your Social Security Number down and carry it with you either.

Shred personal documents before throwing them away – and this includes “junk” credit card offers you receive in the mail. Thieves can retrieve these offers from your trash and apply for them without your knowledge if they are not shredded.

Keep Credit and Debit Cards Safe

Do not carry cards you do not anticipate needing in your wallet in case you lose it or have it stolen.

While shopping online verify the credentials of the people you are dealing with and only purchase from reputable websites.

Also, carefully look over your credit card statements. Too many people do not go over the itemized list of charges.

Finally, in the event you lose a card or have it stolen, immediately notify the credit card company or bank so that no one has an opportunity to misuse your account.

Protect the Identity of Your Deceased Family Members

Identity thieves do not allow even the dead to rest in peace. They use the identity of the deceased in committing a fraud in the same way they would use your identity so be sure to alert all credit companies and banks to remove the deceased from joint accounts. Also, contact the three credit reporting agencies and ask for a “deceased alert” which is a notice placed on the deceased person’s credit report informing companies that the person has died and therefore cannot be given credit. This is very important because depending on your relationship to the deceased or his status on your accounts, you may be responsible for debts incurred in their name.

Review Your Credit Report

Everyone is entitled to an annual credit report from each of the three credit bureaus, meaning you can receive a free credit report every 4 months. It is wise to review your credit report at least once every six months to check for activity that you are unaware of – especially because thieves will often open new accounts in your name. If you have an account you do not know about, just checking your bank and credit card statements is not enough.

To realize your retirement goals it is recommended that you start by saving money in specialized retirement vehicles. These are the most common and some of the best ways to financially secure your future. The two most common categories are:

1. IRAs – personal retirement accounts
2. 401(k)s, 403(b)s and 457s – employer sponsored plans
   

Before going into the details of these accounts, it’s crucial to understand how retirement accounts work and why are they the best modes of saving for your future.

Retirement accounts are the most effective way of saving money for retirement because they combine the benefits of compounding interest, consistent savings and tax savings if used properly.

There are two basic types of IRAs:

1. Traditional IRAs: this plan allows individuals to contribute $4,000 if they are under 50 and $5,000 if they are 50 and over yearly with the contribution qualifying as tax deductible (in 2008, each of those contribution limits will increase by $1,000). The money invested in this IRA is not taxed until withdrawal, and withdrawals can be made without a 10% penalty beginning at the age of 59 and ½.
2. Roth IRAs: this plan is usually designed for people who have a backup of a company retirement plan or whose income exceeds the deductibility limits of the IRA plan. The contribution limits are the same as with a Traditional IRA; however, the money invested in a Roth IRA is not tax deductible, but in return you won't have to pay taxes when you finally start withdrawing from the account.
   

Only if you become disabled can you access the account before you turn 59 and ½ without penalty. Also, were you to die, your beneficiary can receive the accounts funds without penalty.

Finally, Roth IRAs don’t have a compulsory withdrawal condition. A Traditional IRA requires you to start withdrawing from the account at age 70 and ½ but a Roth IRA will allow you to continue making contributions even after that age.

401(k)s, 403(b)s, and 457s

These plans are sponsored by your employer with the different numbers effectively just being different tax code depending on whether you work for a corporation, non-profit, or the government. These plans fall are considered “defined contribution” because you know what is being added to your account but you are not guarantee a particular return at retirement. This is different than a “defined benefit” plan such as a traditional pension where an employer promises to pay a certain amount to you at retirement assuming you meet certain criteria – typically being over a certain age and having worked for the employer for at least a certain period of time.

With these types of plans, the value of the benefits you receive at retirement depend on the value of your particular account, meaning two employees at the same firm could have vastly different 401(k)s due to different contribution amounts and management of funds.

These accounts make retirement saving very easy because you elect to have your employer automatically put a portion of your pay into the account. Not only does it help you prioritize your retirement saving, but it also means your contributions to these plans are tax deferred.

Currently, you can contribute no more than $15,500 to one of these plans a year, though there are exceptions if you are over 50 years of age.

If you must withdraw from one of these plans before you reach 59 and ½ you will be penalized 10% except under certain tax code exemptions.

Finally, you must begin withdrawing from these accounts by the year after you turn 70 unless you are still actively working for the employer that is offering the particular plan. Failure to withdraw from these accounts results in an incredibly harsh IRS penalty.