We all know the value of an emergency fund. With several months’ worth of expenses in the bank, we get some level of security and can handle unexpected expenses. In fact, the first step in achieving a higher level of financial freedom is moving away from living paycheck to paycheck.

The big question is where to keep your emergency fund. For many the first option is a savings account. While you can find some high interest savings account options online, the best rates currently top out at less than 1.5%. While that is certainly better than stuffing the money in your mattress, it’s still pretty low. The good news is that there is an excellent alternative—a long-term certificate of deposit.

A five-year CD, for example, currently pays around 3.0% interest. This rate is much higher than anything available from a savings, checking, or money market account. And with some of the best CD rates available online, it’s extremely easy to open an account. But the reality is that most people do not put their emergency fund in a long-term CD. Why?

There are two reasons. First, folks are rightly concerned about the interest penalties they will pay if they need to take out their money before the CD matures. This is a valid concern as some CDs charge as much as 6-months’ worth of interest for an early withdrawal. And second, many are concerned that interest rates will rise during the term of the CD, and they will be stuck with a long-term investment at a lower rate.

The good news is that there is a way to address both of these concerns. It turns out that some long-term certificates of deposit charge a relatively low penalty for early withdrawal. The best example comes from Ally Bank. Not only does Ally offer some of the best CD rates available (its 5-year CD currently pays about 3%), but its penalty for early withdrawal is just 2-months worth of interest.

So how does this long-term CD compare to a savings account? Let’s compare a high interest savings account paying 1.40% APY with a long-term CD paying 3.0% APY and charging a 2-month interest penalty for early withdrawal. And let’s assume that after 12 months, an emergency comes up (or interest rates rise) and you need to withdrawal all of your money from the account. With the savings account, you would have earned 1.40% before taxes. With the CD, you would have earned 3.0% less two months worth of interest (about 0.50%), for a total return of about 2.5%. The CD wins!

About the only time a long-term CD with a low penalty rate wouldn’t beat a savings account is if you need the money immediately after opening the account. If that’s a concern, you can always split your emergency fund, placing a portion of it in a savings account and the rest in a CD. So with a little creativity and effort, you can put your emergency fund to work earning more interest than you would get from a savings account.

This post comes from DR, the founder of the Dough Roller, a personal finance and investing blog.

As property values have increased significantly in many areas of the country, some localities have taken steps to increase their tax revenues by increasing their real estate taxes. But take heart: you can take steps to potentially lower these taxes by examining the assessed value of your home.

How could your assessor be wrong? It might depend on when you property was last appraised.

Although assessments must typically be established each year, some assessors might not perform an annual appraisal of every property they assess. Instead, individual valuations are sometimes made when there is a municipal-wide reassessment, and then carried forward until another municipal-wide reassessment is performed. In some cases, many years can pass between reassessments. So, if your property value has fallen, you could be paying more than you should.

Moreover, when assessments are conducted, errors can sometimes be made. Some of these errors may include the size of your home or the number of bedrooms and bathrooms. Sometimes unfinished basements are listed as finished in the assessor’s report; sometimes garages that don’t exist are factored into the property value.

You can obtain a property valuation report from your local assessor’s office upon request. Study it for these possible errors. And, compare your home’s value to others in the neighborhood; it should be in line. Obtain proof of any errors, and then visit the assessor’s office to ask how you can dispute the report.

If your property value is assessed correctly, there might be other tax breaks available, depending on where you live. Although property taxes are typically imposed by cities, townships, counties and school districts, some states specify a maximum tax rate as the standard for local assessors to follow.

In closing, you should also know that property tax protests must be made in a timely manner, and that there are strict deadlines that must be met for making a timely protest. For information regarding these deadlines, you should contact the assessor’s office in your local community.

Bonds aren’t the only way investors can generate income; stocks can be viable options as well. Some stocks, anyway—such as preferred stocks.

Preferred stock is a class of ownership in a corporation which generally has priority over common stockholders on earnings and assets in the event of liquidation.

Even though preferred stocks are listed as equity on a company’s balance sheet, they generally behave more like bonds than common stocks. First, some investors feel that preferred stock offers a potentially higher level of security than common stock, because if the company goes bankrupt, dividends on the company’s preferred stock are paid after the company’s debt but before dividends on the company’s common stock. (Of course, no investment is completely secure.) But preferred stock may also be a great way to generate income. That’s because preferred stock has a stated dividend which must be paid before dividends to common stockholders. And, most preferred stocks are eligible for the 15% tax rate on dividends (preferred stocks issued by real estate investment trusts, or REITS, being the notable exception).

So, if you’re looking for potentially lower volatility and higher dividends than common stocks offer for your portfolio, preferred stocks may be worth considering.

On the other hand, preferred stock offers little potential for growth of capital. An investor generally buys shares of a preferred stock with the investment goal of a relatively stable income yield rather than for the potential capital growth goal of a common stock investor. Many preferred issues trade within a dollar or two of their issue price for the long-term.

Of course, as with any investment, some preferred stocks are of a better quality than others. When buying preferred stock, as when buying any stock, it’s important to understand what the company issuing the stock does. But you also need to do a risk analysis, like you would with bonds. In other words how also likely is it that the company will be unable to pay its preferred dividends? One way to determine quality of a preferred stock is to look at the preferred stock’s rating. Like corporate bonds, preferred stocks are rated by Standard & Poor’s or Moody’s.

Where do you find preferred stock? The same place you find common stocks. Take a look at Yahoo! Finance or CNBC. On Yahoo! Finance, preferred stocks are listed by the ticker symbol of the issuing company, followed by an underscore, followed by the letter P, followed by the series letter (if there is one, and there probably is, because companies that issue preferred stocks often have more than one series, using letters of the alphabet to distinguish them). On CNBC, preferred stocks are listed by the company ticker symbol, followed by a vertical PR, followed by a letter indicating the specific issue.

As mentioned previously, preferred stocks will not provide the same long-term returns as common stock or stock mutual funds. However, they can provide an effective form of diversification even in a more aggressive portfolio, where they could perhaps be substituted for cash or guaranteed fixed-income instruments.

While it’s possible to get life insurance without a medical exam, let’s deal with four common instances and their tradeoffs. First, understand that in many cases, the “medical exam” is obtaining a urine and blood sample and that’s it. The medical professional even comes to your home. Only at higher amounts of insurance, e.g. $1 million and over, do the exams become more involved and will include an EKG and other tests.
1. Life Insurance ads you see on television. Typically, these policies are very overpriced and that’s how the insurance company can take the risk of insuring someone who is potentially applying from their hospital bed. By charging outrageous premiums and also offering very low levels of insurance (typically a maximum of $50,000 of death benefit), the insurance company reduces its risk. If your health is even mediocre, you can probably get less expensive insurance on your own if you agree to a medical exam.
2. Group life insurance through an association or employer. Typically, if you’re working, the insurance company “bets” that the pool of people are young enough that incidence of poor heath is rare and they can take the risk of insuring large groups without a medical exam. But if the pool of insureds is a retiree group, the insurance company will either charge large premiums and/or issue very small policies to reduce its risk.
3. I know a woman whose religious beliefs precluded getting care from doctors. However, she had a significant estate and leaned of the important role that life insurance plays in estate planning. She refused to have a medical exam from the insurance company appointed doctor. While she could not avoid an exam because of her age (80), she did agree to have an exam from a doctor she knew and in this case, the policy was of significant size and the insurance company permitted the exam by the insured’s chosen physician. This is rare but possible. The insurance company typically wants its contractor to do the exam.
4. Young insureds applying for term insurance are the other category of people where the exam may not be necessary.
Here’s the advice. While it’s possible to get life insurance without a medical exam or an exam on your terms, always ask about the tradeoff. Would the premium be lower if you did get an exam? Can you choose the physician? Could you get more coverage? If for any reason you are uncomfortable with an exam but have interest in life protection, call and we can explain the alternatives available to you.

When interest rates rise, a bond’s market value often goes down. This is because the bond’s rate can be fixed and can’t compete with the rates offered by newer issued bonds. If this situation arises, the bond might sell at a discount. Such declines can be unsettling for owners of bond mutual funds, since the value of the fund can sometimes drop with these rate increases. So where does that leave you, if you are seeking an income stream that keeps pace with prevailing interest rates but without the radical drop in principal? Consider bank-loan mutual funds.
Bank-loan mutual funds typically hold baskets of short-term loans issued by banks and other financial institutions. These loans are often made to companies for financing leveraged buyouts and restructuring activities.
The loans are usually secured by the assets of the borrowing companies. The interest paid on these loans is often tied to a certain benchmark lending rates, such as the London-Interbank Offered Rate (LIBOR) which adjusts every 30 to 60 days. Therefore, as the market rates change, the monthly interest payments to the fund companies can change as well. Because of the changing interest on the underlying business loans, the values of the fund shares tend to be less affected by interest rate fluctuations in the economy.
There are, however, some risks that need to be considered. For example, some bank-loan funds are dominated by non-investment grade quality issues. This means that the underlying loans are made to companies that have lower financial stability. And they may have ratings, such as a BB or lower on the Standard & Poor’s bond-rating scale. The loans to these companies can have a greater risk of default, but as secured loans, they are often given priority for repayment; although the assets collateralized aren’t always enough to completely compensate the loan holders.
Bank loan funds are mutual fund investments that involve risk and are offered by prospectus only. Investment return and principal value will fluctuate so that upon redemption an investor’s shares may be worth more or less than original value. An investor should carefully consider the investment objectives, risks, charges and expenses of a fund prior to investing. The fund prospectus contains this and other information about the investment company. For a copy of the prospectus, you should contact your financial advisor. You should also read the prospectus carefully prior to investing money.

Next week offers the long-awaited red letter day for consumers frustrated by unexpected interest fee spikes, varying penalties, and moveable Whack-A-Mole due dates on their credit card billing statements. Next Monday, the Credit Card Reform Act of 2009 finally takes effect, forcing some consistency on an industry long known for its inconsistencies.

Ten for ‘10

Consumer Reports.org outlined ten critical changes we can now expect on our billing statements and any future credit accounts:

1. Interest rates can’t be raised during the first year of an account;

2. Customers will be notified 45 days in advance of any change in interest rates;

3. Bills can be paid online or over the phone without incurring a processing fee;

4. Customers must be over 60 days late on payments before their interest rate can be raised on balances. if the rate is raised, it will go back to the lower rate if customers make the minimum payment on time for six months in a row;

5. Over-the-limit fees can’t be charged unless cardholders are told that the purchase will put them over their limit and they authorize it to go through anyway;

6. If your card has more than one interest rate on balances, then payments must be applied to the highest interest rate first;

7. Gift cards can’t expire for five years, and issuers can’t charge dormancy fees for unused amounts left on the card;

8. Credit card statements must be mailed out 21 days before they’re due;

9. Individuals under 21 will need a co-signer on their cards unless they can prove that they have the means to make payments on their own;

10. Credit card agreements will have to be posted on the internet.

Many would agree that these are quite reasonable requirements. Unfortunately, industry lobbyists thought otherwise, fighting tooth and nail to sink the bill. When their efforts failed, the credit card companies got busy, FAST. Rates and fees were increased, credit limits were cut, and interest terms were changed from fixed to variable in an attempt to make hay while the sun was still shining. A number of people have already received the, “Accept this rate increase or we will close your account in 30 days,” letter.

And while a consumer-friendly, February 22 is only a few days away, there are still some favorable credit card company loopholes to keep in mind. At this time, there is still no regulation on how high an interest rate can reach on limits or future purchases, nor have small business credit line woes been addressed. Readers, what do you think? Will this reform work or will we just keep getting hit with more inventive fee structures?

Do you own a cash-value life insurance policy? Have you been thinking about donating the policy to your favorite charity? There are two ways to do this—you could gift the policy outright, making the charity the owner and beneficiary, or you could name the charity as the beneficiary when you die. Which choice makes more sense? The answer really depends on a number of factors, including:
• What the charity wants and when it needs the money
• Whether you need a current tax deduction (and are willing to give up control)
• Whether you still want to keep some or most of the benefits of the insurance policy.
If you want or need the federal income-tax deduction, you should make sure that the non-profit is actually a 501(c)(3) entity. Ask the executive director for the organization’s tax status and get them to send you written proof. Then make sure that they want the life insurance policy. In some cases, the organization might simply accept the policy and immediately surrender it to get the cash. In such cases, the charitable gift could end up being much less than what you intended.

Continue Reading »

We will be implementing a social groups feature that will allow users to create groups and share them with other BudgetTracker users. Once a group is created, you will have your own Forums, Events Application, and Home Page to show what’s going on with the group. We plan to launch this later this month so if you have any ideas you would like to see as a part of the first release, please post them here.