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Previously, I had highlighted Fidelity’s Investors Weekly columns as some of my favorite read for a-ha! ideas. One of this week’s articles is a fantastic way to get your financial life in order between now and 2007.  I’ll be reviewing one month per day this week.

August

Review your portfolio

I wrote about my update process back in April. It’s a good idea to at least review your portfolio annually, but I like to look at my progress quarterly. Fidelity has many tools to help you analyze your portfolio. I would bet whomever you have for your 401(k) or IRA have similar tools (you do have one of those, right?). Always remember that a diversified portfolio is a happy portfolio.

Check your tax withholding and estimated tax payments

This is a fantastic idea that I sadly do not follow like I should. Many people (ourselves included) over withhold on income taxes in order to get a refund at the end of the year. There are many, many, many people that argue that you are giving a free loan to the government and you can save the money yourself, etc. While that is true, I think that the interest that is passed up is well worth the piece of mind that people get from not having to pay at the end of the year. If you get a $1,000 refund, for instance, and you can get 4% interest on the money and we assume that the money is over withheld equally throughout the year, you’ll be giving up about $20 in interest. That is if you invest all of it. If you spend any (and most people will) then you are giving up even less in interest.

Starting with the 2006 filing season (due April 15, 2007), you’ll even be able to directly deposit a tax refund into an IRA account. This will allow you to not only save for retirement, but will generate a tax deduction for the next year, potentially saving you additional taxes which you can then deposit into the IRA.

If you are concerned that you may be under withheld (for instance, you received a large raise or lost some large tax deduction) you may want to run through a free tool, such as the one from CCH that I pointed out a couple of weeks ago.

The Christian Science Monitor has an excellent Work and Money section that I think is often overlooked by those seeking financial help. One particularly great story involves a comprehensive listing of free online financial tools.

These tools do everything from finding cheap gas to help you plan for retirement. However, the more sophisticated the analysis, the greater chance of error. If you’re planning for retirement and plug unrealistic assumptions into the tool, it won’t be smart enough to say “you’re an idiot”. It will just return the amount based upon the data you put in.

Out of their recommendations, my favorites are:

The Financial Planning Toolkit from CCH - This one they actually didn’t highlight, but mentioned at the bottom. We use CCH at work and it’s a fantastic product. They’ve made a lot of their tools available to anyone for free. These will help with major aspects of financial planning.

Salary.com - Find out what you are worth by comparing your salary to people in similar positions in your area. A good way to figure out if you are really underpaid, or just feel that way.

Gas Buddy - I don’t use this as much many other people do because of our frequent use of gas cards. But, if you aren’t linked to a particular brand, this is a great tool to help you find the cheapest gas.

It will never happen but an article at Breakingviews says that the only way to save the American auto industry is to merge Ford and GM. His main arguments are based upon the fact that a GM-Ford merger would create a giant that could actually fix the two companies problems rather than having to work separately and have interested parties play one against the other.

The Big One - as a GM-Ford combination might be dubbed - would be in a much stronger position to tackle legacy costs in bargaining with unions, suppliers, healthcare providers, dealers and the government than they presently are today as fierce rivals.

The savings would be tremendous - far larger than anything Nissan-Renault presents. If a merged GM-Ford reduced costs equal to 2% of sales - one common M&A benchmark - the capitalised value of the savings could be some $40bn - well above their $30bn of combined market cap today.

I have a hard time believing the savings alone is more than market caps of both companies combined, even if their stocks are depressed under the weight of their immense problems.

The article goes on to suggest the issues that would obviously arise, such as the number of brands that a combined entity to have (24) and the issues with dealers and unions.

Personally, I love the idea of a Renault-Nissan-GM alliance from a purely selfish standpoint. One of the ideas bandied about is that GM kills a brand (Pontiac or Buick, most likely) and pays off the dealers by making them Renault dealerships. I would love to be able to import some of the fuel efficient diesels that Renault produces (of course GM produces them overseas too, but is too stubborn to bring them here). If they do make Renault dealerships, it wouldn’t make any sense to only bring over the gas models.

I really think, though, it’s much ado about nothing. Rick Waggoner has to do the meeting with Carlos Ghosn to show he’s doing something. The number of roadblocks that GM will through up will never be able to be met. The crisis at GM isn’t at a high enough state in order to bring about fundamental changes that need to be made. Someday we won’t recognize GM, but that day isn’t anytime in the near future.

It’s funny how emotional attachment can override the most basic rational thinking in humans. Whether it’s someone that runs up thousands of dollars on a credit card when they know they shouldn’t for the latest tech bauble or someone putting their entire 401(k) balance in company stock, an emotional attachment can overcome the basics that we all know are true.

The basic rule being violated here, obviously, is that we should all diversify our investments. According to a study referenced on CNN Money, company stock accounts for 25% of the value of all assets in companies that offer their own stock as an option. More than one in five people have at least half their assets in company stock!

Some of that obviously has to do with companies that make 401(k) matches in company stock and then refuse to allow employees to sell the match. If your company matches the first 3% of your salary and you only put in 3%, half of the value of your 401(k) will be in company stock. That is a situation you can’t get around (even though you should be putting in much more unless you’re investing elsewhere).

So, if you have more than say 10% of your 401(k) in company stock what do you do? First, check to see if you are really locked in or if your company just makes it seem like you are. If you are not locked in, I would sell all the stock you need to get to 5%-10% of your 401(k). If you can’t sell all at once, you can sell in chunks. But keep selling until you get to your goal. Use the proceeds from the stock sales to purchase other options in your 401(k) to diversify your investments.

If you are locked in, there’s not a lot you can do in your 401(k). In this case, I would limit the amount that you contribute to your 401(k) to maximize the company match. I would then take the money you would have contributed to your 401(k) and contribute it to an IRA instead. You will still get the tax break and you can diversify better than you could in a 401(k). I think that using an IRA to supplement a 401(k) is always a good idea to diversify, but many people either do not want to do the homework or cannot trust themselves to make the IRA contribution every month. In these cases, continue to invest in the 401(k) but make sure that your contributions stay far, far away from your company’s stock.

That’s the focus of this week’s Ask the Expert column over at CNN Money. The reader is asking if they should turn over their $1.5 million savings over to a professional to run for a fee of $2,500 per quarter.

Basically, the question comes down to how much you want to do. The fee the financial advisor is charging is equivalent to 0.67% per year. That is on top of the fees that the mutual funds will charge. As the “Expert” points out, that’s cheap for a financial advisor but can it be avoided entirely?

As I’ve said before, I believe it can. Even if you have no idea of where to invest (if you have $1.5 million in savings you’ve done pretty well already) you can go to a fee-only financial planner that suggest where to put your money without specifically trading for you. It will be much cheaper than having the financial advisor trading for you, even if you go back every year.

Additionally, they could put their funds in a “lifestyle” fund such as Fidelity’s “Freedom” funds, Vanguard’s Target Retirement funds or T. Rowe Price’s Retirement funds. I’ve discussed these funds before (another time when the “Expert” slammed financial advisors rather than softly recommending them here) and I think they are good funds for those that don’t want to mess with portfolio allocation and similar concepts, but I believe people can do better by either researching on their own or going to a fee-only advisor.

I always suggest going with T. Rowe Price’s fund because it is more aggressive and puts more of the money in equities at every stage. Historically, returns are higher on stocks so T. Rowe Price’s fund will put people in a better position to retire than the other funds will.

Fidelity’s Investors Weekly has a nice roundup of how long to keep various types of documents. The piece mainly focuses on how long to keep the records for tax purposes, which may or may not be the most important function of these documents based upon circumstance.

Tax records: Keep three to seven years

I would push for closer to seven years because the IRS has a sneaky habit of using the “we have six years if you underreport your income by 25%” rule if you’ve pitched your records. And this means all tax records: W-2s, mortgage deduction statements, charitable contribution records, child care expense backup, etc.

Investment records: Keep until you sell the security, plus seven years

This is primarily for tax purposes. You need all of your historical records to calculate the cost of the investment, which can be changed by dividends and stock splits. If you don’t have the records the IRS will assume a zero cost and you will pay tax on the entire sales price.

Retirement account records: Keep indefinitely

I hadn’t heard that the IRS was requiring all retirement statements to be kept until all the amount is drawn out. For me, that could be 70 years (!) if I live into my 90s. I’m not sure of the reason for this, but I will definitely start keeping records.

Home improvement records: Keep until you sell your house, plus seven years

For the same reason as investment records. Major home improvements increase the “cost” of your house for tax purposes. They don’t cover closing records, but have those as well. Again, the IRS will assume zero cost if you don’t have these records.

Bank and cash management account: One year to indefinitely

I’m not sure why they say “indefinitely” since their description says seven years. Again, for tax purposes you should keep any checks that go on your tax return (deductions, etc.). Your bank statements can help with an audit if you no longer have W-2s, etc.

Personal bills: Until you have proof of payment

We don’t do a very good job of this. We usually shred as soon as they are paid. By the time you get notified you didn’t pay it’s too late anyway.

So, there you have it. A brief primer on document retention.

Today is the Major League Baseball amateur draft. The top draft pick 15 years ago was an 18 year old 6′4″ lefthanded pitcher. A lefthanded pitcher that averaged 2.5 strikeouts per inning his senior year of high school. A lefthanded pitcher that could throw 95 mph without effort and could dial it up close to triple digits when he needed to. A pitcher that was the ultimate can’t-miss prospect. He was called the best amateur pitcher ever. His name was Brien Taylor.

Haven’t heard of him? You’re not alone. Except to those that obsess over the game the name means nothing. But his tale is a cautionary one. What is this doing on this website? Well, other than my love of the game his is mostly a cautionary tale in how to handle a windfall.

Brien Taylor was a poor black kid from rural North Carolina. The son of a crabber and a bricklayer, his shoulder was his family’s ticket out of poverty. The Yankees drafted him and offered him $300,000 to sign. That was more money than the family ever had, but it was nearly a million dollars less than the #1 overall pick from the prior year received (Todd Van Poppel for those wondering). His mom became famous in her quest to get him more money. He ended up getting a signing bonus of $1.55 million.

Taylor went to the minor leagues and continued his brilliance. He struck out more than a hitter an inning in Class A and AA ball over the next two years. He was headed straight for the majors and a big payday.

Then fate intervened. His brother got into trouble and got beaten up (partially because he was Black and Brien was his brother). Brien later went to defend him and got involved in a fight. He fell on his shoulder, his golden shoulder, and tore it up. His surgeon called it one of the worst shoulder injuries he had ever seen. Surgery was performed but Brien was no longer golden. His fastball dropped into mortal territory and he became hittable. His career was over. He became the second player ever drafted #1 overall to never reach the majors.

Brien made over $2 million during his brief career (including his signing bonus). That windfall likely could have set Brien up for life. Using the retirement principle of taking no more than 4% of your savings to ensure it won’t run out, he would have started at $48,000/year ($2m * (1-40%) * 4%), a fortune in rural North Carolina. And that would have only increased as his investments compounded. Instead, Brien went home and worked as beer distributor. He is now 34 years old and is working with his father as a bricklayer to support his five daughters and living in the trailer he grew up in with his parents.

Brien is a cautionary tale, but hardly the only one from the world of major sports. If you come into a windfall, make sure to take care of yourself first. You never know what will happen. When Brien signed for that $1.55 million, he didn’t know that two years later his career would be all but over and his future windfall would never come. This is why it is important to have savings and an emergency fund. If you get a windfall, don’t buy a new house and a shiny car. Put it away and let it take care of you for the rest of your life. Don’t become the next Brien Taylor.

Fidelity’s listed their five top tax strategies that you can use right this minute to “fix” your taxes for 2006 (not “fix” like this guy, but fix potential problems).

1. Take a look at your payroll withholding
2. Consider increasing contributions to retirement savings accounts
3. Get more energy efficient
4. Keep better records of charitable contributions
5. Consider taking advantage of stock losses

Take a look at your payroll withholding 

A lot of people overlook this tip on purpose. If you’re getting a refund, you are giving the government a free loan, but it’s a saving trick a lot of people use. As interest rates rise, people may take a second look at this “saving” strategy. It makes a lot more sense to adjust withholding when you’re giving up more than half a percent of interest.

Consider increasing contributions to retirement savings accounts

Everyone should be saving for retirement and increasing those savings whenever they can. I put it to people this way, if you can sacrifice a little bit now you won’t have to work as long when you get older. Or, the more you put into retirement the quicker you can quit your job. That argument seems to work with my peers (late 20s) that don’t want to think about being in their 60s anytime soon.

Get more energy efficient

There were a myriad of tax credits passed late last year dealing with energy efficiency, from the hybrid car credit to credits for improving the energy efficiency of your home. The easiest way to determine what products are eligible is taking a gander at the IRS fact sheet on energy tax credits. And make sure that the store/manufacturer proves you are eligible for the credit before you buy. If they tell you they’ll show you the docs after you purchase, it’s likely not eligible.

Keep better records of charitable contributions

Fidelity’s tip is all about documenting charitable donations over $250. I would posit the majority of lost charitable deductions are actually smaller dollar amounts that people never bother to write down. Donations to churches or money dropped in the Salvation Army kettles are the most likely lost deductions because people don’t note the amount donated when they make the donation and then forget to later. We keep a notecard in my wife’s purse that she uses to note any cash donations and we try to write checks for as many as we can so that we can flag donations in Microsoft Money for easy year-end recordkeeping.

Consider taking advantage of stock losses 

Harvesting tax losses to offset capital gains is a time honored tradition to reduce taxes. You can also use it to reduce normal income as $3,000 can be offset against non-capital income and the rest can be carried forward. Though, with stock markets around the world up by double digits in the past year, it may be slim pickings when it comes to tax losses. You also need to be aware that re-purchasing the stock you sold within 30 days before and after the sale will cause the loss to be disallowed even if purchased in a separate account.

These are five relatively easy tax strategies that can either reduce your tax or reduce the over or under withholding of taxes so that a surprise (good or bad) doesn’t happen next April.

Technorati Tags: refund, withholding, saving, retirement, tax credits, energy efficiency

Last week, I wrote about XM’s problems with the RIAA. Now, they are having problems with the FCC and it could mean more harm to the stock price (which dropped 40% on the RIAA lawsuit). The company has stopped shipping the popular SkyFi2 made by Delphi and Xpress manufactured by Audiovox. The FCC is also looking at the Roady line of radios also manufactured by Delphi.

The issue stems from the FM broadcasting feature of the radios. Apparently, the signal is much more powerful than FCC standards. Anyone that’s pulled up to someone that has one of these models probably already knows the signal strength. My wife and I both have SkyFi2s and we can pick each other’s radio up on the highway if we are following the other. The signal also reaches from one corner of ourhouse to the other, which absolutely shocked us when we purchased the units.

So, what does this mean for XM? Besides any settlement with the FCC it could put a damper on XM’s growth, which has already been ratched down by a half million subscribers this year. This won’t stop XM from selling the in-car stereos that are sold with new vehicles, but it will stop their most popular “plug-n-play” stereos that allow consumers to bring their radios from their car to their office or home. The stock is curiously up today on the news, probably more to do with recent analyst upgrades, but I’d imagine that whenever the revised growth numbers are released the stock will take another hit. I’m still keeping it in my “products I love, stocks I hate” category.

In just my last post I commended the “expert” on CNNMoney on his recommendation of pairing a Roth IRA with a 401(k). Unfortunately, he’s back to missing the mark with today’s installment.

The question had to do a with a $3,500 windfall from selling a car. The reader asked if he should put it into a Roth IRA or pay down his $8,000 credit card balance first. He starts out all good and logical by suggesting to pay down the debt because the reader will never approach the return necessary to make the investment have a higher return than the interest rate on his credit card.

Then he goes off the reservation and discusses why the reader should actually open the Roth with the majority of the money if not with all of it. It is true that people are irrational and may just spend the credit card debt back up. However, since the person is asking the question it seems like they have realized that they need to save rather then racking up credit card bills. The reader is paying more than the minimum already, so it doesn’t sound they’re completely financially strapped.

It’s hard to tell intent from a reader question, but I’d have a hard time telling someone to do anything other than pay off credit card debt first. Free Money Finance is having a similar discussion over a similar USA Today article that punted and said to do both (gee, you think?). Overall, I would always suggest plowing the money into credit card debt and then using the free cash to go into savings (emergency or retirement).  

Technorati Tags: Roth IRA, credit card, credit card debt