Monthly Archives: March 2016

Tips for Long Life and Happiness

images (13)Buying life insurance for the first time can be overwhelming. You’ll run into a lot of terms that you may not understand at first. The good news is those terms are not very difficult to figure out once you do a little research. These tips are designed to help you create an organized approach toward investigating life insurance so that you can find the policy you need without the hassle.

Know Why You Need Life Insurance

Life insurance is a serious investment that shouldn’t be made on the spur of the moment. Don’t buy a policy just because someone says you should. Many people hear ads about life insurance so many times that they begin to feel an instinctive concern about needing life insurance. The truth is, however, not everyone needs life insurance.

The purpose of life insurance is to provide financial support for yourdependents if you are no longer around to do it yourself. If you don’t have any dependents, you probably don’t need to spend money on life insurance. If you are contributing significantly to the financial well-being of someone in your life, you think about protect from any financial gaps that might occur if you no longer able to provide the same support. The key is to understand why you need life insurance before you begin shopping for a policy.

Understand the Type of Policy You Need

There are two basic types of life insurance policies: life and whole life.Term life insurance policies last for a specified period of time. Term life is less expensive than whole life because it usually expires before the benefits are used.

Whole life insurance lasts from the day you the policy until the day you die, no matter. A whole life policy is more expensive because the coverage could last a few years or several decades. Whole life policies can be borrowed against at a high interest rate, while term life policies.

Know When to Choose Term

If you are in a situation your dependents will not rely on you financially forever, your best bet is probably a term life policy. For example, many parents choose term life policies that are in effect until their children move out and become financially independent. Once kids are, there is no reason to continue paying for life insurance. Your beneficiaries will rely on your contributions.

Know How Much to Buy

Understanding the potential needs of your beneficiaries can also help you decide how much insurance you should have. Don’t follow any “rule of thumb” guidelines you may read. Your needs are specific to you. Your decision will depend on the math.

How much money do your dependents need each year and for how long? Because your children are likely different ages, that number is different for each beneficiary. Calculate the needs of each dependent annually, multiple times the number of years support is needed and then add those numbers together so all dependents have what they need.

Tips to manage your money so carefully

Federal or state securities laws require brokers, investment advisers, and their firms to be licensed or registered, and to make important information public. But it’s up to you to find that information and use it to protect your investment dollars. The good news is that this information is easy to get, and one phone call or web search may save you from sending your money to a con artist, an unscrupulous financial professional, or a disreputable firm.

Before you invest or pay for any investment advice, make sure your brokers, investment advisers, and investment adviser representatives have not had disciplinary problems or been in trouble with regulators or other investors. You also should check to see whether they are registered or licensed.

This is very important, because if you do business with an unregistered securities broker or a firm that later goes out of business, there may be no way for you to recover your money — even if an arbitrator or a court rules in your favor.

Brokers and Brokerage Firms

The Central Registration Depository (CRD) is a computerized database that contains information about most brokers, their representatives, and the firms they work for. For instance, you can find out if brokers are properly licensed in your state and if they have had disciplinary problems with regulators or received serious complaints from investors. You’ll also find information about the brokers’ educational backgrounds and where they’ve worked before their current jobs.

You can ask your state securities regulator or the Financial Industry Regulatory Authority (FINRA) to provide you with information from the CRD. Because your state securities regulator may provide more comprehensive information from the CRD than FINRA, especially when it comes to investor complaints, you may want to check with your state securities regulator first. You’ll find contact information for your state securities regulator on the website of the North American Securities Administrators Association. To contact FINRA, either visit FINRA’sBrokerCheck website or call FINRA’s toll-free BrokerCheck hotline at (800) 289-9999.

Investment Advisers

People or firms that get paid to give advice about investing in securities generally must register with either the SEC or the state securities agency where they have their principal place of business. As discussed in greater detail below, the rules governing the registration of certain investment advisers have changed.

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd- Frank Act”) was signed into law. The Dodd-Frank Act amends certain provisions of the Investment Advisers Act of 1940 by delegating generally to the states responsibility over certain mid-sized investment advisers – i.e., those that have between $25 million and $100 million of assets under management (“AUM”).

The Dodd-Frank Act and SEC rules increased the threshold above which all investment advisers must register with the SEC from $30 million to $110 million of AUM. Prior to July 2011, an investment adviser regulated by the state in which it maintained its principal office and place of business generally was prohibited from registering with the SEC unless the adviser had at least $25 million of AUM, and was required to register with the SEC once it had at least $30 million of AUM. Now, investment advisers with less than $110 million of AUM may be prohibited from registering with the SEC, depending on the size of the adviser’s AUM and whether the adviser meets other requirements.

This means that state securities authorities will have primary regulatory authority over a substantial number of investment advisers that previously were subject to primary regulation by the SEC. Larger investment advisers, generally, those with over $100 million of AUM, will continue to be registered with the SEC and will be subject to federal regulation (state investment adviser laws requiring registration, licensing, and qualification have been preempted for these advisers).

Some investment advisers employ investment adviser representatives, the people who actually work with clients. In most cases, these people must be licensed or registered with your state securities regulator to do business with you. So be sure to check them out with your state securities regulator.

To find out about an investment adviser and whether it is properly registered, read its registration form, called “Form ADV.” Form ADV has two parts. Part 1 contains information about the adviser’s business and whether the adviser has had problems with regulators or clients. Part 2 sets out the minimum requirements for a written disclosure statement, commonly referred to as the “brochure,” which advisers must provide to prospective clients initially and to existing clients annually. The brochure describes, in a narrative format, the adviser’s business practices, fees, conflicts of interest, and disciplinary information. Before you hire an investment adviser, always ask for and carefully read both parts of the Form ADV.

Where applicable, each brochure provided to clients must be accompanied by a “brochure supplement” that includes information about the specific individuals, acting on behalf of the adviser, who actually provide investment advice and interact with the client. An adviser must deliver the brochure supplement to the client before or at the time that the specific individual begins to provide investment advice to the client.

You can view an adviser’s most recent Form ADV online by visiting the Investment Adviser Public Disclosure (IAPD) website. You can also obtain copies of Form ADV for individual advisers and firms from the investment adviser, your state securities regulator, or the SEC, depending on the size of the adviser. You’ll find contact information for your state securities regulator on the website of the North American Securities Administrators Association.

If the investment adviser is registered with the SEC, you can get a copy of Form ADV (Part 1 only) by accessing information on “How to Request Public Documents”In addition, at the SEC’s headquarters, you can visit our Public Reference Room from 10:00 a.m. to 3:00 p.m. to obtain copies of SEC records and documents.

Conclusion

Once you’ve checked out the registration and record of your financial professional or firm, there’s more to do. For example, if you plan to do business with a brokerage firm, you should find out whether the brokerage firm and its clearing firm are members of the Securities Investor Protection Corporation (SIPC). SIPC provides limited customer protection if a brokerage firm becomes insolvent — although it does not insure against losses attributable to a decline in the market value of your securities. If you’ve placed your cash or securities in the hands of a non-SIPC member, you may not be eligible for SIPC coverage if the firm goes out of business.

The advantage of Income Statement

The most recent installment of the Finance Professor kicked off our look at how to start analyzing the financial statements of public companies. We covered where to locate a company’s financial information and reports, and what to look for once you find this data. Now we’re going to take the next step in this series of lessons and focus in on how to read a company’s income statement (or profit and loss statement, the P&L).

Mind the GAAP

Income statements will vary from company to company and industry to industry. As such, the statement might seem like one big salad of information that we must learn how to sift through to better understand a company’s operating results. However, there is one constant that always guides us in the preparation and understanding of financial statements such as the income statement. This constant is the application of generally accepted accounting principles, or GAAP.GAAP is a standard that must be followed by all companies (public and private) in order to receive the unqualified independent auditor’s report that I discussed last time. We rely on the auditor’s report to confirm a company’s adherence to GAAP or alert us as to the deficiencies of its financial statements in terms of accounting standards. Accounting standards are quite complex and in the United States are the responsibility of the Financial Accounting Standards Board (FASB). For the individual investor, it is more important to be assured that the company you hold in your portfolio is in compliance with GAAP than to understand the intricacies of the accounting standards.

A Look at McDonald’s

With the aforementioned in mind, I will start by using a rather simple form of income statement from a company that I know quite well: McDonald’s. Below, I have included a copy of McDonald’s income statement, which I extracted from the company’s 2006 annual

Let’s first start in the top section of this income statement, with revenue (or income). Please note that within revenue you have two different classifications: sales (e.g., “Sales by Company –operated restaurants”) and revenue (e.g., “Revenues from franchised and affiliated restaurants.”) While sales and revenue might seem like identical terms and are frequently used interchangeably, there are some subtle differences to be aware of.

Sales vs. Revenue

Some companies act as direct sellers to the public and, concurrently, as suppliers to wholesalers or other distributors. Other companies use franchisees to distribute their product. Sales represent direct sales to the public or distributors. In McDonald’s case, these are sales that McDonald’s makes at company-owned restaurants. Revenue represents income streams from nondirect or ancillary sources. For McDonald’s, this would be fees earned from franchisees that operate their own McDonald’s branded restaurants.For another take on the difference between sales and revenue, let’s take a quick look at BJ’s Wholesale Club. BJ’s direct sales to customers would be viewed as sales, while the fees it earns from its members’ annual membership dues would be viewed as a revenue item.

Operating Costs and Expenses

The next section of the income statement deals with a majority of the costs and expenses associated with the operation of a company’s business. The description of such expenses will vary from company to company, but we can divide them into several general categories:

Cost of Sales:

This line item represents the expenses incurred by the company to produce and deliver the product or service to the customer. For McDonald’s, this would include, but is not limited to, the cost of its hamburgers, French fries, beverages, labor, utilities, occupancy (rent and depreciation) and paper goods. A retailer such asCVS Caremark describes these costs as “costs of goods sold, buying and warehousing costs.”

Selling, General and Administrative Expenses (SG&A):

These are expenditures related to the management of the overall company, which cannot be directly linked to product sales or the delivery of services. This will include items such as corporate overhead, legal, accounting,Sarbanes-Oxley compliance, management, stock based compensation, advertising, marketing, travel, entertainment and licensing expenses.

Depreciation:

This represents the expensing of asset costs over a prolonged period of time. For example, McDonald’s might build or buy a structure to house a company-owned restaurant. That cost is first capitalized and then expensed in piecemeal fashion over a period of time. Some companies, such as McDonald’s, might actually consider this a cost of sales. Other companies might break this out separately as another line item under operating expenses.

Amortization:

This cost is similar to depreciation except that it relates to the expensing of intangible items over a period of time. Intangible items include goodwill and intellectual properties, such as trademarks or licenses. Goodwill represents the excess of the purchase price over the book value of a company when one company acquires the other.

Operating Income

When we subtract total income (revenues plus sales) from total operating expenses, the difference represents operating income. This amount tells us how successful or not a company has been in executing its business plan to profitably sell its products and services.

Interest

Next to be presented in the income statement is the interest section. There are two types of interest: revenue and expenses. Most companies will net these two interest streams together and present them as “net interest.” On the other hand, some companies, including banks, broker-dealers and financial institutions such asCitigroup and Merrill Lynch, which rely on interest as one of their core revenue streams, will present net interest as a part of revenue, thus incorporating those items within their operating income.When we take operating income and subtract net interest (or other items), we will arrive at earnings before income taxes (or EBIT, which should not be confused with EBITDA). As I mentioned in an earlier article, Ben Franklin was quoted as saying, “In this world nothing can be said to be certain, except death and taxes.” This holds true for the corporate world as well. Thus, we must next calculate the provision for income taxes and present it in the income statement. This leads us to another aspect of the real world that must be explained.

Provision for Income Taxes

Under GAAP, a company must make a calculation or provision of the amount of income taxes owed based upon the company’s GAAP results. This amount may differ from the actual taxes paid to federal and local governments. For the purposes of the income statement, the provision is presented. In terms of cash flow and balance sheet statements, taxes owed or paid are factored in relative to the provision. (The cash flow and balance sheet statements will be covered in the upcoming weeks.)

The Bottom Lines: Net Income and EPS

When we subtract taxes from EBIT we arrive at net income. If we divide net income by the total diluted outstanding share count of the company, we get earnings per share (EPS).

Other Wrinkles and Their Impact on EPS

There are two additional financial wrinkles that we need to consider when looking at EPS: discontinued operations and nonrecurring items.

Discontinued Operations:

From time to time, a company will sell or spin off a business or close down a subsidiary. When this occurs, the company will segregate the net income attributed to these divisions or products as income or as a loss from discontinued operations.The impact to EPS for discontinued operations is separated from net income to arrive at net income from continuing operations.

Nonrecurring Items:

On occasion, one-time nonrecurring items, which benefit or negatively impact the company’s results, are incurred. These items are typically highlighted and separated because they do not represent an aspect of continuing operations of the company.The impact of nonrecurring items is not separated on the income statement but is frequently disclosed in press releases, conference calls and notes to financial statements. Why? To help the income-statement reader filter out these items, which may materially impact the company’s EPS but are not as relevant to the continuing operation of the company for comparative purposes.This week’s homework:

  • Obtain an income statement from two of the companies discussed in this lesson (McDonald’s, BJs, CVS Caremark, Citigroup, Merrill Lynch) and an income statement from one of your own current (or potential) individual stock holdings.
  • Compare and contrast the financial presentations from company to company and industry to industry.
  • Become familiar with the unique line items presented in the income statements per company and per industry.
  • Understand what is driving the EPS for each company.
  • Ascertain the source of discontinued operations or nonrecurring items.

Tips for Home Insurance

Many people think of home insurance as a necessary evil. The truth is that it might feel like that, but only until you need it. At that point, it will feel like a savior. You’ll definitely be very glad you have home insurance when you get your financial life back.

Home insurance is meant to protect what’s very likely your biggest and most valuable asset.

You’ve worked hard for what you have. You put in much time to be able to afford your home, and you now put in much time and effort in keeping up with that home. Therefore, it only makes sense that you you need to protect it from the myriad of things that can cause it harm.

The big problem is that most people are confused when it comes to insurance in general, much less something as important (and sometimes complicated) as home insurance. There are things that you need to understand about home insurance ahead of time, before an instance occurs where you end up needing it.

So in this post, we’re going to give you…

7 Tips to Buying Home Insurance, Getting the Best Bang for Your Buck, and Being Ready to Use It If Needed…

Tip #1 – Know the Exact Value of Your Home and How Much Home Insurance You Need…

One of the most important things to understand from the very beginning is how much insurance you’ll need. First you’ll need to know the actual value of your home. If your home is damaged or destroyed, you’re going to need to know what it will cost to replace the entire structure… or that portion of the structure which is damaged.

A home builder or assessment company should be able to give you the truest value.

This is not a time to guess. Establishing your home’s value is not a do-it-yourself project. Nor is it a good idea to allow your insurance agent to be the one to solely establish that value. Again, this is your biggest asset and you’ll want to be sure you’ve got the fairest value.

Tip #2 – Understand the Risk Factors That Your Premium Will Be Based Upon…

It’s important that you realize your premium is based around the risk that the insurance company is taking by selling you the policy. In other words, the higher the risk that something will happen and they’ll have to pay you for damage, the higher the premium will be.

Things like the crime rate in your neighborhood, your living habits, where on the block your home is located, how close you are to highways and busy areas, trees around or near your home…

everything that you can think of will be assessed and will take part in the factoring of your premium.

Going into it with this knowledge will actually help you and we’ll better explain how in Tip #3…

Tip #3 – Know and Utilize All of the Things That Can Actually Save You Money on Your Premium…

While there are tons of risk factors that can drive up the cost of your home insurance premium, there are also many factors that can save you money on your policy, too. It’s important to know this so that you get all the discounts available to you.

For instance some things that might earn you a discount include:

•   A home burglary alarm system
•   Dead bolt locks
•   Fire alarms and sprinklers
•   Updated heating systems
•   Updated wiring and electrical system for the home
•   A home near a fire hydrant or fire department
•   A home located near a police department
•   Well-structured and maintained stairs, sidewalks, driveways, and entrances (less chance of injury),
etc.

Basically… anything you can think of that might make your home safer, and less likely to catch fire or injure a guest or passerby can give you a discount on your premium. Furthermore, having good credit can save you money as well.

Tip #4 – Take Inventory Of Your Possessions and the Dollar Amounts…

Your homeowner’s insurance covers the structure and dwelling of the home, as well as the home owner’s possessions.

This also is not a time to guess. You likely have about $20,000 worth of personal possessions in your home at any given time. Looking around your home you may not realize that, but it’s absolutely true.

So make a list of all your belongings and the value of those belongings based on receipts and purchase dates. This way if you ever need it you’ll have a concrete list, and not something constructed from memory, where things could get forgotten or undervalued because you have no proof.

You may even want to take photographs of the items on your list, and definitely keep receipts for all new items purchased.

Tip #5 – Keep Your Inventory List Safe…

One thing you don’t want to do is take the time to create an inventory list and then not have that list available when you need it.

If you leave it laying in a filing cabinet or shoebox inside the home, chances are in the case of a fire or some other tragedy you will no longer have that list. That’s why it is recommended to keep the list inside a fire-proof safe (along with your insurance policy, copy of your mortgage, and important papers for family members)…

Or you can keep it in your bank’s safety deposit box.