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2010 Financial Fitness Kit


  • pg 1
									                         2010 Financial
                         Fitness Kit

                             Put your finances to work
                             for you with this FREE Guide
                             from the Oklahoma Society of

                             Topics Include:
                               • Getting Out of Debt;
                               • Paying for College;
                               • Financial Setbacks;
                               • Retirement Planning;
                               • Insurance Basics;
                               • Estate Planning;
                               • Unemployment; and
                               • Much, Much More!

Our CPAs Know What Counts.
Are your finances under water?
    Get the ultimate one-day financial makeover
      with our outreach seminars for women.

	      Since	2000,	the	Oklahoma	Society	of	Certified	Public	Accountants	has	offered	Do	It	Herself:	A	
    Journey to Financial Freedom. For only $15 per event (including lunch and materials), women can
              learn	how	to	improve	their	financial	lives.	Two	events	are	scheduled	this	year:	

                  1.) Oklahoma City • Oct. 1, 2010 at the Clarion Meridian Convention Center
                             2.) Tulsa	•	Oct.	22,	2010	at	the	Renaissance	Hotel

                Sign up for on the brochure mailing list at

                                                 Our CPAs Know What Counts.
2010 Financial Fitness Kit Contents
Chapter 1 • Teaching Kids About Money
Teaching Kids about Money: Wants vs. Needs ...................................................................................................2
Allowance: To Give or Not to Give ........................................................................................................................2
You Can Bank on It: Savings Add Up! ..................................................................................................................3
Create a Budget and Track Your Child’s Spending ..............................................................................................4
Build Their Future By Teaching Them to Invest ....................................................................................................5

Chapter 2 • Managing Money for College
Chapter Sponsored by Oklahoma Money Matters
Managing Money for College................................................................................................................................6
Popular College Savings Accounts.......................................................................................................................9

Chapter 3 • Financial Tips for Starting Your Career
Getting Started: Establishing a Financial Safety Net ............................................................................................12
Evaluating a Job Offer ..........................................................................................................................................13
Changing Jobs? Take Your 401(k) and Roll It! .....................................................................................................14
Tips for Working in an Entry-Level Position ..........................................................................................................15
Buying a Car .........................................................................................................................................................16

Chapter 4 • Money Tips for the Military
Managing Your Money While Serving Your Country .............................................................................................17
A Guide to Living Overseas ..................................................................................................................................18
Maximizing Your Military Tax Benefits ..................................................................................................................19
A Guide to Your Retirement Benefits ....................................................................................................................20

Chapter 5 • Merging Money – Help for Couples and Marriage
Merging Your Money When You Marry .................................................................................................................21
Financial Tips for Unmarried Couples ..................................................................................................................22
Getting to “I Do” Despite Investing Differences ....................................................................................................23
After the Honeymoon: Insurance Advice for Newlyweds ......................................................................................24

Chapter 6 • Home Ownership – Hints for the American Dream
Qualifying for a Mortgage In a Tough Economy ...................................................................................................25
Buying a Home .....................................................................................................................................................26
Multiple Programs for Modifying Mortgages .........................................................................................................27
Your Home as a Source of Dollars in Retirement .................................................................................................28
Opening the Door to Homeowners Insurance ......................................................................................................30
Renters Insurance ................................................................................................................................................31

Chapter 7 • Insurance Basics – Protecting What’s Most Important
Insuring your Family’s Health ...............................................................................................................................32
Protecting Yourself and Your Family with Long-Term Disability Insurance ...........................................................33
Long-Term Care Insurance ...................................................................................................................................34
Protecting Yourself and Your Family with Life Insurance ......................................................................................35

Chapter 8 • Entrepreneurs – What to Consider When You Become
Your Own Boss
Starting or Buying a Business ..............................................................................................................................36
Funding a Business ..............................................................................................................................................37
Choosing an Entity for Your Business ..................................................................................................................38
Tax Planning for the Self-Employed .....................................................................................................................40
Properly Insuring Your Business...........................................................................................................................41

Chapter 9 • Managing Credit Cards and Getting Out of Debt
Choosing a Credit Card ........................................................................................................................................42
Understanding Your Credit Report........................................................................................................................43
Credit Traps for the Unwary..................................................................................................................................44
Debt Consolidation and Repayment .....................................................................................................................45                     Provided By the
Chapter 10 • Investments, Retirement and Estate Planning
Retirement Issues to Watch in 2010 .....................................................................................................................46
Annuities and Retirement Planning ......................................................................................................................47
Estate Planning: An Introduction ..........................................................................................................................48
Trust Basics ..........................................................................................................................................................50
Wills — The Cornerstone of Your Estate Plan ......................................................................................................52
Investment Planning: The Basics .........................................................................................................................53
Mutual Fund Basics ..............................................................................................................................................54
Six Keys to More Successful Investing.................................................................................................................56                      1900 NW Expy, Ste. 910
                                                                                                                                                                             Okla. City, OK 73118-1898
Chapter 11 • Financial Preparedness and Recovery for Life Crisis                                                                                                                   (800) 522-8261
Contemplating Bankruptcy ...................................................................................................................................58
Starting Over: Eight Steps for Rebuilding Your Finances .....................................................................................59
Be Prepared for a Disaster ...................................................................................................................................60               Visit our Web site at
Chapter 12 • Help for the Unemployed
Job Loss ...............................................................................................................................................................61
Receiving Unemployment Benefits.......................................................................................................................62
What to Do When Layoffs Loom...........................................................................................................................63
Health Insurance Options After a Job Loss ..........................................................................................................64
                    Oklahoma Society of CPAs

                                       Teaching Kids about Money:
                                       Wants vs. Needs
                                                hildren understand the power of spending money         choice made. They gave up the opportunity of having
                                                long before they grasp the concepts of earning,        the ice cream when they chose to buy the toy because
                                                saving and investing. So, in order to build a solid    they could not buy both with their money. Purchasing the
                                       financial foundation, it’s important for them to understand     ice cream cone is called an opportunity cost. It’s what
                                       the difference between needs and wants.                         they gave up in order to buy the toy. Therefore, making
                                                                                                       decisions is not free.
                                            Needs are things you must have in order to
   360 Degrees of Financial Literacy

                                       survive. Food, water, clothing and shelter are all needs.            Have your children go through advertisements in the
                                       A want is something you would like to have, but it is not       newspaper and pick out five items that are family needs
                                       necessary for your survival. Books, CDs and toys are all        and five items that are family wants. Then, give them
                                       wants. Wants make life more enjoyable, but they are not         $100 in fake money to “spend” on these items. After they
                                       necessary for survival.                                         have finished “shopping” sit down and ask to see the
                                                                                                       needs and wants items purchased. Are they truly wants
                                             Children also need to understand the concept of           or needs? Did they run out of money before all 10 items
                                       scarcity, which means they have unlimited wants and             were purchased? If so, explain to them that they just
                                       limited resources to meet those wants. Learning “we             experienced scarcity. They didn’t have enough money to
                                       can’t have everything” is a valuable lesson because it          purchase all the items on the list.
                                       helps them understand why we must make good choices.
                                       Scarcity requires people to make choices.                            Share an experience with scarcity that you had to
                                                                                                       face as a grown-up and encourage discussion about the
                                             Making choices — is it really free? The answer is         issue between your children.
                                       no. Each time we make a choice, we give up something.
                                       If your children have $10, they can’t purchase an $8 toy             From: “How to Raise a Financially Fit Child,” a guide
                                       and a $4 ice cream cone; they must choose between               developed by the Oklahoma Society of CPAs and the
                                       the two. If they decide to purchase the toy, they cannot        Oklahoma Council on Economic Education. It’s available
                                       purchase the ice cream cone. Purchasing the toy is the          for download at

                                       Allowance: To Give or Not to Give
                                                he question of allowance is often raised by parents              preschooler can make his or her bed and pick
                                                and children alike. While it is a personal decision,             up playthings. Have a list of “little jobs” that small
                                                both giving an allowance and having work income                  hands can do to earn a dime or a quarter. Provide
                                       seems to work best.                                                       a piggy bank for savings and little sheets for easy
                                              Start by establishing a base allowance for each child              recordkeeping.
                                       for doing required chores. Then if the child wants more
                                                                                                            •    Don’t buy toys on demand. Help your children
                                       money, create a list of jobs the child can perform if he or
                                                                                                                 look forward to holidays for special items.
                                       she wants to earn additional money. For each item on the
                                       list, there should be a set amount of compensation and a             •    Let your children learn about actions and
                                       complete description of the work to be done.                              consequences. Having possessions brings
                                                                                                                 responsibilities, such as putting away a game to
                                            Help children form good work habits and job skills                   avoid losing pieces.
                                       by keeping weekly and monthly records. List the dates
                                       jobs are assigned and completed as well as extra jobs                 As your children get older, begin letting them
                                       available to increase earnings and savings. Also keep           make more decisions on their own. Encourage them to
                                       track of progress toward reaching your child’s savings          comparison shop. Also, give a specific allowance and
                                       goal. Parental goals when paying allowance should be to:        stick to it. Encourage them to get a part-time job or pick up
                                                                                                       additional household duties to earn more money.
                                            1.   Shift some spending decisions to the child;
                                                                                                              Discuss with your children the work skills they have
                                            2.   Eliminate or dramatically reduce the child’s          already developed. Help them explore how they could use
                                                 need to ask for money; and                            the skills they already have to earn income. Have your
                                                                                                       children take out four pieces of blank paper and draw
                                            3.   Provide a method for learning about                   illustrations describing possible jobs they could do now to
                                                 accumulating money and developing proper              earn income. Then, discuss a plan for them to earn that
                                                 spending techniques.                                  income.
  Created by the American
  Institute of Certified Public                                                                            From: “How to Raise a Financially Fit Child,” a guide
  Accountants and                      Here are some tips for getting started:                         developed by the Oklahoma Society of CPAs and the
  the California Society of                                                                            Oklahoma Council on Economic Education. It’s available for
  Certified Public Accountants              •    Assign basic household chores. Even a
                                                                                                       download at

2 • 2010 Financial Fitness Kit
                                                                                               Chapter 1 • Teaching Kids about Money

You Can Bank on It: Savings Add

        eaching your children money management skills is                •    Talk to your children about the family
        a critical part of their future. Good habits start early             budget. Include a discussion on wants and
        in life and the savings habit brings lifelong benefits.              needs. Reinforce the learning process by
                                                                             budgeting for a family outing or purchase.
     Here are some simple suggestions from the                          •    Involve children in spending decisions
American Bankers Association Educational Foundation to                       by holding family meetings to talk about
teach your kids the value of money:                                          savings. This gives them practical experience
                                                                             and allows them to be active participants in the
    •      Teach your children the importance of                             buying and saving process.
           saving money. To make their savings visible
           and real, have them build up savings in a piggy             Talk with your children about how people carry the
           bank.                                                   money they plan to spend and how they often keep this
                                                                   money in their pockets. Discuss why they do not carry the
    •      Visit the bank with your children to let them           money they plan to save in their pockets.
           see how the bank works. Call in advance and
           a bank employee may arrange a tour for your                   Also, discuss the advantages and disadvantages of
           children. Encourage them to ask questions.              saving money in various locations like a wallet, a dresser,
    •      Help them open their own savings accounts               a piggy bank or bank account. For each, ask your
           and make deposits regularly. Many banks                 children:
           offer no-fee and no-minimum balance
           accounts for children. If your bank does                     •    “Is this place big enough to hold your money?”
           not have children’s accounts, ask if special
           arrangements can be made.                                    •    “Can you get money out easily when you want
    •      While many children know money doesn’t
           grow on trees, they may think it comes
                                                                        •    “Will the money be safe there?”
           out of a wall. Show them how an automated
           teller machine (ATM) works and help them
                                                                        •    “Will you spend the money freely without
           understand that to take money out of the bank,
                                                                             thinking about it or planning for it?
           you must put it in first.
    •      Kids love to get mail, so keep an eye out for                From: “How to Raise a Financially Fit Child,” a guide
           their statements, which will help them see the          developed by the Oklahoma Society of CPAs and the
           gradual effects of time and interest on their           Oklahoma Council on Economic Education. It’s available
           balances.                                               for download at

                                                                                                 Visit our Web site at • 3
       Oklahoma Society of CPAs

 Create a Budget and Track Your Child’s

    s tomorrow’s allowance already spent? Creating a budget can help                At first, children may perceive budgets as restrictive; but, teaching
    your children learn how to better manage money and save for future          them to budget early will help them create financial freedom in the future.
    purchases. Simply put, a budget is a plan for coordinating income and
 expenses. Budgets are not one-size-fits-all; their structure depends upon             Show your children the family budget or a sample list of everything
 spending priorities and savings goals.                                         the family must pay for each month. Talk about each item on the list, why
                                                                                it’s there and how you decide how much to spend on it. Talk about the
      Have your children analyze their current spending and saving habits       importance of staying within budget and what a valuable tool a budget is
 by creating a budget. Be sure to ask them: What are you spending the           for spending money wisely.
 most money on? Are you spending your money on necessary items? Are
 you on target for your savings goal? What items can you start cutting              Encourage your children to make their own budgets, using the
 back on? Using the feedback from these questions, help them rework a           suggested model on this page.
 budget with their saving goals in mind. But, remember to keep it realistic
 and simple. Use the sample budget at the right to help your children start          From: “How to Raise a Financially Fit Child,” a guide developed by
 the budgeting process.                                                         the Oklahoma Society of CPAs and the Oklahoma Council on Economic
                                                                                Education. It’s available for download at

                                                                        Budget Worksheet
                                                                              Planned Amount             Actual Amount                Difference
                                  Income (after taxes)
                                  Other: (birthday cash, etc.)
                                  (A) Total Income

                                  Saving for:
                                  Saving for:
                                  (B) Total Savings

                                  Fixed Expenses
                                  Cell Phone
                                  (C)Total Fixed Expenses

                                  Flexible Expenses
                                  Food (lunch/snacks, etc.)
                                  Clothing and Accessories
                                  School Supplies
                                  (D) Total Flexible Expenses

4 • 2010 Financial Fitness Kit
                                                                                        Chapter 1 • Teaching Kids about Money

Build Their Future By
Teaching Them to Invest
          hile savings is a good tool for reaching our       investments generally pay greater returns than savings
          financial goals, we should also start thinking     accounts. Explain that when they are buying stock, they
          about investing, especially when large amounts     are buying a share of ownership in the company. Have
of money are needed for goals. Investments tend to pay       your children list companies that may be listed on the
higher returns on money, which means we earn more on         stock market.
what we invest than on what we save.
                                                                   Using the company symbols you selected, have your
     Investing refers to the purchase of assets such         children check the business section of a newspaper to
as stocks or bonds. These purchases are designed to          find the current price of stocks for those companies. Tell
produce more money or wealth for the investor. Generally,    them to pretend they have $25,000 to buy stocks from
investments have greater risk than savings accounts.         the list provided. Have them list the company name, stock
Because there is more risk, we need to make informed         symbol, stock price, number of shares purchased and the
choices and research our options before we invest our        total amount of each stock purchase. Be sure the total of
money. Remember the old saying, “If it sounds too good       all stocks purchased does not exceed the hypothetical
to be true, then it probably is!” Good investment choices    $25,000. Ask your children to explain their purchases.
are important for building a financial future.
                                                                   Finally, have them find the price change for each
      To give your children a hands-on look into the world   stock and convert the decimal to a fraction. Have them
of investing, enroll them in the Oklahoma Stock Market       identify the stocks with the greatest and least changes
Game™, available online at                 in price. Discuss any possible reasons for changes in
                                                             those prices. Encourage your children to track stock price
      The OKSMG is a hands-on, educational game for          changes for the next month, calculating price changes for
fourth- through 12th-graders. Children receive a pretend     that time period.
investment amount (usually $100,000) to invest in stocks
listed in the New York, NASDAQ and American Stock                 From: “How to Raise a Financially Fit Child,” a guide
Exchanges. Using the Internet throughout the 10-week         developed by the Oklahoma Society of CPAs and the
period, children can buy, sell and research stocks, follow   Oklahoma Council on Economic Education. It’s available
their portfolios and monitor their regional and state        for download at

       Have your children review companies on the stock
exchange list and pick 10 familiar to your children. Make
a list of those companies and their respective symbols.
Ask your children if they know anyone who is retired.
Explain how many people who are retired or planning to
retire have invested in the stock market because

                                                                                           Visit our Web site at • 5
      Oklahoma Society of CPAs

                             Managing Money for College
                             This chapter is sponsored by Oklahoma Money Matters.

                             O         klahoma Money Matters (OKMM) is a personal finance education
                                       program that helps K-12 schools, higher education campuses,
                                       businesses and community partners develop or expand educational
                             services that empower Oklahomans to make positive financial choices.


                                •   Offers money management tools for freshman orientation classes;

                                •   Provides instructional materials and teaching support for campus and
                                    community workshops covering a wide variety of topics, including money
                                    management, saving for college and paying for college;

                                •   Develops personal finance content for Web sites and newsletters;

                                •   Offers educational resources and training for fellow service providers and

                                •   Locates supplemental materials and activities for K-12 and collegiate
                                    classroom instruction; and

                                •   Promotes other organizations’ financial education services and activities.

                                 An initiative of the Oklahoma Guaranteed Student Loan Program and
                             Oklahoma State Regents for Higher Education, OKMM offers information,
                             resources, and a variety of services to educate students, adults and families about
                             managing personal finances, saving, consumer credit, financial aid and student
                             loan management.

                                 OKMM can help you develop a customized plan to highlight financial
                             education through programming, event planning, material distribution, workshops,
                             Web sites and newsletters, among other projects. The many services OKMM
                             provides to students, schools, businesses and community organizations include
                             free personal finance workshops, train-the-trainer teaching support, and print and
                             online financial literacy materials, to name a few.

                             Oklahoma Money Matters (OKMM)
                             Web site:
                             Phone: (800) 970-OKMM

6 • (800) 970-OKMM /
                                                                                  Chapter 2 • Managing Money for College

E        ver feel just a little bit overwhelmed by the thought of saving and paying for college? If
         you’re like most parents, your answer is probably yes.

         If you’re wondering how to pay for school or where to look for money, don’t worry! In
Oklahoma, there are several resources available to help you and your child plan for and manage the
cost of earning a college degree.

Save for college.
    Next to saving for retirement, one of your biggest financial challenges is likely to be saving for
your child’s education. Although saving for higher education seems difficult, the key to success is
saving early and often.

    If your child is still in diapers, congratulations! Before baby can even crawl, walk or talk is the
best time to start saving. With many years before your little one begins college, there’s a magical
component on your side: compounding interest.

     If you’re getting a late start, have no fear! Despite what you may have heard, there’s still value
in saving for college. Remember, every dollar you save is one less dollar you or your child may need
to borrow to earn a degree. Every little bit helps.

Let it add up.
    Not sure you can afford to save for school? You can’t afford not to! Take a look at the chart
below to see how minimal amounts of money each month can add up to big savings.

     As you can see, contributing $50 a month starting at age 10 can give your child nearly $6,000
toward educational expenses. By sacrificing one or two meals out per month, renting videos instead
of going to the movies or making other small changes, you CAN afford to save for your child’s
educational goals.

                                Savings Worksheet
                                                            Savings Per Month
   Age Saving Begins                           $20                $30             $50          $100
   Birth                                   $6,984            $10,476         $17,460       $34,920
   Age 5                                   $4,382             $6,573         $10,955       $21,911
   Age 10                                  $2,355             $3,532           $5,887      $11,774
   Age 15                                     $785            $1,163           $1,938        $3,875

                                                                        / (800) 970-OKMM • 7
      Oklahoma Society of CPAs

                             Set a goal.
                                 It’s hard to hit a savings goal if you don’t know what it is. Before determining how much you
                             can or need to contribute to the goal, figure out how much money your child will need to attend
                             school. Check out for information about the average cost to attend one of
                             Oklahoma’s many public colleges or universities.

                                 While there, encourage your child to create an online account, which allows students to
                             bookmark favorite colleges and build a personal portfolio of grades and applications.

                                  Also, consider using Sallie Mae’s Education Investment Planner to stay on track when saving
                             for your child’s future:

                             Begin with a budget.
                                 The key to making any savings goal work is to make sure it’s a priority in your monthly budget.
                             Be sure you consistently allow for funds to contribute to your college savings goal. Want to make
                             sure $50 is added each month? Add that money to your chosen savings vehicle before you have a
                             chance to spend it. You can’t spend what you don’t have.

                                  You may find it necessary to cut back on other expenses in order to save for the future. Look for
                             ways to embrace a more frugal lifestyle. Finding ways to lower expenses can be fun and meaningful
                             if you tackle it as a family. Check out Web sites, blogs and newsletters for easy ways to cut back and
                             apply those savings to your child’s college education fund.

                                 Here are a few cost-cutting options you may want to consider:

                                 •    Rent movies and borrow magazines and books from the library instead of purchasing them.

                                 •    Host potluck game nights to connect with friends and family instead of a night out on the

                                 •    Cook in bulk and freeze the leftovers.

                                 •    Avoid shopping as entertainment.

                                 •    Learn a new trade, like car repair or sewing, to reduce the need to pay experts for their

8 • (800) 970-OKMM /
                                                                                  Chapter 2 • Managing Money for College

Popular College Savings

        ow that you have a savings goal worked into your budget, there are several ways to
        build a college fund. Shop around to find the plan that’s right for you (check out www. to get the ball rolling). Two common methods are described below.

Oklahoma College Savings Plan                                                                                Q: If my child
     Contributions to Oklahoma’s 529 College Savings Plan grow tax-free, are deductible from your
state taxes (up to a certain level) and can be deducted from your paycheck by your employer.
                                                                                                             doesn’t go to
                                                                                                             college, what
     In addition, 529 plans have no income requirements or annual contribution limit, and if a              happens to the
beneficiary decides not to attend a post-secondary institution, contributed funds can be transferred
to another eligible beneficiary. The program also includes many investment options and the flexibility       money in my
to use your savings at higher education institutions across the United States and abroad.                      529 plan?
    For more information, call 877.654.7284 (toll-free) or visit

                                                                                                            A. You can transfer
Coverdell Education Savings Account                                                                           the account to
     A Coverdell Education Savings Account (ESA) is another option to consider. An ESA is a trust
or custodial account created to fund elementary, secondary and college education expenses. Annual
                                                                                                           another beneficiary
contributions, which grow tax-deferred, are limited to $2,000.                                                within the same
                                                                                                             family or you can
     The amount you can contribute to an ESA is determined by your income level. Contributed               withdraw the funds.
funds must be used by the time the student turns 30 or the earnings become taxable and a penalty
                                                                                                              If you withdraw
is applied. Learn more about Coverdell ESAs at
                                                                                                                the funds, be
Consider these important tips when saving for college.                                                       prepared to pay
                                                                                                               a tax penalty.
    •    Make your child contribute, too. Encourage your student to add gift money or income to the
                                                                                                             Consult your CPA
                                                                                                             or other qualified
    •    Look into other ways to save for college, like pre-paid tuition plans (currently offered by a     tax adviser for more
         few private Oklahoma schools) or rewards programs like Upromise (,                     information.
         to increase savings.

    •    Generally speaking, keep college savings accounts in the parent’s name to maximize the
         student’s eligibility for federal financial aid. Talk to your CPA or other qualified financial
         planner or tax adviser to determine what’s best for you.

Consider these important tips when paying for college.
    If you have a junior or senior heading to college soon, time may not be on your side. Don’t
panic! There’s still value in saving as much as you can during the time you have.

     Education after high school is an investment in the future. Fortunately, financial aid is available
to help almost everyone manage the cost. To be considered for federal financial aid, including
grants, scholarships, student loans and work-study, your family must complete the Free Application
for Federal Student Aid (FAFSA) after Jan. 1 each year aid is needed. You can apply online at www. or get a paper copy by calling 800.4.FED.AID (toll-free).

     One of the biggest mistakes families make is thinking they make too much money for their child
to receive any aid, so they don’t complete the FAFSA. Never assume your family makes too much
money to qualify for aid. Your child may qualify for federal work-study or other forms of financial aid,
like unsubsidized federal loans, which aren’t based on financial need. You never know unless you

                                                                       / (800) 970-OKMM • 9
      Oklahoma Society of CPAs

                                    Remember, the first “F” in FAFSA stands for “free”, so you should never have to pay to complete
                                and submit the FAFSA. Beware of businesses that offer to help you fill out this form for a fee.

                                     After you complete and return the FAFSA, your child will get a Student Aid Report (SAR).
                                Make sure your child reviews the SAR to ensure all the information is correct. The information from
                                the SAR will be sent to the school(s) listed on the FAFSA. Once all the application materials are
                                complete, the financial aid office(s) will let your child know what types of aid he or she is eligible to
                                receive. This is called an award letter and it may be sent via regular mail or e-mail. In this letter, your
                                child will be asked to accept or decline the awards offered and return the letter to the school.

                                     If you have a student in junior high or early high school, you have more time to plan and save
                                for their education. Be sure to check out Oklahoma’s Promise, a program that allows Oklahoma
      The Federal               students to earn free college tuition if they meet certain academic and conduct requirements in
                                high school. Students must apply for the program during the 8th, 9th or 10th grade, and their
  Family Education              family income may not exceed $50,000 at the time of application. For more information, visit www.
   Loan Program       
     (FFELP) offers                 Here’s some other important information you’ll want to consider when paying for school.
    three types of
    federal loans:                  •    Always go for free money first. When paying for college, take advantage of all grants,
                                         scholarship and college savings available to you before taking out a student loan.
       Subsidized Federal
    Stafford Loans are low-         •    Focus on federal. If you or your student must take out a loan, exhaust all federal loan
   interest loans based on               options before turning to “private” or “alternative” loans, which can have higher interest
   financial need. Interest              rates and fewer flexible repayment options.
     is paid by the federal
  government while you’re           •    Borrow only what’s needed to pay for school. Before accepting a loan, make sure you
  attending school at least              and your child know exactly how much is needed to cover school expenses, which includes
      half-time, during the              basic living expenses. Students are often offered more loan funds from outside sources
   six-month grace period                than they actually need to pay their school expenses. Be cautious in pursuing additional
  following graduation or a              loans outside those offered by the financial aid office.
  drop to less than half-time
   enrollment, and during           •    Keep your child’s future career in mind. A good rule of thumb is to make sure student
  specified loan deferment               loan payments won’t exceed eight percent of your child’s first-year expected monthly
                                         income after graduation. The interactive debt/salary wizard at
     Unsubsidized Federal                can help your family figure out how much to borrow based on future expected earnings or
    Stafford Loans are low-              help you determine the salary your child will need to comfortably repay student loan debt.
  interest loans that aren’t
  based on financial need.          •    Encourage your child to work. The more money your student can earn to pay for college,
  You’re responsible for all             the less money he or she will have to borrow and pay back later, plus interest.
    interest accrued from
      the date the loan is          •    Once enrolled, your student should examine his or her financial aid needs each
    disbursed. This includes             semester and adjust future borrowing accordingly. Some students struggle to make
  the time that you attend               ends meet, while others have more student loan money than needed; encourage your child
  school, during the grace               to decide each time to borrow only what is needed to pay for school.
    period and during any
   type of loan deferment.          •    If it’s an option, encourage your child to pay the interest accrued on unsubsidized
                                         loans while in school. These quarterly payments are usually affordable, even on a tight
   Federal PLUS and Grad
                                         budget, and can save hundreds of dollars over the life of the loan.
      PLUS Loans are low-
    interest loans made to
  graduate or professional
       students and the
    biological or adoptive
    parents of dependent
  undergraduate students.
   PLUS loans aren’t based
    on financial need. The
  borrower is responsible for
      all accrued interest.

10 • (800) 970-OKMM /
                                                                               Chapter 2 • Managing Money for College

                Sample College Budget Worksheet
                                  Amount Budgeted                    Actual Amount
    Student Loans
    Support from Parents
    Job Earnings
    Other Income

                                   Amount Budgeted                   Actual Amount
    Tuition and Fees
    Books and Supplies
    Cell Phone/Internet
    Car Payment
    Auto Maintenance
    (Car, Home, Life)
    Credit Cards

   Difference Between Income and Expenses?

If your family has questions about planning, preparing and paying for college, the following
resources can help.
    •     Oklahoma Guaranteed Student Loan Program,;
    •     UCanGo2,;
    •     Oklahoma State Regents for Higher Education,; and
    •     Oklahoma Money Matters,

                                                                   / (800) 970-OKMM • 11
                    Oklahoma Society of CPAs

                                       Getting Started: Establishing a
                                       Financial Safety Net

                                           n times of crisis, you don’t want to be shaking pennies    source of funds in a time of crisis. Borrowed money,
                                           out of a piggy bank. Having a financial safety net         however, has to be paid back (often at high interest rates).
                                           in place can ensure that you’re protected when a           As a result, you shouldn’t consider lenders as a primary
                                       financial emergency arises. One way to accomplish this         source for your cash reserve.
                                       is by setting up a cash reserve, a pool of readily available
                                       funds that can help you meet emergency or highly urgent
                                                                                                      Where to Keep Your Cash
   360 Degrees of Financial Literacy

                                       short-term needs.
                                       How much is enough?                                                 You’ll want to make sure that your cash reserve is
                                             Most financial professionals suggest that you            readily available when you need it. However, an FDIC-
                                       have three to six months’ worth of living expenses             insured, low-interest savings account isn’t your only option.
                                       in your cash reserve. The actual amount, however,              There are several excellent alternatives, each with unique
                                       should be based on your particular circumstances. Do           advantages. For example, money market accounts and
                                       you have a mortgage? Do you have short-term and                short-term CDs typically offer higher interest rates than
                                       long-term disability protection? Are you paying for your       savings accounts, with little (if any) increased risk.
                                       child’s orthodontics? Are you making car payments?
                                       Other factors you need to consider include your job                 It’s important to note that certain fixed-term
                                       security, health and income. The bottom line: Without an       investment vehicles (i.e., those that pledge to return your
                                       emergency fund, a period of crisis (e.g., unemployment,        principal plus interest on a given date), such as CDs
                                       disability) could be financially devastating.                  and Treasury securities, impose a significant penalty for
                                                                                                      early withdrawals. So, if you’re going to use fixed-term
                                                                                                      investments as part of your cash reserve, you’ll want to be
                                       Building Your Cash Reserve                                     sure to ladder (stagger) their maturity dates over a short
                                             If you haven’t established a cash reserve, or if the     period of time (e.g., two to five months). This will ensure
                                       one you have is inadequate, you can take several steps         the availability of funds, without penalty, to meet sudden
                                       to eliminate the shortfall:                                    financial needs.

                                            •    Save aggressively: If available, use payroll
                                                 deduction at work; budget your savings as part       Review Your Cash Reserve
                                                 of regular household expenses
                                            •    Reduce your discretionary spending (e.g.,                  Your personal and financial circumstances change
                                                 eating out, movies, lottery tickets)                 often — a new child comes along, an aging parent
                                                                                                      becomes more dependent or a larger home brings
                                            •    Use current or liquid assets (those that are         increased expenses. Because your cash reserve is the first
                                                 cash or are convertible to cash within a year)       line of protection against financial devastation, you should
                                                                                                      review it annually to make sure that it fits your current
                                            •    Use earnings from other investments (e.g.,           needs.
                                                 CDs, stocks, mutual funds)
                                                                                                            The 360 Degrees of Financial Literacy Web site
                                            •    Check out other resources (e.g., do you have         offers general information for managing personal finances
                                                 a cash value insurance policy that you can           and does not recommend specific financial actions. For
                                                 borrow from?)                                        financial advice tailored to your situation, please contact an
                                                                                                      expert such as a CPA or a personal financial advisor.
                                            A final note: Your credit line can be a secondary

  Created by the American
  Institute of Certified Public
  Accountants and
  the California Society of
  Certified Public Accountants

12 • 2010 Financial Fitness Kit
                                                                              Chapter 3 • Financial Tips for Starting Your Career

Evaluating a Job Offer

    f you’re considering changing jobs, you’re not              still be unhappy if the work environment doesn’t suit you.
    alone. Today, few people stay with one employer             Try to meet the individuals you will be closely working
    until retirement. It’s likely that at some point during     with. It may also be helpful to find out something about
your career, you’ll be looking for a new job. You may be        the company’s key executives and to read a copy of the
looking to make more money or seeking greater career            mission statement.
opportunities. Or, you may be forced to look for new
employment if your company restructures. Whatever
the reason, you’ll eventually be faced with an important        Deciding Whether to Accept
decision: When you receive an offer, should you take it?
You can find the job that’s right for you by following a few    the Job Offer
                                                                      You’ve spent a lot of time and energy researching
sensible steps.
                                                                and evaluating a potential job, but the hardest part is yet
                                                                to come: Now that you have received a job offer, you
How does the salary offer                                       must decide whether to accept it. Review the information
                                                                you’ve gathered. Think back to the interview, paying close
stack up?                                                       attention to your feelings and intuition about the company,
      What if the salary you’ve been offered is less than       the position and the people you came in contact with.
you expected? First, find out how frequently you can            Consider not only the salary and benefits you’ve been
expect performance reviews and/or pay increases. Expect         offered, but also the future opportunities you might expect
the company to increase your salary at least annually.          with the company. How strong is the company financially,
To fully evaluate the salary being offered, compare it          and is it part of a growing industry? Decide if you would
with the average pay of other professionals working in          be happy and excited working there. If you’re having
the same field. You can do this by talking to others who        trouble making a decision, make a list of the pros and
hold similar jobs, calling a recruiter (i.e., a headhunter),    cons. It may soon become clear whether the positives
or doing research at your local library or on the Internet.     outweigh the negatives, or vice versa.
The Bureau of Labor Statistics is a good source for this
                                                                Negotiating a Better Offer
Bonuses and Other Benefits                                            Sometimes you really want the job you’ve been
      Next, ask about bonuses, commissions and profit-          offered, but you find the salary, benefits or hours
sharing plans that can increase your total income. Find         unfavorable. In this case, it’s time to negotiate. You
out what benefits the company offers and how much               may be reluctant to negotiate because you fear that the
of the cost you’ll bear as an employee. Don’t overlook          company will rescind the offer or respond negatively.
the value of good employee benefits. They can add the           However, if you truly want the job but find the offer
equivalent of thousands of dollars to your base pay.            unacceptable, you may as well negotiate for a better offer
Ask to look over the benefits package available to new          rather than walk away from a great opportunity without
employees. Also, find out what opportunities exist for you      trying. The first step in negotiating is to tell your potential
to move up in the company. This includes determining            employer specifically what it is that you want. State
what the company’s goals are and the type of employee           the amount of money you want or the exact hours you
that the company values.                                        wish to work. Make it clear that if the company accepts
                                                                your terms, you are willing and able to accept its offer
Personal and Professional
Consequences                                                          What happens next? It’s possible that the company
                                                                will accept your counteroffer. Or, the company may
      Will you be better off financially if you take the job?
                                                                reject it, because either company policy does not allow
Will you work a lot of overtime, and is the scheduling          negotiation or the company is unwilling to move from its
somewhat flexible? Must you travel extensively? Consider        original offer. The company may make you a second offer,
the related costs of taking the job, including the cost         typically a compromise between its first offer and your
of transportation, new clothes, a cell phone, increased         counteroffer. In either case, the ball is back in your court.
day-care expenses and the cost of your spouse leaving           If you still can’t decide whether to take the job, ask for a
his or her job if you are required to relocate. Also, take      day or two to think about it. Take your time. Accepting a
a look at the company’s work environment. You may be            new job is a big step.
getting a good salary and great benefits, but you may

                                                                                               Visit our Web site at • 13
                    Oklahoma Society of CPAs

                                       Changing Jobs? Take Your
                                       401(k) and Roll It!

                                           f you’ve lost your job, or are changing jobs, you           sum includes employer stock.)
                                           may be wondering what to do with your 401(k) plan
                                           account. It’s important to understand your options.               If your vested balance is more than $5,000, you
                                                                                                       can leave your money in your employer’s plan until you
                                                                                                       reach normal retirement age. In many cases, however,
                                       What will I be entitled to?                                     your best bet will be to roll the funds over to an IRA.
   360 Degrees of Financial Literacy

                                             If you leave your job (voluntarily or involuntarily),     Your investment alternatives will be almost limitless, and
                                       you’ll be entitled to a distribution of your vested             you’ll have better control over when and how to take
                                       balance. Your vested balance always includes your               distributions from your account.
                                       own contributions (pretax, after-tax, and Roth), and any
                                       investment earnings on those amounts. It also includes                Your employer must allow you to make a direct
                                       employer contributions and earnings that have satisfied         rollover to an IRA. As the name suggests, in a direct
                                       your plan’s vesting schedule. In general, you must be           rollover the money passes directly from your 401(k)
                                       100 percent vested in employer contributions after three        plan account to your IRA. This is preferable to a “60-day
                                       years of service (“cliff vesting”), or you must gradually       rollover” — where you get the funds and then roll them
                                       vest 20 percent per year until you’re fully vested after six    over to an IRA yourself — because your employer has
                                       years (“graded vesting”). Some plans have 100 percent           to withhold 20 percent of the taxable portion of a 60-
                                       immediate vesting. You’ll also be 100 percent vested if         day rollover. You can still roll over the entire amount of
                                       you’ve reached your plan’s normal retirement age.               your distribution, but you’ll need to come up with the 20
                                                                                                       percent that’s been withheld from other funds until you
                                             Special vesting rules apply to certain plans, so make     recapture that amount when you file your income tax
                                       sure you understand how your particular plan’s vesting          return.
                                       schedule works. This is important, because you’ll forfeit
                                       any employer contributions that haven’t vested by the                If you really do need to use some of the money, and
                                       time you leave your job. If you’re on the cusp of vesting, it   you have nontaxable after-tax or Roth contributions in
                                       may make sense to wait a bit before leaving, if you have        your account, keep in mind that you may be able to roll
                                       that option.                                                    over the taxable portion of your distribution to an IRA, and
                                                                                                       take a distribution of just the nontaxable portion of your
                                       Don’t spend it, roll it!                                        account.
                                             While this pool of dollars may look attractive, don’t
                                       spend it unless you absolutely need to. If you take a full      What if I have an outstanding
                                       distribution you’ll be taxed, at ordinary income tax rates,
                                       on the entire value of your account except for any after-       plan loan?
                                       tax or Roth 401(k) contributions you’ve made. And, if                 In general, if you have an outstanding plan loan,
                                       you’re not yet age 55, an additional 10 percent penalty         you’ll need to pay it back, or the outstanding balance will
                                       may also apply to the taxable portion of your payout.           be taxed as if it had been distributed to you in cash. If you
                                       (Because of the five-year holding period requirement,           can’t pay the loan back before you leave, you’ll still have
                                       there won’t be any tax-free qualified distributions from        60 days to roll over the amount that’s been treated as a
                                       Roth 401(k) accounts until 2011 at the earliest. And            distribution to your IRA. Of course, you’ll need to come up
                                       special rules may apply if you receive a lump-sum               with the dollars from other sources.
                                       distribution and you were born before 1936, or if the lump

  Created by the American
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  Accountants and
  the California Society of
  Certified Public Accountants

14 • 2010 Financial Fitness Kit
                                                                            Chapter 3 • Financial Tips for Starting Your Career

Tips for Working in an Entry-Level

        fter you’ve graduated, maintaining your finances       are required to provide safeguards and help to the
        on an individual basis can be daunting. Fully          employees in terms of investments. The employee’s
        researching your employer’s retirement plan            contributions to a 401(k) or a 403(b) plan are always the
options will give you a greater understanding of what to       property of the employee and are not subject to use or
expect from your retirement plan and how to manage a           confiscation by the employer.
budget your savings.
                                                                     IRA: An employee may want to consider an IRA
                                                               if there is no employer-sponsored fund offered, if the
Where should you begin?                                        amounts available for deferral in the employer plan are
      It is always a good idea for new graduates to            less than the maximum the employee could defer, in
begin their retirement plans as soon as possible. The          which case the employee may want an IRA to supplement
performance of the markets should not be a deterrent,          the employer plan, or if the employee views the
because the investment can always be in cash or                employment as temporary or unstable for some reason.
something very safe. Studies and experience show               The choice of a standard IRA or a Roth comes down
that building a successful retirement nest egg is more         to tax considerations. A standard IRA is tax deductible
dependent on the saving discipline, which is much more         and its eventual proceeds are taxable. A ROTH is not
important than the investment performance. In addition         deductible, but its proceeds are not taxable, and its
the longer an amount is earning the more it will be worth      distribution requirements are more liberal. However, it is
at retirement.                                                 important to remember that the eligibility requirements
                                                               for an IRA, including the contribution limits, can be
     401(k) and 403(b): These plans are employer-              complicated in some cases.
sponsored plans. A 403(b) plan is one sponsored by a
tax exempt organization, although recent legislation now            Most of the time it makes sense to use the
allows tax exempt organizations to have 401(k) plans.          employer’s plan, though there will be situations (e.g.
                                                               temporary employment, unstable employer) where IRAs
    It is usually better for an employee to have an            are a better option. Above all though, remember to save
employer-sponsored plan, especially if the employer            early and save often, even in an entry-level position.
makes a contribution to the plan for the plan’s participant/
employees. In addition, as part of these plans, employers

                                                                                           Visit our Web site at • 15
                    Oklahoma Society of CPAs

                                       Buying a Car

                                       M                                                             Going to the Dealership
                                                 aybe you’ve always pictured yourself driving a
                                                 shiny red convertible. Or perhaps you’ve had a
                                                                                                           Armed with your target price, you should be ready to
                                                 recent addition to the family and you’re looking
                                                                                                     begin shopping around for the best purchase price. Try to
                                       for the practicality of a minivan. Whatever the reason,
                                                                                                     visit more than one dealership, since prices vary. At the
                                       you’re in the market for a new car. Here are some tips to
                                                                                                     dealership, you’ll want to be sure to negotiate, keeping in
                                       help make the car-buying process a bit easier.
                                                                                                     mind the following tips:

                                       Choosing a Car                                                     •    Don’t set your sights on just one car model.
   360 Degrees of Financial Literacy

                                            As you try to decide what type of car you want to                  Many manufacturers offer similar models,
                                       buy, consider the following:                                            and one may be much more affordable than
                                            •    If you already have a car, what do you like and
                                                 dislike about it?                                        •    If you’re trading in your old car, don’t discuss
                                                                                                               the trade-in price until you have established a
                                            •    Do you want a lot of passenger space?                         purchase price for the new car. You don’t want
                                                                                                               to negate a good purchase deal by accepting
                                            •    Do you want two doors or four?                                far less than your trade-in vehicle is worth.

                                            •    Do you prefer a standard or an automatic                 •    If the dealer isn’t willing to give you a deal that
                                                 transmission?                                                 you’re happy with, don’t hesitate to take your
                                                                                                               business elsewhere.
                                            •    How much does prestige matter?
                                                                                                          •    If you want to avoid negotiating over price, you
                                            •    What about better fuel economy?                               may want to consider a dealer with a no-haggle
                                            •    Is your heart set on purchasing a new car, or
                                                 are you willing to settle for a well-maintained
                                                 used one?
                                                                                                     Closing the Deal
                                                                                                           After you and the dealer have settled on a purchase
                                                                                                     price, you may need to sign some preliminary paperwork
                                            •    How much can you afford to spend?
                                                                                                     and give the dealer a deposit. If you need a loan to
                                                                                                     purchase the car, you’ll also need to obtain financing. If
                                             You’ll also want to keep in mind such factors as
                                                                                                     you don’t mind making financing arrangements ahead
                                       resale value, maintenance and insurance costs. It may
                                                                                                     of time, many banks, credit unions and auto clubs offer
                                       be helpful to consult one of the many car-buying guides
                                                                                                     favorable interest rates on car loans.
                                       to help you choose a vehicle and give you information on
                                       pricing, reliability and safety. Many are available online.
                                                                                                          At the dealership, you have a couple of financing
                                                                                                     options. First, you’ll want to ask about special financing
                                             Once you have narrowed down your choices, you’ll
                                                                                                     programs available through the car manufacturer. These
                                       want to visit some dealerships and take those cars for a
                                                                                                     are usually the best deals, offering low interest rates.
                                       test-drive. When you get behind the wheel, ask yourself:
                                                                                                     Unfortunately, though, qualifying for these programs can
                                                                                                     be hard because special restrictions often apply (e.g.,
                                            •    Is there plenty of legroom and headroom?
                                                                                                     large down payment, limited payment terms).
                                            •    Is it easy to load passengers and cargo?
                                                                                                          You can also apply for a traditional car loan through
                                                                                                     the dealer, who makes additional money by arranging
                                            •    Is the seat comfortable?
                                                                                                     on-the-spot financing. But don’t assume you’re getting the
                                                                                                     best deal available. The interest rate on dealer-sponsored
                                            •    Is the control panel visible and accessible?
                                                                                                     loans is usually higher than the interest rate that you
                                                                                                     would receive on your own.
                                            •    Is there enough trunk space?
                                                                                                          Around this time, the dealer will try to sell you
                                            •    Does the car ride smoothly?
                                                                                                     extras such as an extended warranty, service contract
                                                                                                     or rustproofing. Watch out — these extras are expensive
                                            •    Does the car have good acceleration and
                                                                                                     and often overpriced. If you’re interested in purchasing
                                                                                                     them, be sure to negotiate a favorable price, or look into
                                                                                                     buying them elsewhere.
                                       Determining Your Target Price
                                             Once you’ve settled on a car model, you should               The dealer can also help you arrange proper
                                       do some research on the invoice price, including the          insurance coverage of your car and make sure that the
                                       cost of any options that you want. That way, you can          registration and plates are in order, or you can choose to
                                       negotiate the price based on the approximate cost of          do this yourself. In either case, once all the paperwork is
                                       the vehicle to the dealer, rather than try to bargain down    signed, the dealer will hand you the keys, and the car will
  Created by the American                                                                            be yours!
  Institute of Certified Public
                                       from the sticker price. Keep in mind that the dealer’s cost
  Accountants and                      is often less than the invoice price because of factory-
  the California Society of            to-dealer incentives. That’s why a good target price is
  Certified Public Accountants         approximately three percent above the invoice price,
                                       although this will vary depending on the car model.

16 • 2010 Financial Fitness Kit
                                                                                                     Chapter 4 • Money Tips for Military

Managing Your Money While
Serving Your Country

A                                                             During Active Duty
        lthough military pay has improved, most reservists
        earn more in their civilian job — making it
                                                                    Understand your financial protections. In 1940,
        financially difficult when they are called away
                                                              Congress passed the Soldiers and Sailors Civil Relief
on active duty. Here are some tips for managing your
                                                              Act. It remains the chief financial protection for service
finances while serving your country.
                                                              members today. When a soldier is called to active duty,
                                                              the law:
Before Being Called to Duty
                                                                   •    Bars evictions, when the rented housing costs
•    Build up savings. If you are a Reserve Component                   less than $1,200 per month.
     member, think ahead. Work on building an
     emergency fund which includes enough money to                 •    Prevents default judgments for failure to appear
     cover six months’ expense. This may prevent you                    in court in lawsuits and trials.
     and your family from experiencing undue hardship
     while you are called away.                                    •    Stays civil proceedings.

•    Create a financial plan. You know what your                   •    Caps interest rates on pre-existing loans,
     income is now, but it’s beneficial to create a budget              including mortgages, credit cards and personal
     for your new level of income. Check the current pay                loans to six percent during the period of
     for activated reservists through your command or                   military service. The protections start the day
     through the Defense Finance Accounting System.                     that active service begins and ends when
     You may want to consider how you or your family                    active duty is over. So the law buys time, not
     will handle the difference. Drawing on savings and                 forgiveness. Reservists called to active duty
     reducing expenses may help. Identify a trusted                     remain responsible for their mortgage, credit
     family member to pay bills. Someone will have to                   cards and other payments.
     handle your finances while you are away. For good
     measure, you may want to grant that person power
     of attorney.
                                                              A Mobilization Kit: Military and
•    Contact creditors. If you expect to make late
                                                                   Stick to the budget that you set before you left. The
     payments or miss payments due to hardship,               high cost of chatting with folks on the home front can
     you should contact your creditors to explain your        result in some unwieldy phone bills. The military provides
     circumstances. The Soldiers and Sailors Civil Relief     a set number of overseas calls. Use them to keep in
     Act (see below) may help you cap the interest you        touch with loved ones. The military also provides free e-
     are charged on loans and credit cards while you are      mail access to help soldiers stay in touch.
     away. Become familiar with military-provided help. All
     the services have financial counseling and legal help
     available for soldiers. Make use of these experts.       After Active Duty
                                                                   When you return, you don’t want to face bills, ruined
•    Contact your life insurance carrier. Your life           credit, even repossessions and foreclosure proceedings.
     insurance carrier may provide additional benefits        That’s why it’s even more important to plan for the future
     during active service. Call them to find out.            and to make sure that your finances and family are taken
                                                              care of while you’re gone.

                                                                                           Visit our Web site at • 17
                    Oklahoma Society of CPAs

                                       A Guide to Living Overseas

                                            t’s never easy to relocate to another country. But         waiting for assignment to Government Quarters or other
                                            soldiers and their families are provided with a number     permanent living accommodations.
                                            of allowances to ease the transition. Because the cost
                                       of living varies in different areas, the soldier should check
                                       with the Finance or Disbursing Office regarding rates and       Interim Housing Allowance
                                       limits.                                                              Interim Housing Allowance is designed to
                                                                                                       reimburse a member for expenses incurred for renting
                                                                                                       nongovernment family housing before the arrival of his or
                                       Overseas Housing Allowance                                      her dependents at a new permanent duty station.
   360 Degrees of Financial Literacy

                                              Overseas Housing Allowance (OHA) is paid to
                                       service members who live in private housing overseas.
                                       It includes rent and a utility/recurring maintenance            Evacuation Allowance
                                       allowance. OHA may not cover all housing and utility                 Evacuation Allowance is a per diem allowance
                                       costs if the rent is higher than the established rate ceiling   payable for dependents whenever they are evacuated
                                       or if utility and occupancy costs exceed the allowance.         from the vicinity of the soldier’s duty station to a safe

                                       Move-In Housing Allowance
                                             Move-In Housing Allowance (MIHA) is paid in lump-         CPA Mobilization Kit: Military
                                       sum supplemental payments when a member becomes
                                       eligible for Overseas Housing Allowance and incurs              and Reserves
                                       related expenses. MIHA consists of three supplemental                What kind of tax deductions am I eligible for
                                       payment components:                                             overseas?

                                            •    Rates: Rates are published in the Joint                     Military personal living overseas can take advantage
                                                 Federal Travel Regulation and reflect average         of a number of tax benefits. The include tax deductions
                                                 expenditures made by members to purchase              for:
                                                 household necessities for their residence.                  •     Combat pay;
                                                 Examples of such necessities are sinks, toilets,            •     Moving expenses;
                                                 light fixtures, kitchen cabinets, refrigerator and          •     Per diem;
                                                 stove (which sometimes are not provided in                  •     Car allowances;
                                                 overseas dwellings).                                        •     Legal assistance;
                                                                                                             •     Medical and dental care;
                                            •    Rent: This covers all rent-related expenses.                •     Life insurance;
                                                 Receipts are required. Examples are real                    •     Living allowances;
                                                 estate agent fees, redecoration fees and one-               •     Educational expenses for you and your
                                                 time lease taxes.                                                 dependents;
                                                                                                             •     Death expenses;
                                            •    Security: Security-related expenses are                     •     Defense counseling;
                                                 for members assigned to designated areas                    •     Disability;
                                                 where dwellings must be modified to minimize                •     Survivor and retirement protection; and
                                                 exposure to a terrorist or criminal threat.                 •     Roundtrip travel for dependents once a year.
                                                 Receipts are required. Qualifying areas and
                                                 allowable items are published in the Joint
                                                 Federal Travel Regulation.
                                                                                                       How do I file my tax returns
                                                                                                       while serving overseas?
                                       Cost of Living Allowance                                             The military provides one of the best free tax
                                                                                                       preparation assistance agencies, Volunteer Income Tax
                                             The Cost of Living Allowance (COLA) is authorized         Assistance (VITA). The IRS and some state tax agencies
                                       for the purpose of supplementing costs in certain high          also offer assistance.
                                       cost-of-living areas including Alaska and Hawaii. Foreign
                                       exchange rates also may affect the amount of the COLA                 VITA provides free tax-preparation assistance for
                                       received.                                                       both federal and state taxes to service members and
                                                                                                       their families worldwide. To find the location nearest
                                       Temporary Lodging Allowance                                     you, call (800) 829-1040. Members can file their returns
                                                                                                       electronically and select direct deposit so they can
                                            Temporary Lodging Allowance (TLA) partially
                                       reimburses members upon initial arrival or just prior to        expedite their return. Some state tax agencies also
                                       departing to overseas duty stations for expenses incurred       provide assistance for military families filing state income
                                       while occupying temporary quarters. It is payable for           tax returns.
                                       specific periods, generally not to exceed 60 days, while

  Created by the American
  Institute of Certified Public
  Accountants and
  the California Society of
  Certified Public Accountants

18 • 2010 Financial Fitness Kit
                                                                                                     Chapter 4 • Money Tips for Military

Maximizing Your Military Tax

      he Military Family Tax Relief Act of 2003 contains           •    Moving expenses;
      several provisions to assist military personnel. Take
      time to learn about them before tax time so that             •    Per diem;
you can take advantage of the benefits available to you.
                                                                   •    Legal assistance;

Capital Gain Exclusion for                                         •    Medical and dental care;
Home Sale                                                          •    Life insurance;
     Military and Foreign Service personnel can exclude
capital gains on a home sale, provided that the military           •    Living allowances, including mortgage interest
member used and lived in the home for two of the five                   and real estate taxes on your home, even if you
years it was owned. This change also is retroactive                     pay these expenses with your Basic Allowance
for home sales after 1997. Those who qualify have an                    for Subsistence;
extension to file amended tax returns.
                                                                   •    Educational expenses for you and your
Overnight Travel                                                        dependents;
     National Guard and Reserve personnel are provided
an above-the-line deduction for unreimbursed overnight             •    Death expenses including dependents’ funeral
travel expenses. This means that you don’t have to                      and travel costs to a burial site;
itemize your taxes to take advantage. This is effective for
tax years after 2002 and restrictions apply.                       •    Defense counseling;

                                                                   •    Disability, including payments resulting from
Dependent Care Assistance                                               direct military action;
     Military personnel are allowed to exclude dependent
care assistance from their gross income. This provision            •    Survivor and retirement protection; and
became effective for tax years after 2002.
                                                                   •    Roundtrip travel for dependents once a year.

Combat Zone Extension
      Those serving in a “combat zone” can delay filing       Death Benefits
and paying income taxes for up to 180 days after their             This provision doubles the amount your family
last day in that combat zone without charges for interest     receives upon your death to $12,000. It is exempt from
or penalties. This provision also prevents the state from     taxation and is retroactive to September 2001. The
taxing a nonresident military member’s compensation           Department of Defense will send refund checks to those
when computing the tax rate.                                  who are eligible. If you have paid taxes on a death
                                                              benefit, you should file an amended tax return.

Additional Exclusions                                               To learn more about Military family Tax Relief
     Military personnel can exclude a number of items         Act of 2003, go to
from their gross income on tax returns, including:            0,,id=118104,00.html.

     •    Combat pay;

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                    Oklahoma Society of CPAs

                                       A Guide to Your Retirement
                                       I’ve served my country, now                                              and a permanent and total disability. They are
                                                                                                                based on need and take into consideration income,
                                       what do I do?                                                            savings and other assets.
                                              You’ve completed your duty and now want to know
                                       what next step you should take. Getting a job may be                •    Free or low-cost medical care — VA hospitals
                                       first on your mind. Start with your local Department of                  and medical facilities offer free or low-cost medical
   360 Degrees of Financial Literacy

                                       Veterans Affairs to check out your options. You may have                 care.
                                       taken advantage of education benefits while in the military
                                       to maximize your ability to find a job after your service.
                                       However, the government also provides programs to
                                                                                                      How do I compute my retirement
                                       assist with employment after you retire. Here are some of
                                       the available employment benefits:
                                                                                                             If you entered active duty or on prior to September
                                                                                                      1980, retired pay amounts are determined by multiplying
                                            •    Troops to Teachers — This program trains             2.5 percent by your active duty base pay at the time of
                                                 and employs retired service personnel as             retirement. If you entered active duty after September 1980,
                                                 teachers and pays for their costs to receive         the base pay is the average of the highest 36 months of
                                                 accreditation. Teachers receive $5,000 to            active duty base pay received. Additionally, your initial cost-
                                                 supplement their education to teach and a            of-living adjustment will be reduced by one percent.
                                                 $10,000 bonus to teach in high-risk or low-
                                                 income schools for three years.
                                                                                                      Am I still eligible for insurance?
                                            •    VetFran — This benefit allows Veterans to                  You and your dependents are eligible for certain
                                                 buy a franchise with a down payment of 10            medical insurance through the VA. To assure you receive
                                                 percent or less of the initial franchise cost. The   your benefits, it’s a good idea to schedule a physical about
                                                 franchise covers the rest.                           120 days prior to retiring, as this may be the basis for future
                                                                                                      disability compensation claims. It’s also a good idea to get a
                                            •    Priority hiring — The federal government             certified copy of your medical records.
                                                 gives priority hiring opportunities to retired or
                                                 disabled service personnel.                               The VA provides a number of specific health programs:
                                                                                                           •   Agent Orange and Other Herbicides;
                                            •    Job training and placement — The local VA                 •   Alcohol/Drug Dependency Treatment;
                                                 provides job training and placement assistance.           •   Blind Veterans Services;
                                                                                                           •   Gulf War Syndrome and Related Illnesses; and
                                            •    Educational assistance — The Department                   •   Radiation Exposure.
                                                 of Veteran Affairs, Department of Labor and
                                                 the Department of Education all administer a              A number of life insurance policies are available through
                                                 number of educational assistance programs            the Armed Forces, so check with your local VA to find out
                                                 including the Montgomery GI Bill, the Veterans       which you qualify for and which would work best for you.
                                                 Educational Assistance Program, Veterans
                                                 Upward Bound and Veterans Employment and
                                                 Training. You may be able to take advantage          The Veterans Benefits Act of
                                                 of other scholarships, special loans and grants
                                                 outside the federal government as well.              2003
                                                                                                           The Veteran’s Benefits Act of 2003 introduced new and
                                                                                                      expanded benefits for disabled veterans, surviving spouses
                                       What benefits do I qualify for?                                and children.
                                            For personnel who receive an honorable or general
                                       discharge, three major benefit programs are available               The wide range of benefits includes allowing the VA
                                       through the Veterans Administration:                           to provide specially adapted housing grants to severely
                                                                                                      disabled service members prior to their separation from
                                            •    Disability compensation — You are                    active duty. It also increases grants for specially adapted
                                                 eligible only if you were wounded, injured           automobiles and housing. In addition, monthly educational
                                                 or ill while on active duty or if pre-existing       benefits for spouses and dependent children of a disabled
                                                 conditions worsened due to service. Disability       veteran have been increased. And the Act encourages
                                                 compensation is calculated based on the              entrepreneurship by expanding the Montgomery GI Bill to
                                                 seriousness of your disability.                      cover self-employment training classes.

                                            •    Veterans pensions — These are available if           	   To	find	out	more	about	the	provisions	of	the	Act,	visit	
                                                 you are a wartime veteran with limited income or Veterans also may get
                                                                                                      more information on eligibility by calling (800) 827-1000.

  Created by the American
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  Accountants and
  the California Society of
  Certified Public Accountants

20 • 2010 Financial Fitness Kit
                                                         Chapter 5 • Merging Money — Help for Couples and Marriage

Merging Your Money When You

         etting married is exciting, but it brings many             If you or your spouse does not qualify for a card
         challenges. One such challenge that you and          because of poor credit, and you are willing to give
         your spouse will have to face is how to merge        your spouse account privileges anyway, you can make
your finances. Planning carefully and communicating           your spouse an authorized user of your credit card. An
clearly are important, because the financial decisions that   authorized user is not a joint cardholder and is therefore
you make now can have a lasting impact on your future.        not liable for any amounts charged to the account. Also,
                                                              the account activity won’t show up on the authorized
                                                              user’s credit record. But remember, you remain
Discuss Your Financial Goals                                  responsible for the account.
      The first step in mapping out your financial future
together is to discuss your financial goals. Start by
making a list of your short-term goals (e.g., paying off      Insurance
wedding debt, new car, vacation) and long-term goals                If you and your spouse have separate health
(e.g., having children, your children’s college education,    insurance coverage, you’ll want to do a cost/benefit
retirement). Then, determine which goals are most             analysis of each plan to see if you should continue to
important to you. Once you’ve identified the goals that are   keep your health coverage separate. For example, if your
a priority, you can focus your energy on achieving them.      spouse’s health plan has a higher deductible and/or co-
                                                              payments or fewer benefits than those offered by your
                                                              plan, he or she may want to join your health plan instead.
Prepare a Budget                                              You’ll also want to compare the rate for one family plan
      Next, you should prepare a budget that lists all of     against the cost of two single plans.
your income and expenses over a certain time period
(e.g., monthly, annually). You can designate one spouse            It’s a good idea to examine your auto insurance
to be in charge of managing the budget, or you can take       coverage, too. If you and your spouse own separate cars,
turns keeping records and paying the bills. If both you       you may have different auto insurance carriers. Consider
and your spouse are going to be involved, make sure           pooling your auto insurance policies with one company;
that you develop a recordkeeping system that both of          many insurance companies will give you a discount if you
you understand. And remember to keep your records in          insure more than one car with them. If one of you has a
a joint filing system so that both of you can easily locate   poor driving record, however, make sure that changing
important documents.                                          companies won’t mean paying a higher premium.

      Begin by listing your sources of income (e.g.,
salaries and wages, interest, dividends). Then, list your     Employer-sponsored
expenses (it may be helpful to review several months
of entries in your checkbook and credit card bills). Add      Retirement Plans
them up and compare the two totals. Hopefully, you get a      If both you and your spouse participate in an employer-
positive number, meaning that you spend less than you         sponsored retirement plan, you should be aware of
earn. If not, review your expenses and see where you can      each plan’s characteristics. Review each plan together
cut down on your spending.                                    carefully and determine which plan provides the best
                                                              benefits. If you can afford it, you should each participate
                                                              to the maximum in your own plan. If your current cash
Bank Accounts — Separate or                                   flow is limited, you can make one plan the focus of your
                                                              retirement strategy. Here are some helpful tips:
     At some point, you and your spouse will have to               •    If both plans match contributions, determine
decide whether to combine your bank accounts or keep                    which plan offers the best match and take full
them separate. Maintaining a joint account does have                    advantage of it.
advantages, such as easier recordkeeping and lower
maintenance fees. However, it’s sometimes more difficult           •    Compare the vesting schedules for the
to keep track of how much money is in a joint account                   employer's matching contributions.
when two individuals have access to it. Of course, you
could avoid this problem by making sure that you tell              •    Compare the investment options offered by
each other every time you write a check or withdraw                     each plan — the more options you have, the
funds from the account. Or, you could always decide to                  more likely you are to find an investment mix
maintain separate accounts.                                             that suits your needs.

Credit Cards                                                       •    Find out whether the plans offer loans — if
                                                                        you plan to use any of your contributions for
     If you’re thinking about adding your name to your                  certain expenses (e.g., your children's college
spouse’s credit card accounts, think again. When you and                education, a down payment on a house), you
your spouse have joint credit, both of you will become                  may want to participate in the plan that has a
responsible for 100 percent of the credit card debt. In                 loan provision.
addition, if one of you has poor credit, it will negatively
impact the credit rating of the other.

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                    Oklahoma Society of CPAs

                                       Financial Tips for Unmarried

                                          f you are in a long-term, committed relationship,                    permitted, and of your IRAs.
                                          you have many of the same financial concerns as
                                          married couples. However, you lack many of the legal            •    Increase your savings now to replace the
                                       protections and advantages that married couples enjoy.                  spousal benefits your partner won’t receive
                                       Here are some tips that can help you and your partner                   from Social Security and your defined benefit
                                       stay on the road to financial security.                                 pension plan.
   360 Degrees of Financial Literacy

                                                                                                          •    Consider using life insurance to fund your
                                       Talk about Your Finances                                                partner’s retirement. As long as you can prove
                                             One of the first financial decisions you’ll have to               that you have an insurable interest, you can
                                       make as an unmarried couple is whether you should                       purchase an individual policy that names your
                                       handle your finances separately or together. Sit down with              partner as the beneficiary.
                                       your partner and discuss each other’s financial values,
                                       priorities and goals. Being open and honest now will help           Before you jump into planning jointly for retirement,
                                       you and your partner avoid the arguments about money          however, consider all of the possibilities. Although it may
                                       that plague most couples, married or unmarried.               seem unlikely now, your relationship could end before
                                                                                                     you retire, leaving one or both of you with inadequate
                                             How will you handle household expenses: separately      retirement income. In some cases, it may be wiser for
                                       or jointly? If you prefer a simple financial arrangement      each of you to plan for retirement on your own, even if
                                       and want to avoid some of the liability associated with       you plan on being together forever.
                                       joint accounts, you can keep your finances separate.
                                       One of you pays the bills and collects money from the
                                       other, or you each pay for certain things separately.         Make Estate Planning a
                                       However, for the sake of convenience, many unmarried
                                       couples opt to pay household expenses together, as most       Priority
                                       married couples do. Keep in mind that if you do open a              Proper estate planning is essential for unmarried
                                       joint checking account, you’ll each be responsible for all    couples. The laws that protect married couples don’t
                                       checks drawn (or overdrawn) on the account.                   apply to you. Without proper protection, your surviving
                                                                                                     partner could be ordered out of a house that you share,
                                             What about the rest of your income and other            and your next of kin could dispose of your estate however
                                       personal expenses? Will you pool all of your finances         they choose. Your partner could also be left out of
                                       or keep some income separate for your personal use?           financial and medical decisions if you become seriously ill
                                       Even if you decide to pay your bills together from a          or incapacitated. You owe it to yourself and your partner
                                       joint checking account, you can always keep separate          to ensure that your estate will be handled according to
                                       accounts for personal expenses.                               your wishes. Here are some ideas to consider:

                                            Finally, will you hold joint credit cards? You can            •    Consult an experienced estate planning
                                       open joint credit card accounts or add your partner to                  attorney to help you protect your assets, your
                                       an existing account as an authorized user. Remember,                    partner and your family.
                                       though, that with a joint account, you are each fully
                                       responsible for all charges on the account, including              •    Prepare durable power of attorneys for health
                                       charges that your partner made.                                         care and finances, and name your partner as
                                                                                                               your representative.

                                       Plan for Retirement                                                •    Execute a will if you want to leave certain
                                             As an unmarried couple, you and your partner don’t                property to your partner. Without it, he or she
                                       have to give up on planning for retirement together, but it             has no legal right to inherit your estate.
                                       may be harder for you than for married couples. Neither
                                       partner will be eligible for spousal benefits from two key         •    Sign a domestic partner agreement. It won’t
                                       sources of retirement income: Social Security and defined               replace your will, but it can support your will
                                       benefit pension plans (i.e., traditional pension plans).                and your partner’s right to jointly held property
                                       However, if you’re a little creative, there are other ways              by stating your wishes and intentions.
                                       that you can provide an adequate living for your partner in

                                            •    Designate your partner as the beneficiary of
                                                 your retirement plan (e.g., 401(k)s, 403(b)s), if

  Created by the American
  Institute of Certified Public
  Accountants and
  the California Society of
  Certified Public Accountants

22 • 2010 Financial Fitness Kit
                                                          Chapter 5 • Merging Money — Help for Couples and Marriage

Getting to “I Do” Despite
Investing Differences

   n a perfect world, both halves of a couple share the        of future returns, understanding how an investment has
   same investment goals and agree on the best way             typically behaved in the past or how it compares to other
   to try to reach them. It doesn’t always work that way,      investment possibilities could give you a better perspective
though. One spouse may be risk-averse, while the other         on why your spouse is interested in it.
may be comfortable investing more aggressively. How
can you bridge that gap?                                              Consider whether there are investments that are less
                                                               aggressive than what your spouse is proposing but that
First, define your goals.                                      still push you out of your comfort zone and might represent
                                                               a compromise position. For example, if you don’t want
     Making good investment decisions is difficult if you      to invest a large amount in a single stock, a mutual fund
don’t know what you’re investing for. Making sure you’re       that invests in that sector might be a way to compromise.
on the same page — or at least reading from the same           (Before investing in a mutual fund, carefully consider its
book — when it comes to financial goal-setting is the first    investment objective, risks, charges and expenses, which
step toward dealing jointly with investments.                  can be found in the prospectus available from the fund.
                                                               Read it carefully before investing.)
Make sure the game plan is
clear.                                                         What if you still can’t agree?
                                                                    You could consider investing a certain percentage
     Making sure both spouses know how and, equally            of your combined resources aggressively, an equal
importantly, why their savings are invested in a certain       percentage conservatively and a third percentage in a
way can help minimize marital blowback if investment           middle-ground choice. This would give each partner equal
choices don’t work out as anticipated. Second-guessing         input and control of the decision-making process, even if
rarely improves any relationship; making sure both of you      one has a larger balance in his or her individual account.
understand from the beginning why an investment was
chosen, as well as its risks and potential rewards, may             Another approach is to use separate asset allocations
help moderate the impulse to say “I told you so” later.        to balance competing interests. If both of you have
                                                               workplace retirement plans, the risk-taker could invest the
If you’re the more aggressive                                  largest portion of his or her plan in an aggressive choice
                                                               and put a smaller portion in an option with which a spouse
investor...                                                    is comfortable. The conservative partner would invest the
     Listen respectfully to your spouse’s concerns. You        bulk of his or her money in a relatively conservative choice
may need to provide additional information to increase his     and put a smaller piece in a more aggressive selection on
or her comfort level, but you won’t know what to supply if     which you both agree.
you automatically dismiss any objections.
                                                                     Or you could divide responsibility for specific goals.
      If you’re enthusiastic about an investment,              The more conservative half could be responsible for the
concealing potential pitfalls could make future joint          money that’s being saved for a house down payment in five
decisions more difficult if your credibility suffers because   years. The other partner could take charge of longer-term
of a loss. A more cautious spouse may help you                 goals that may benefit from taking greater risk in pursuit of
remember to assess the risks involved.                         potentially higher returns. You also could consider setting a
                                                               predetermined limit on how much the risk-taker can put into
      Remember that you can make changes in your               riskier investments.
portfolio gradually; you don’t have to become more
aggressive all at once. And if you’re an impulsive investor,         Finally, a neutral third party such as a qualified
try not to act until you can consult your partner — or be      financial advisor with some expertise and a dispassionate
prepared to face the consequences.                             view of the situation may be able to help work through

If you’re the more                                                   The 360 Degrees of Financial Literacy Web site
conservative investor...                                       offers general information for managing personal finances
                                                               and does not recommend specific financial actions. For
     If you’re unfamiliar with a specific investment,          financial advice tailored to your situation, please contact an
research it. Though past performance is no guarantee           expert such as a CPA or a personal financial advisor.

                                                                                            Visit our Web site at • 23
                    Oklahoma Society of CPAs

                                       After the Honeymoon: Insurance
                                       Advice for Newlyweds

                                                  ant to demonstrate your true love for your           and your spouse both have health insurance through
                                                  new spouse? Take out an insurance policy.            your employers, compare your coverage and costs to
                                                  Compared to planning your wedding and                determine which plan best fits your circumstances and
                                       honeymoon, buying insurance may not seem very                   finances.
                                       romantic but, in reality, coverage that protects you and
   360 Degrees of Financial Literacy

                                       your spouse against life’s unforeseen risks is an important
                                       part of planning your life together. The following provides     Auto Insurance – Cheaper for
                                       an overview of the types of insurance protection you
                                       should consider.                                                the Wedded
                                                                                                             You’ll also want to review your auto coverage.
                                                                                                       If you each have a car registered in your own name,
                                       Life Insurance – to Do or Not                                   combining them in one policy may qualify you for a
                                                                                                       multi-car discount from the insurer. Since the policy
                                       to Do                                                           rates for married drivers are usually lower than for
                                             Newlyweds with children from a previous marriage          single policyholders, be sure to notify your agent of
                                       and couples with only one working spouse should                 your marriage.
                                       seriously consider purchasing life insurance for both
                                       spouses. Young married couples who both work and
                                       have no children may not need life insurance now.               Home or Renter’s Insurance
                                       However, most CPAs agree that there are advantages to                Couples who rent should consider obtaining
                                       purchasing life insurance early in life. Buying coverage        renter’s insurance to cover the value of their
                                       while you’re young and healthy gives you the opportunity        possessions. As you and your new spouse combine
                                       to “lock in” favorable rates.                                   households, you’ll want to drop one policy, making
                                                                                                       sure that the remaining one covers both of your
                                            For most newlyweds, term insurance is the best way         possessions. A renter’s policy also includes liability
                                       to get adequate coverage at an affordable cost. Expect to       coverage. Your renter’s policy should become effective
                                       pay more for permanent life insurance, such as whole life,      as soon as you move in, particularly if you are not living
                                       which offers an investment component in addition to the         together yet.
                                       death benefit.
                                                                                                              The main purpose of homeowner’s insurance is
                                            If you already have life insurance, contact your agent     to protect your home and your personal property from
                                       to have the beneficiary named on your policies changed          fire, theft, and similar perils. In addition, homeowner’s
                                       to your new spouse.                                             insurance, like renter’s policies, provides liability
                                                                                                       coverage as well. Most lenders require homeowner’s
                                                                                                       insurance in order to get a mortgage.
                                       Disability Insurance – Better
                                                                                                            Keep in mind that since most homeowner’s and
                                       Safe than Sorry                                                 renter’s policies have a limit on jewelry coverage,
                                             As important as life insurance is, statistically, young   you may need to add a rider to your policy to cover
                                       married couples are more likely to be disabled than             expensive engagement and wedding rings.
                                       to die prematurely. That’s why disability insurance is
                                       so important. Disability insurance provides you with a
                                       monthly income in the event an accident, illness, or injury     Shop Around for the Best
                                       leaves you unable to work. You may be able to purchase
                                       long-term disability insurance from your employer. If not,      Coverage
                                       you can buy it on your own. Compare policies and select              Assessing and addressing your insurance needs
                                       the one that meets your needs at a premium you can              early on will help get your marriage off on the right
                                       afford. If finances are tight, you can do reduce the cost by    financial footing. To get started, you should carefully
                                       extending the waiting period before coverage kicks in.          review your financial situation and objectives.

                                                                                                             The 360 Degrees of Financial Literacy Web site
                                       Health Insurance – Don’t Be                                     offers general information for managing personal
                                                                                                       finances and does not recommend specific financial
                                       Without It                                                      actions. For financial advice tailored to your situation,
                                            Increased health care costs make it more critical          please contact an expert such as a CPA or a personal
                                       than ever for newlyweds to consolidate health insurance         financial advisor.
                                       so they are not paying for duplicate coverage. If you

  Created by the American
  Institute of Certified Public
  Accountants and
  the California Society of
  Certified Public Accountants

24 • 2010 Financial Fitness Kit
                                                           Chapter 6 • Home Ownership — Hints for the American Dream

Qualifying for a Mortgage In a
Tough Economy

        etting a mortgage has become increasingly              — but not to overdo it. How much is too much? As a
        challenging during recent months. One recent           general rule, you should use no more than 25 percent
        survey showed that 67 percent of those who             to 30 percent of your available credit. So, if you have a
applied for a mortgage found it more difficult. Although       $2,000 limit on a credit card, don’t carry more than a $500
banks now may have stricter lending rules, it is still         to $600 balance on that card.
possible to qualify for a mortgage. Here are a few steps
that may make it easier.
                                                               Clean Up Your Credit Record
                                                                     After the wave of loan defaults and foreclosures
Determine How Much You Can                                     that have taken place in recent months, lenders now
                                                               scrutinize loan applications to ensure that borrowers can
Afford                                                         afford to pay off the debt they are taking on. In particular,
      Before you apply for a mortgage, you should have         banks are looking for people with good credit scores.
a realistic idea of how much you can afford to pay. If you     Your credit score is based on your financial situation and
apply for a mortgage amount that fits within your budget,      how well you have managed your credit in the past. If
you’ll be more likely to have your mortgage application        you’re uncertain about your ability to get a mortgage, it’s
approved. This Web site provides calculators that you can      definitely a good idea to check your credit report from one
use to figure out potential mortgage loan payments.            of the three national credit bureaus. If your score is low,
                                                               you may have trouble getting a mortgage or you may face
Put Your Documents in Order                                    stricter loan terms.
       Lenders will want to know a great deal about
your financial history before they give you a loan, so         Repair Your Credit
it’s important to organize all the documents you’ll need             There are two particularly important steps you can
for your application. You may be asked for items such          take to improve your chances of obtaining a mortgage.
as pay stubs or other proof of income, tax returns             First, pay off some of your existing debts. If you have
and information on other debts, such as credit cards           several credit cards and have charged the maximum
or auto loans. The application process will be faster          amount on some or all of them, lenders will be more
and smoother if you have this documentation in order           reluctant to give you credit. It’s also important to get into
beforehand.                                                    the habit of paying your bills on time. Both of these simple
                                                               steps can raise your credit score and put you in a better
Use Your Existing Credit                                       position to get a loan.

     It’s a good idea to have some credit — whether it
takes the form of a credit card, auto loan or other debt

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       Oklahoma Society of CPAs

 Buying a Home

       here’s no doubt about it — owning a home is an exciting prospect.        that you want your home to have. Knowing what you want ahead of time
       After all, you’ve always dreamed of having a place that you could        will make the search for your dream home much easier. Here are some
       truly call your own. But buying a home can be stressful, especially      things to consider:
 when you’re buying one for the first time. Fortunately, knowing what to              •    Price of home and potential for appreciation;
 expect can make it a lot easier.                                                     •    Location or neighborhood;
                                                                                      •    Quality of construction, age, and condition of the property;
 How much can you afford?                                                             •
                                                                                           Style of home and lot size;
                                                                                           Number of bedrooms and bathrooms;
       According to a general rule of thumb, you can afford a house that              •    Quality of local schools;
 costs two and a half times your annual salary. But determining how                   •    Crime level of the area;
 much you can afford to spend on a house is not quite so simple. Since                •    Property taxes; and
 most people finance their home purchases, buying a house usually                     •    Proximity to shopping, schools, and work.
 means getting a mortgage. So, the amount you can afford to spend on a
 house is often tied to figuring out how large a mortgage you can afford.
 To figure this out, you’ll need to take into account your gross monthly        Making the Offer
 income, housing expenses, and any long-term debt. Try using one of                    Once you find a house, you’ll want to make an offer. Most home sale
 the many real estate and personal finance websites to help you with the        offers and counteroffers are made through an intermediary, such as a real
 calculations.                                                                  estate agent. All terms and conditions of the offer, no matter how minute,
                                                                                should be put in writing to avoid future problems. Typically, your attorney
                                                                                or real estate agent will prepare an offer to purchase for you to sign. You’ll
 Mortgage Prequalification vs.                                                  also include a nominal down payment, such as $500. If the seller accepts
 Preapproval                                                                    the offer to purchase, he or she will sign the contract, which will then
                                                                                become a binding agreement between you and the seller. For this reason,
       Once you have an idea of how much of a mortgage you can afford,          it’s a good idea to have your attorney review any offer to purchase before
 you’ll want to shop around and compare the mortgage rates and terms            you sign.
 that various lenders offer. When you find the right lender, find out how
 you can prequalify or get preapproval for a loan. Prequalifying gives you
 the lender’s estimate of how much you can borrow and in many cases             Other Details
 can be done over the phone, usually at no cost. Prequalification does not            Once the seller has accepted your offer, you, your real estate
 guarantee that the lender will grant you a loan, but it can give you a rough   agent or the mortgage lender will get busy completing procedures and
 idea of where you stand. If you’re really serious about buying, however,       documents necessary to finalize the purchase. These include finalizing
 you’ll probably want to get preapproved for a loan. Preapproval is when        the mortgage loan, appraising the house, surveying the property, and
 the lender, after verifying your income and performing a credit check, lets    getting homeowners insurance. Typically, you would have made your
 you know exactly how much you can borrow. This involves completing an          offer contingent upon the satisfactory completion of a home inspection, so
 application, revealing your financial information, and paying a fee.           now’s the time to get this done as well.

       It’s important to note that the mortgage you qualify for or are
 approved for is not always what you can actually afford. Before signing        The Closing
 any loan paperwork, take an honest look at your lifestyle, standard of               The closing meeting, also known as a title closing or settlement,
 living, and spending habits to make sure that your mortgage payment            can be a tedious process — but when it’s over, the house is yours! To
 won’t be beyond your means.                                                    make sure the closing goes smoothly, some or all of the following people
                                                                                should be present: the seller and/or the seller’s attorney, your attorney,
                                                                                the closing agent (a real estate attorney or the representative of a title
 Should you use a real estate agent or                                          company or mortgage lender) and both your real estate agent and the
 broker?                                                                        seller’s.
      A knowledgeable real estate agent or buyer’s broker can guide                  At the closing, you’ll be required to sign the following paperwork:
 you through the process of buying a home and make the process much
 easier. This assistance can be especially helpful to a first-time home              •    Promissory note: This spells out the amount and repayment
 buyer. In particular, an agent or broker can:                                            terms of your mortgage loan.
      •     Help you determine your housing needs;
      •     Show you properties and neighborhoods in your price range;               •    Mortgage: This gives the lender a lien against the property.
      •     Suggest sources and techniques for financing;
      •     Prepare and present an offer to purchase;                                •    Truth-in-lending disclosure: This tells you exactly how much
      •     Act as an intermediary in negotiations;                                       you will pay over the life of your mortgage, including the total
      •     Recommend professionals whose services you may need (e.g.,                    amount of interest you'll pay.
            lawyers, mortgage brokers, title professionals, inspectors);
      •     Provide insight into neighborhoods and market activity; and              •    HUD-1 settlement statement: This details the cash flows
      •     Disclose positive and negative aspects of properties you're                   among the buyer, seller, lender, and other parties to the
            considering.                                                                  transaction. It also lists the amounts of all closing costs and
                                                                                          who is responsible for paying these.
       Keep in mind that if you enlist the services of an agent or broker,
 you’ll want to find out how he or she is being compensated (i.e., flat fee          In addition, you’ll need to provide proof that you have insured the
 or commission based on a percentage of the sale price). Many states            property. You’ll also be required to pay certain costs and fees associated
 require the agent or broker to disclose this information to you up front and   with obtaining the mortgage and closing the real estate transaction. On
 in writing.                                                                    average, these total between three and seven percent of your mortgage
                                                                                amount, so be sure to bring along your checkbook.
 Choosing the Right Home
      Before you begin looking at houses, decide in advance the features

26 • 2010 Financial Fitness Kit
                                                        Chapter 6 • Home Ownership — Hints for the American Dream

Multiple Programs for Modifying

          omeowners in financial distress who are              the following criteria:
          investigating the possibility of modifying an
          existing mortgage may have more options                   •     They are at risk of foreclosure on their primary
than they realize. Here’s a quick summary of the major                    residence, and they own no other residential
initiatives to date that are aimed at helping homeowners                  property.
find a way to stay in their homes:
                                                                    •     Their mortgage must have originated before
Fannie Mae/Freddie Mac                                                    Jan. 1, 2008, and they must have made at least
                                                                          six payments on it.
Mortgages                                                           •     Mortgage payments must either represent
     The Federal Housing Finance Agency (FHFA),                           more than 31 percent of their income or be
which oversees Fannie Mae and Freddie Mac, has                            likely to do so because of a mortgage interest
established guidelines for reworking mortgages that are                   rate reset. A previous requirement that the
owned or guaranteed by the two government-sponsored                       refinanced mortgage can represent no more
enterprises. The guidelines are somewhat similar to the                   than 90 percent of the home's value has been
program developed by the Federal Deposit Insurance                        eliminated.
Corporation (FDIC) to manage IndyMac mortgages after
the bank was taken over by the FDIC earlier this year.              •     Loans may not exceed $550,440.
      Fannie and Freddie own or guarantee almost 31                 •     They may not intentionally default on a
million mortgages — roughly 58 percent of all single-                     mortgage.
family mortgages, according to the FHFA. The program is
designed to set an industry standard for modifying private          •     They also may not have been convicted of
label mortgages and mortgage-backed securities and                        fraud under federal or state law within the last
streamline the modification process.                                      10 years and have not provided materially
                                                                          false information to obtain the mortgage being
      The program, announced Nov. 11, 2008, and                           refinanced, such as information about their
currently scheduled to begin Dec. 15, 2008, is designed                   income.
to help modify loans so that mortgage payments,
including homeowner association dues, represent no                   The program is authorized to insure up to $300
more than 38 percent of the household’s monthly gross          billion in mortgages, which it anticipates will allow it to
income. Options for modification include: reducing the         assist 400,000 homeowners. A list of participating H4H
interest rate, extending the term of the loan, deferring       lenders, updated regularly, is available at
payment on part of the principal, or some combination.
Mortgage servicers will receive $800 for each loan
modified through the program.                                  Other Possibilities
                                                                     Some individual lenders have announced their own
      The program is aimed at borrowers who (1) own and        programs for modifying mortgages, generally those that
live in their homes, (2) are at least three months behind in   are still held by the issuer. Each has its own criteria for
making mortgage payments, and (3) are not in bankruptcy        which borrowers qualify for mortgage modification, how
proceedings. Borrowers who are defaulting because of           mortgages may be reworked, and whether the bank
financial mismanagement or simply being overextended           will impose a temporary moratorium on foreclosure
will be encouraged to get financial counseling through         proceedings for borrowers operating in good faith.
agencies approved by the Department of Housing and
Urban Development (HUD).                                            Modifications generally involve reducing monthly
                                                               mortgage payments to some percentage of the
HOPE for Homeowners (H4H)                                      household’s monthly income. Stated figures so far have
                                                               ranged from 31 percent to 40 percent. However, as noted
     This program allows borrowers to refinance into a         above, the FHFA is encouraging mortgage lenders to
30-year fixed-rate loan insured by the Federal Housing         adopt the new Fannie Mae/Freddie Mac standard of 38
Administration (FHA). However, it is voluntary for the         percent.
lender and depends on the lender being willing to take a
loss by reducing the principal balance owed. The program            According to the FHFA, private label mortgages
was established in July 2008 as part of the Housing and        represent less than 20 percent of mortgages but 60
Economic Recovery Act. The program was launched Oct.           percent of serious delinquencies.
1, 2008, and is scheduled to run through Sept. 2011.

    A lender will make the final determination as to
whether a borrower can participate in the program.
However, borrowers may be eligible for H4H if they meet

                                                                                             Visit our Web site at • 27
                    Oklahoma Society of CPAs

                                       Your Home as a Source of
                                       Dollars in Retirement

                                            f you own a home, you may be wealthier than you            before Jan. 1, 2009) during which the property was not
                                            think. The equity in your home could be one of your        used as your, or your spouse’s, principal residence.)
                                            largest assets, especially if your mortgage has been
                                       paid down over the years or paid off. This home equity
                                       can be a valuable source of extra income during your            Trading down can reduce your
   360 Degrees of Financial Literacy

                                       retirement years.
                                                                                                       housing costs.
                                                                                                             The other important financial benefit of trading down
                                       How do you tap your home                                        is that it reduces housing costs — often substantially.
                                                                                                       A smaller home usually means lower real estate taxes
                                       equity?                                                         and smaller bills for heating, cooling, insurance and
                                             There are two ways to tap your home equity if you’re      maintenance costs. If your move is from a single-family
                                       approaching retirement (or already retired) and don’t want      house to a condominium, your costs will be reduced even
                                       to make mortgage payments: You can trade down, or               more because outside painting, roof repair, landscaping,
                                       you can use a reverse mortgage. Trading down involves           and similar costs disappear into lower monthly condo
                                       selling your present home and replacing it with a smaller,      fees. You should carefully estimate the amount of the cost
                                       less expensive home. A reverse mortgage is a home               savings that you’ll get from trading down. Compare the
                                       mortgage in which the lender makes monthly payments             annual cost of maintaining your present home with the
                                       to you, rather than you making monthly payments to the          expected annual cost of maintaining your new home. Be
                                       lender. Both of these strategies can give you substantial       sure to prorate expenses that do not occur regularly, such
                                       additional income during retirement.                            as indoor and outdoor painting and roof repairs.

                                            Note: You could get money from your home by
                                       taking a home equity loan, where you place a regular            But trading down may have
                                       mortgage on your home. But you must repay the home
                                       equity loan, with interest, like other regular home
                                                                                                             Consider the possible drawbacks of trading down.
                                                                                                       For instance, you may not want to reduce your living
                                                                                                       space by moving to a smaller home. Or, you may not be
                                       Trading down can give you                                       able to find a smaller home as attractive as your present
                                                                                                       home. Another common problem with trading down
                                       increased income.                                               occurs if you are strongly attached to your present home.
                                             If your home is larger than you need, trading down        You may not want to be uprooted from your home and the
                                       to a smaller place may be a good way to increase your           social network around it. Still, you may also be troubled
                                       retirement income. The difference between the price             by worries that afflict many older homeowners, such as
                                       that you receive for your present home and the cost of a        rising property taxes, the threat of escalating insurance,
                                       smaller new home can be added to your retirement funds          and the unexpected cost of major repairs. You may
                                       to provide you with additional investment income. The           decide that trading down is warranted to lighten these
                                       amount of cash that you can get by trading down depends         worries as well as your financial burden.
                                       on the value of your present home, the cost of purchasing
                                       a new home, and the incidental costs involved in the                   Note: If you sell your home at a gain and aren’t
                                       trade (e.g., brokerage commissions, legal fees, closing         eligible for the capital gain homesale exclusion, you’ll
                                       costs, and moving expenses). You should estimate these          have to pay federal income taxes on the difference
                                       amounts to get some idea of the net amount that you will        between	the	selling	price	and	your	adjusted	basis	(the	
                                       receive. To check the present value of your home, you           initial cost of your home, plus amounts you’ve paid for
                                       should get an estimate of its selling price from two or         capital improvements, less any depreciation and casualty
                                       three real estate agents. You should also get an estimate       losses claimed for tax purposes) in the home.
                                       of the cost of your replacement home by shopping around
                                       for the type of home that you think you’ll want.
                                                                                                       A reverse mortgage can also
                                             Note: If you think that the tax consequences of
                                       trading down are a drawback, think again. You may be
                                                                                                       give you increased income
                                                                                                             If you are older and have substantial equity in your
                                       able to exclude from federal taxation up to $250,000
                                                                                                       home, a reverse mortgage can give you a valuable
                                       ($500,000	if	you’re	married	and	file	a	joint	return)	of	any	
                                                                                                       supplemental source of retirement income. You can
                                       resulting capital gain, regardless of your age. To qualify
                                                                                                       receive this income based on the equity that you have
                                       for this exclusion, you generally must have owned and
                                                                                                       built up over the years in your home — without having to
                                       used the home as your principal residence for a total of
                                                                                                       repay the reverse mortgage during your life. The amount
                                       two	out	of	the	five	years	before	the	sale.	An	individual,	or	
                                                                                                       of the monthly payment you receive from a reverse
                                       either spouse in a married couple, can generally use this
                                                                                                       mortgage depends on four factors:
                                       exemption only once every two years. However, even if
                                                                                                             •     Your age;
                                       you don’t meet these tests, a partial exemption may be
  Created by the American                                                                                    •     The amount of equity in your home;
                                       available. (For sales and exchanges made after Dec. 31,
  Institute of Certified Public                                                                              •     The interest rate charged by the lender; and
                                       2008, this homesale exclusion won’t apply to the extent
  Accountants and                                                                                            •     Closing costs.
  the California Society of
                                       the gain is allocated to periods (not including any period
  Certified Public Accountants

28 • 2010 Financial Fitness Kit
                                                        Chapter 6 • Home Ownership — Hints for the American Dream

     The older you are and the more the equity in your
home, the larger your monthly payments will be. Also, a
lower interest rate and lower closing costs will increase
your payments.

A reverse mortgage lets you
keep your present home for
      As discussed, you may not want to trade down for a
variety of reasons, including attachment to your present
home. With a reverse mortgage, you can increase your
income and continue to live in your present home for life.
The mortgage typically becomes due when you no longer
live in the home.

      When reverse mortgage payments last as long
as you live in your home, the mortgage is known as a
tenure reverse mortgage. You can get other types of
reverse mortgages, including an annuity advance reverse
mortgage. With the annuity mortgage, payments last as
long as you live, regardless of whether you continue to
live in your home.

But a reverse mortgage is not
without drawbacks.
      With a reverse mortgage, you must mortgage your
home to the lender. Each payment that you receive from
the lender increases the amount of principal and interest
that you owe on the mortgage. Although the mortgage
typically does not become due while you’re still living
in the home, the equity value of your home is reduced
by each payment that you receive. This reduction in the
equity value of your home may have a negative effect on
your children’s ultimate inheritance.

     Note: If you face a retirement income shortage, this
equity reduction may be preferable to a reduction in your
standard of living. Also, in the rare case where the value
of your home appreciates more rapidly than the mortgage
loan increases, equity reduction does not occur.

     A reverse mortgage may have other drawbacks,

     •    High up-front costs: The closing costs for a
          reverse mortgage normally exceed the closing
          costs for a conventional mortgage. This means
          that a reverse mortgage may not be cost
          effective if you plan to remain in your home for
          only a few years.

     •    No reduction in homeowner costs: Unlike
          trading down to a home with lower housing
          expenses, a reverse mortgage does not
          reduce your housing costs. Since you stay
          in your home, you still face real estate taxes,
          insurance, repairs, and other costs associated
          with the home.

                                                                            Visit our Web site at • 29
                    Oklahoma Society of CPAs

                                       Opening the Door to
                                       Homeowners Insurance

                                              our home is your castle, so the saying goes. And         cover a wide variety of perils (e.g., flood, earthquake
                                              you’re going to want to protect it. Homeowners           damage). You may need to purchase an endorsement or
                                              insurance can give you just the protection you           separate insurance policy to ensure adequate coverage
                                       need. It provides coverage if your home is damaged              in these instances.
                                       or destroyed. It also covers your family’s possessions
                                       and provides you with compensation for liability claims,             When reimbursing you for a loss, insurance
   360 Degrees of Financial Literacy

                                       medical expenses and other expenditures that result from        companies use one of two methods to determine the
                                       property damage and bodily injury suffered by others.           value of property:

                                       Why You Need It                                                      •    Replacement cost: This pays you the cost of
                                                                                                                 replacing damaged property, with no deduction
                                             You may need homeowners insurance because your                      for depreciation, but with a maximum dollar
                                       mortgage lender requires it. But even if you own your                     amount; or
                                       home outright, you still need homeowners insurance to
                                       protect that which you can’t afford to lose. It’s really that        •    Actual cash value: This pays you an amount
                                       simple. After all, you’ve spent years building up a solid                 equal to the replacement value of damaged
                                       financial foundation for you and your family. Without                     property minus a depreciation allowance.
                                       homeowners insurance, all of that hard work can go
                                       down the drain in a matter of minutes when, for example,             Keep in mind that before an insurance company
                                       a tornado devastates your house, a burglar robs and             reimburses you for a loss, you’ll need to satisfy a
                                       vandalizes your home, your dog bites and severely               deductible.
                                       injures your neighbor or your mail carrier slips on your
                                       front steps and breaks his leg.
                                                                                                       Liability Coverage
                                       Property Coverage                                                    In addition to insuring your property, the typical
                                                                                                       homeowners policy includes liability protection that
                                             The main purpose of homeowners insurance is to            provides coverage for damages caused by your
                                       protect your home and other structures, like a shed or          negligence. Medical payments to third parties and your
                                       detached garage. Your policy will cover not only the cost       legal costs for any lawsuits brought against you are also
                                       of the damage (the exact amount depends on your policy)         included. Most homeowners policies provide a standard
                                       but also your living expenses (up to a limit) while you wait    amount of liability coverage (usually $100,000) per
                                       for your home to be repaired.                                   accident.

                                             In addition to protecting your home, the typical
                                       homeowners policy covers your personal property, both           Purchasing Homeowners
                                       on and off premises. Your personal property consists of
                                       the contents inside your home (e.g., furniture, appliances,     Insurance
                                       clothing, jewelry) as well as outdoor items (e.g., sporting           Homeowners insurance policies are written
                                       equipment, lawn tools). It’s important to note that             individually, typically at the time you purchase a home or
                                       homeowners policies set specific dollar limits for certain      when you take out a mortgage on a home. For the most
                                       types of personal property (e.g., jewelry, coins).              part, you’ll want to purchase enough property coverage to
                                                                                                       cover the replacement cost of your home and its contents.
                                            Although policies vary, a typical homeowners policy        The amount of liability coverage you’ll need to purchase
                                       provides coverage for damage to property caused by:             will depend on the assets you would like to protect (e.g.,
                                            •    Fire and lightning;                                   home, car, investments).
                                            •    Windstorm and hail;
                                            •    Explosions;                                                The cost of homeowners insurance depends on the
                                            •    Theft or vandalism;                                   amount of your coverage, any endorsements you add to
                                            •    Vehicles;                                             the policy, and policy deductibles. But since premiums for
                                            •    Smoke;                                                similar policies vary from company to company, it pays to
                                            •    Falling objects;                                      shop around and compare rates.
                                            •    Weight of ice, snow, and sleet;
                                            •    Freezing of plumbing, heating, or air
                                                 conditioning system; and
                                            •    Riots.

                                            But be aware that homeowners insurance does not

  Created by the American
  Institute of Certified Public
  Accountants and
  the California Society of
  Certified Public Accountants

30 • 2010 Financial Fitness Kit
                                                            Chapter 6 • Home Ownership — Hints for the American Dream

Renters Insurance

I                                                               Replacement Cost vs. Actual
    f you rent a house or an apartment, you might think
    you don’t need insurance because you don’t own
    the building. After all, your landlord probably has         Cash Value
coverage. But your landlord’s insurance covers only the              These may sound like highly technical terms, but
building, not the contents. Without insurance of your own,      they are actually very important in determining how much
you could be left with nothing in the event of a fire or        money you will get if you ever have to file a claim. When
burglary.                                                       you get a quote from your insurance agent, make sure
                                                                you know which type of coverage is being described.
     That’s why you need renters insurance (HO-4), a
special kind of homeowners insurance. It provides no                  Actual cash value coverage reimburses you for
coverage for the building itself. Instead, it covers your       only the amount that your property was worth at the
personal possessions and protects you against liability         time it was stolen, damaged, or destroyed. This means
claims if you rent a house or apartment.                        that if all of your clothes suffer smoke damage in a fire,
                                                                your insurance company probably will pay as much as
Property Damage Coverage                                        you could’ve made at a yard sale — not the $4,000 you
                                                                spent over the last couple of years to create the perfect
      Renters insurance policies cover only losses that
result from any of 17 named perils. If your property is
lost or damaged as a result of one of these perils, your
                                                                      Replacement cost coverage, by comparison,
insurance company will compensate you for your loss.
                                                                reimburses you for the amount that it will cost to replace
The covered perils are:
                                                                your property. If you bought a $400 television two years
      •    Fire or lightning;
                                                                ago, you’ll receive enough money to go out and buy
      •    Windstorm or hail;
                                                                another television just like the old one. You will probably
      •    Explosion;
                                                                have to replace the lost property with your own money
      •    Riot or civil disturbance;
                                                                and submit the receipt before you receive compensation.
      •    Aircraft;
                                                                Nevertheless, replacement cost coverage typically pays
      •    Vehicles;
                                                                significantly more than actual cash value coverage
      •    Smoke;
      •    Vandalism or malicious mischief;
      •    Theft;                                               Liability Coverage
      •    Broken glass;                                             Renters insurance also provides liability coverage. A
      •    Volcanic eruption;                                   typical renters insurance policy covers you for accidents
      •    Falling objects;                                     and injuries that occur in your home, as well as accidents
      •    Weight of ice, snow, or sleet;                       outside of your home that are caused by you or your
      •    Accidental discharge or overflow of water;           property. (This does not include automobile accidents.)
      •    Sudden and accidental tearing apart;                 This liability coverage includes legal defense costs, if
      •    Freezing; and                                        you are taken to court over such an accident. Standard
      •    Artificially generated electrical charge.            levels of liability coverage are $100,000, $300,000, and
                                                                $500,000. The amount of liability coverage that you need
     Keep in mind that most renters insurance policies          depends on your individual circumstances.
specifically exclude certain perils (e.g., earthquakes,
flooding). As a result, you may need to purchase a
separate policy to insure your possessions against              What does it cost?
damage caused by these hazards.                                       The cost of renters insurance varies greatly
                                                                depending on where you live, the construction of the
      Property coverage levels typically start somewhere        building, your deductible, and how much insurance
around $15,000 and go up from there. As you increase            coverage you need. But renters insurance is much less
your coverage level, your premiums increase as well.            expensive than homeowners insurance. On average, you
An insurance professional can help you determine the            will pay somewhere between $100 and $300 annually
amount of coverage that you need. Or, you can visit one         for a basic policy providing about $30,000 worth of
of the many insurance websites for more information.            coverage for your property. Replacement cost coverage
                                                                is somewhat more expensive than actual cash value
                                                                coverage, but it is usually worth the extra money.

                                                                                             Visit our Web site at • 31
                    Oklahoma Society of CPAs

                                       Insuring your Family’s Health

                                               ealth insurance has become an increasingly            PPOs will allow you to see any doctor outside of their
                                               complex and expensive item for all of us, but it      network and usually allow you to see specialists without
                                               plays an important role in protecting your family’s   prior approval, but you’ll have to pay a higher percentage
                                       physical and financial well-being. Without adequate           of your co-insurance. Usually, some degree of preventive
                                       health insurance coverage, a major illness or accident        care is covered.
                                       could wipe out your savings and put you into debt.
                                                                                                     POS (Point-of-Service) Plans
                                            While some employers provide group health                      POS plans are similar to a PPO, with the major
                                       insurance programs for their employees, usually some          difference being that a POS usually requires you to use
   360 Degrees of Financial Literacy

                                       type of managed care program, others do not. And while        a primary care doctor to get referrals to specialists, if you
                                       these plans usually cover your spouse and children, they      want the plan to pay for them. Preventive care services
                                       do not cover extended family. Most employers’ plans           are usually covered.
                                       include a cost-sharing arrangement where employees are
                                       required to pay for part of their monthly premiums, and
                                       the employer pays the rest.                                   Additional Options
                                             If your employer does not offer group health            Flexible-Spending Accounts (FSAs)
                                       insurance, or if you are self-employed, individual health          FSAs allow employers and employees to use pretax
                                       insurance policies are available, but be sure to shop         dollars to pay for certain personal expenses that aren’t
                                       around to find one that meets your needs in terms of          covered by insurance, such as out-of-pocket health care
                                       coverage and cost. In some states, self-employed status       costs (i.e., deductibles and co-payments) and dependent
                                       does not condemn you to individual coverage if you have       care (i.e., day care, senior in-home care).
                                       a full-time employee. However, most insurers will not
                                       accept a person working with no employees as a “group.”           Created by the American Institute of Certified Public
                                                                                                     Accountants and the California Society of Certified Public
                                            Whether you’re looking for health insurance for          Accountants.
                                       yourself, your family or your aging parents, be sure to
                                       shop around to find one that meets your needs in terms of     COBRA
                                       coverage and cost.                                                 Usually, if you lose your job, you also lose your
                                                                                                     health insurance. COBRA, or the Consolidated Omnibus
                                                                                                     Budget Reconciliation Act of 1985, requires most
                                       Types of Managed Care Plans                                   employers to give you the opportunity to continue your
                                                                                                     health insurance for up to 18 months, at your expense.
                                       (Health Maintenance Organizations)                                  If you qualify for Social Security you are
                                             Historically, HMOs are the least expensive and least    automatically covered by Medicare Part A, for in-patient
                                       flexible policies available. In return for lower premiums     type benefits, such as hospital care, skilled nursing, home
                                       and copayments, you must see only approved doctors            health care and hospice care. You also can voluntarily
                                       and will need to get permission from your primary care        apply for low-cost Medicare Part B, which covers doctor
                                       physician before seeing a specialist. They usually            visits, outpatient hospital care, medical and physical
                                       cover preventive care. With record increases in medical       therapy equipment and ambulance expenses.
                                       premiums, it’s always smart to comparison shop as
                                       HMOs sometimes may not be your least expensive                Medicaid
                                       option.                                                            This joint federal–state program provides medical
                                                                                                     assistance to various low-income individuals, including
                                       PPOs (Preferred Provider Organizations)                       those aged 65 or older, disabled or blind. You must meet
                                            These offer an incentive to stay within a network        your state’s medical and functional criteria, and there are
                                       of doctors by requiring smaller co-payments. However,         income restrictions.

  Created by the American
  Institute of Certified Public
  Accountants and
  the California Society of
  Certified Public Accountants

32 • 2010 Financial Fitness Kit
                                                   Chapter 7 • Insurance Basics — Protecting What’s Most Important

Protecting Yourself and Your
Family with Long–Term Disability

O                                                              Own Occupation or Any
        ne can never anticipate when tragedy will strike,
        whether it’s a car or household accident or a
        debilitating illness. Statistically speaking, most
people of working age have a greater chance of being
disabled than dying. Yet more people have life insurance            Own occupation coverage pays benefits if you
than disability insurance.                                     can no longer work in your specific occupation. This is
                                                               popular with doctors, attorneys and other professionals.
      Long-term disability insurance replaces a portion of     Any occupation pays you if you are unable to work in the
the salary you were earning before you became disabled.        occupation for which you are reasonably suited or trained.
Single and self-employed individuals should seriously
consider disability policies if they have no other source of   Government-Sponsored Disability Benefits
financial support or if they are the main breadwinner for           While purchasing a private disability insurance policy
their family.                                                  is your best bet, there are some government-sponsored
                                                               disability benefits available.
    Here’s what you need to know to get sufficient
coverage at an affordable price:                               Workers’ Compensation
                                                                    Disability benefits are paid to covered workers
Benefit Amount                                                 whose illness or injuries are work-related. The amount
     Disability insurance typically pays 60–80 percent of      and disbursement of benefits varies from state to state.
your income should you become disabled.
                                                               Social Security Disability
Term of Benefits                                                     The Social Security Administration (SSA) offers two
     You can choose disability coverage that pays for one      programs. Social Security disability insurance pays limited
year, two years, five years, all the way until age 65, or      benefits to qualified individuals under 65 regardless
even for life. Keep in mind that premiums increase as the      of income. Supplemental Security Income (SSI) pays
term increases.                                                benefits to qualified individuals with limited income over
                                                               65 or who are blind or disabled. Neither covers partial
Elimination Period                                             disability.
     Policies usually have waiting periods ranging from
60 days to two years before benefits can start. The            Veterans Benefits
average is 90 days.                                                  Members of our armed forces and veterans are
                                                               entitled to disability compensation for health problems
Noncancelable                                                  associated with their military service.
     While they cost more, these policies prohibit the
insurance company from canceling your policy (unless           Federal Employees Retirement System
they stop covering everyone in your occupation) or raising         Federal employees covered under the Federal
your premium.                                                  Employees Retirement System (FERS) and with at least
                                                               18 months of service credits are eligible for disability
Guaranteed Renewables                                          benefits.
     Cannot be cancelled, but the company can raise
the premium by increasing rates for an entire class of

                                                                                            Visit our Web site at • 33
                    Oklahoma Society of CPAs

                                       Long-Term Care Insurance

                                              eople today are living longer. This means the                 Most policies provide that certain physical and/or
                                              odds of requiring some type of long-term care           mental impairments trigger benefits. The most common
                                              increase as you get older. As the costs of home         method for determining when benefits are payable is
                                       care, nursing homes and assisted living escalate, how will     based on your inability to perform certain activities of daily
                                       you pay for long-term care? One solution quickly gaining       living. Typically, benefits are payable when you’re unable
                                       popularity is long-term care insurance (LTCI).                 to perform a certain number of ADLs.

                                            Americans on average pay $56,000 annually for                   Some policies, however, will begin paying benefits
                                       home care. Since HMOs, Medicaid, Medicare and                  only if your doctor certifies that the care is medically
   360 Degrees of Financial Literacy

                                       Medigap do not pay for most long-term care expenses,           necessary. Others will also offer benefits for cognitive or
                                       you should be financially prepared to take on such costs.      mental incapacity, demonstrated by your inability to pass
                                       Long-term care insurance (LTCI) provides an alternative        certain tests.
                                                                                                      What’s it going to cost?
                                       What is long-term care?                                             Bottom line: LTCI is expensive. However, some
                                             Long-term care refers to the ongoing care of any         important factors that affect price include: size of benefit,
                                       individual, not just the elderly, who can no longer perform    length of benefit period and optional rider.
                                       basic activities of daily living, (ADLs) such as bathing,
                                       dressing or eating, due to illness, injury or cognitive             For the most part, premiums are based on your
                                       disorder. Required care can be provided in private homes,      age at the time you purchase the policy. As a result, the
                                       assisted-living facilities, adult day-care centers, hospices   younger you are when you purchase a policy, the lower
                                       and nursing homes.                                             your premiums will be.

                                       Why You Need LTCI                                              Finding a Policy That’s Right
                                             Consider purchasing an LTCI policy if some or all of
                                       the following apply:                                           for You
                                                                                                            Since LTCI is a relatively new insurance product,
                                            •    You are between the ages of 40 and 84.               policy types vary. So before you buy, it’s important
                                                                                                      to shop around and compare. Read the Outline of
                                            •    You have significant assets to protect.              Coverage portion of each policy carefully, and make
                                                                                                      sure you understand all of the benefits, exclusions and
                                            •    You can afford to pay the premiums now and in        provisions. Once you find a policy you like, be sure to
                                                 the future.                                          check insurance company ratings from services such as
                                                                                                      A. M. Best, Moody’s and Standard & Poor’s to make sure
                                            •    You are in good health and are insurable.            that the company is financially stable. When comparing
                                                                                                      LTCI policies, consult a financial professional, attorney or
                                                                                                      accountant for more information.
                                       How does LTCI work?
                                            You pay a premium, and when you need it, the policy
                                       pays a selected dollar amount per day for a set period of
                                       time for the type of long-term care outlined in the policy.

  Created by the American
  Institute of Certified Public
  Accountants and
  the California Society of
  Certified Public Accountants

34 • 2010 Financial Fitness Kit
                                                     Chapter 7 • Insurance Basics — Protecting What’s Most Important

Protecting Yourself and Your
Family with Life Insurance

    f there is an individual who depends on you for                   Any earnings accrued through a permanent life
    financial support, your financial plan should provide a      policy are tax-deferred until you cash in the policy or are
    source of income for your spouse and dependents in           tax-exempt if paid to your beneficiaries upon your death.
the event of your untimely death. Life insurance fills this      However, earnings could be significantly less with an
need and can also serve estate planning purposes, such           insurance policy than in some other investment vehicles,
as paying estate taxes.                                          even certificates of deposit (CDs).

Choosing Coverage                                                Characteristics of Each Type
      There are a number of factors to consider when
determining the amount of life insurance coverage you            of Permanent Life Insurance
need, including how much you can afford in premiums,
how much coverage your family will need, the period of           Include
time for which they will need coverage and whether you
                                                                      •    Whole Life Insurance: This is the most
want pure protection or are looking for an investment as
                                                                           common type of life insurance. Both the death
                                                                           benefit and premium (which is based on your
                                                                           age and other factors) remain the same, year
THE Great Debate — Term Vs.                                                after year. You can borrow against the policy
                                                                           at a low interest rate, and if the loan is not
Permanent                                                                  repaid, the outstanding balance is deducted
     Term insurance provides the largest death benefit for                 from the benefit paid at your death. You can
your premium dollar. Term policies provide pure income                     withdraw some of your cash value and still
protection at a low cost. As the name implies, you can                     remain insured, or you can surrender the policy
buy it one year at a time or for a specific period of time. If             and retrieve its full cash value. It is best used
you die within the term selected, a benefit is paid to your                as part of a long-term plan, since commissions
beneficiary. If you outlive the term, no death benefit is                  and higher initial premiums slow the cash value
paid. The cost of term insurance rises as you age.                         accumulation in the early years of the policy.

      There are two basic types of term policies—annual               •    Universal Life Insurance: This offers more
renewable policies and level premium policies. The                         flexibility than a whole life policy, allowing
former increases each year and the latter allows you to                    you to vary the premium amount and the
lock in a premium for a fixed number of years.                             death benefit. For example, with the same
                                                                           premium dollars, you can choose a lower death
     Some top-rated insurers are also offering return-                     benefit and a larger cash buildup, or a smaller
of-premium term policies. These pay a death benefit in                     cash buildup and a higher death benefit.
the event you die during the term of the policy, but if you                For this flexibility, you’ll pay higher fees and
survive the policy, you get a refund of all the premiums                   administrative costs.
you paid over the life of the policy. They cost a bit
more, but you get the dual benefit of risk protection and             •    Variable Life Insurance: This allows the
recouping your “investment” should you not need the                        policyholder to control the investment of the
death benefit.                                                             cash value portion of the policy, choosing from
                                                                           investment options with varying degrees of
     Permanent life insurance combines a death benefit                     risks and rewards offered by the insurance
with an investment. Permanent policies—such as whole,                      company. Earnings generated by the policy are
universal or variable life—allow for part of your premium                  not taxed while the policy is in force.
to be invested, thus building cash value. For this reason,
the premiums can be several times higher than for the
same amount of term insurance.

                                                                                              Visit our Web site at • 35
          Oklahoma Society of CPAs

 Starting or Buying a Business

         ach option involves some element of risk and reward. Whichever                   You’ll also need to project cash needs and expected income,
         option you choose, however, owning your own business offers a                    and present a cash flow statement.
         chance at more freedom and greater financial rewards.So, you’re
 thinking of going into business for yourself. You have several options              •    Other areas: A good business plan will also cover in some
 available, and all involve some degree of risk. Do you want to create                    detail your marketing plan, a discussion of how you plan on
 a start-up operation? Perhaps you are planning on buying an existing                     developing products to bring to market (if the business is a
 business. Or, you may be considering the purchase of a franchise                         manufacturing concern), and so on.
                                                                                Buying an Existing Business
 Start-Ups                                                                           The obvious advantage to buying an existing business is that it has
       If you are planning on building your business from the ground up,        a proven track record of success. But that doesn’t mean that there are no
 you are taking a bigger risk than if you were buying an existing business      possible pitfalls that you should avoid.
 or a franchise. Existing businesses and franchises have some operating
 history that you can use to gauge the likelihood of the success of the              Perhaps the greatest problem in buying an existing business is that
 business. By comparison, with a start-up business, you naturally think         you might not acquire the expertise and services of the existing owners,
 that you will succeed, but there are fewer guarantees.                         who have often accumulated goodwill with their customers or clients.
                                                                                However, when a business is bought, it is not unusual for the previous
       Most successful start-ups don’t actually begin with a new, innovative    owners to stay on for a period of time to assist with the transition and
 product. Instead, they begin with a proven product or service (start-up        to make introductions to clients in an attempt to transfer some of that
 owners often open competing businesses in areas in which they are              goodwill.
 familiar) and become innovative after the new venture has generated
 some level of profit and success.                                                    Consult qualified professionals to properly evaluate the information
                                                                                that the owners of the existing business may provide you. Also, make
        Because your start-up has no previous track record (even if you         sure that the reasons why the business is on the market are true. Is the
 have had success in your field), you will first need to raise enough           owner really planning on retiring to Florida, or is he or she just trying to
 financing to make a go of it. Banks or investors will want to see a plan of    escape the crushing debt that the business has accumulated over the last
 attack before they will approve a loan for your start-up. Therefore, your      few years?
 first step should be to create a strong business plan.
                                                                                     Also, keep in mind that you may be taking on a heavy load of debt
                                                                                in acquiring the business. A business that is marginally profitable may not
 The Business Plan                                                              be able to both pay off the debt service on the loan and pay you a living
      A well-developed business plan serves several useful purposes. It         wage.
 helps to organize thoughts and ideas about how the business should be
 developed. It also creates a plan of attack that will help you stay focused.
 And, it will assist you in getting financing. There are several important      Franchises
 elements to a well-prepared plan:                                                     When you buy a franchise, you also buy marketing support,
                                                                                business strategy, name recognition, and assistance with site location (if
      •    Strong introduction: The cover page, executive summary               it’s a retail operation), among other things.
           (essentially an overview of the plan) and table of contents will
           be the first elements that potential financiers or investors will          However, you also give up some things. You will never have the final
           see. If these aren’t strong, potential financiers may not take you   say in all decisions, because franchisors typically retain rights to ensure
           seriously enough to get to the heart of your plan.                   that your business is run their way. Also, you won’t be entitled to all of the
                                                                                profits of your business, because franchisors typically take a percentage
      •    Business description: Whether you are using the business             as part of their fees. Finally, you may be limited in your decision-making
           plan to get financing or create a focus of how your business         processes (e.g., some franchisors require you to buy materials from their
           should be run, you need to present a clear vision of what your       suppliers).
           business will be. The description should include how you want
           your business to be positioned in your industry, what will make            If you are thinking of purchasing a franchise, it is very important to
           your business unique, the products or services that you will         thoroughly investigate the company. Remember, you are doing more than
           provide and how you plan on pricing within the industry. Do you      just purchasing a name — the franchisor is going to be your business
           want to be the low-cost provider or the high-end specialist?         partner. Make sure that he or she doesn’t want only your money and then
                                                                                move on to the next potential buyer.
      •    Market positioning: If you want to attract investors to your
           business, you need to convince them that a need in the                     Franchisors are required to disclose lots of information to potential
           marketplace exists for what you are proposing. This section          franchisees. Do your homework. Talk not only to successful franchisees
           needs to include details on the size of the potential market for     but also to ones who have failed. If several former franchisees tell you
           your business, how your business can benefit through sales           that the company didn’t fulfill the promises of the franchise agreement,
           inside the market and how you plan on succeeding against             beware.
           your competitors.
                                                                                     Make sure every representation is made to you in writing before
      •    Financial objectives: This is perhaps the most important             you purchase. Take notes of everything said to you, and have the
           part of your business plan. Here, you need to convince your          franchisor sign off on them. That way, you will have a record of what was
           potential backers or lenders that your business will make a          represented to you if things go wrong.
           sound investment. You’ll want to show that you have evaluated
           the attendant risks and rewards of your proposed business.

36 • 2010 Financial Fitness Kit
                                                       Chapter 8 • What to Consider When You Become Your Own Boss

Funding a Business

          side from using your own funds and borrowing from friends and                   What fields do venture capital firms focus on? Most venture capital
          family, there are numerous routes that you can take, and each             firms specialize in high-tech, computer, and Internet services. Others
          has its advantages and disadvantages. Here are some of the                specialize in scientific projects and inventions that require a lot of cash.
major options available for funding your small business, and some of the            So, if you’re looking to open your own transmission shop, a venture
pitfalls to avoid. You’ve got your business plan written. You’re excited            capital firm probably isn’t the right financing alternative.
about your business idea, and now it’s time to get started. One problem:
You don’t have the financing to fully realize your idea. What are your
options?                                                                            Selling Stock
                                                                                          Selling stock in your company can take several different forms.
                                                                                    We’ve all heard and read a lot about initial public offerings (IPOs). IPOs
Bank Loans                                                                          are stock sales in which previously private companies go public. An IPO
     Getting a loan from a local bank is the first option that most people          is a possibility for an ongoing business, but it isn’t likely to be a viable
think of when funding a new business. But it’s often difficult to obtain a          alternative for your new company.
bank loan on the basis of a business plan alone. Banks can’t take your
idea as collateral for the loan.                                                          A private placement is less complex than an IPO and involves
                                                                                    selling shares of stock to a select group of equity investors. The investors
     If you are thinking of getting a bank loan, you will likely need to            typically exercise control over the company in direct proportion to the
secure the loan through other means, such as putting up your home                   number of shares that they own.
as collateral. A bank loan may be more feasible, though, if you are
purchasing an ongoing business outright. In that case, the assets or the                 Selling stock or other securities in your business generally requires
business itself can be used to secure the loan.                                     compliance with federal and state securities laws. Seek the advice of an
                                                                                    attorney experienced in these laws before your business issues any stock
     In any case, the advantage of a bank loan is that you won’t have to            or securities.
give away any equity if your business succeeds. You will simply repay the
loan and own your business outright. If your business fails, however, you
may end up losing more than your business assets, depending on the                  Factoring
terms of the loan.                                                                       You’ve been in business for a while and you have customers, but
                                                                                    your collections have been bad. You need cash now, but your lack of
                                                                                    cash inflow is holding you back. What can you do?
Angel Investors
      Angel investors are private investors who contribute money to a                    A common solution to this problem is factoring. Basically, you secure
business in exchange for an ownership interest. The obvious advantage               a loan (usually at a high interest rate) against your accounts receivable.
of utilizing angel investors is that you don’t have to repay a loan.                Factoring companies aren’t hard to find, and some offer better deals than
However, you may have to give up a significant amount of equity (and                others, but they are almost always going to charge you a much higher
control, depending on the security issued) to the angel investors. Angel            rate of interest than your bank. Thus, factoring is usually considered as
investors typically expect to receive preferred equity security in exchange         an option only after all others have been exhausted.
for their investment.

      Perhaps the greatest obstacle is to find the right angels. There are          Economic Development Programs
many people out there who want to invest in small businesses, but it’s not               Many federal, state, and local government loan programs are
easy to find the right fit. If you opt for this route, make sure that all parties   available to small businesses. The U.S. Small Business Administration is
have the same expectations regarding the prospect of success. You                   a good place to start.
need to agree on how long you expect it will take for the business to be
profitable (be aware that most small business plans are overly optimistic                Don’t overlook your local government loan programs, though. Local
as to profit expectations) and whether your angels will hang in there with          governments often offer incentives such as tax breaks or a discounted
you if it takes longer than expected.                                               loan rate if you locate your business in their jurisdiction, often in an area
                                                                                    zoned for economic redevelopment.

Venture Capital                                                                     Customer/Supplier Financing
     We’ve all heard a great deal about venture capital firms over the
past few years. The ups and downs of some of these companies have                         This is an option for a business that has a poor credit rating, and a
been well documented. But are venture capital firms a potential source of           realistic option that many small businesses overlook. In essence, your
financing for your business?                                                        business bills for part of the services or products that it supplies up front.
                                                                                    The rest of the fees are paid as the products are delivered or as the
      Venture capital may be a viable financing source for your business            services are completed.
but, then again, it may not. Like angel investors, venture capitalists
typically take an equity stake in your company, and most expect to                      This strategy is aggressive, but many of your customers can
receive preferred equity security in exchange for their investment. Most            appreciate the need that a small business has to keep cash flow current,
venture capitalists specialize in certain industries, and many provide              and won’t object to your asking for partial payment up front.
corporate direction as well as financing (some angel investors may
provide such direction, as well).

       It is this aspect of specialization that makes venture capital financing
difficult for most new businesses to obtain. If your new business doesn’t
fit into the right niche, your company might not be a candidate for funding.

                                                                                                 Visit our Web site at • 37
                    Oklahoma Society of CPAs

                                       Choosing an Entity for Your

                                                asically, three separate categories of entities        that the entity can obtain credit, file for bankruptcy,
                                                exist: partnerships, corporations and limited          transfer property, and so on. However, the partnership
                                                liability companies. Each category has its own         itself is generally not subject to federal income taxes
                                       advantages, disadvantages, and special rules. It is also        (it does, however, file a federal income tax return).
                                       possible to operate your business as a sole proprietorship      Instead, the income, gains, deductions and losses of
                                       without organizing as a separate business entity. Now           the partnership are generally reported on the partners’
   360 Degrees of Financial Literacy

                                       that you’ve decided to start a new business or buy an           individual federal income tax returns. The allocation
                                       existing one, you need to consider the form of business         of these items among the partners is governed by the
                                       entity that’s right for you.                                    partnership agreement, subject to certain limitations.

                                       Sole Proprietorship                                             Limited Partnerships
                                             A sole proprietorship is the most straightforward way           A limited partnership differs from a general
                                       to structure your business entity. Sole proprietorships are     partnership in that a limited partnership has more than
                                       easy to set up — no separate entity must be formed. A           one class of partners. A limited partnership must have at
                                       sole proprietor’s business is simply an extension of the        least one general partner (who is usually the managing
                                       sole proprietor.                                                partner), but it also has one or more limited partner. The
                                                                                                       limited partner(s) does not participate in the day-to-day
                                             Sole proprietors are liable for all business debts and    running of the business and has no personal liability
                                       other obligations the business might incur. This means          beyond the amount of his or her agreed cash or other
                                       that your personal assets (e.g., your family’s home) can        capital investment in the partnership.
                                       be subject to the claims of your business’s creditors.

                                            For federal income tax purposes, all business              Limited Liability Partnership
                                       income, gains, deductions, or losses are reported on                  Some states have enacted statutes that provide for
                                       Schedule C of your Form 1040. A sole proprietorship             a new type of partnership, the limited liability partnership
                                       is not subject to corporate income tax. However, some           (LLP). An LLP is a general partnership that provides
                                       expenses that might be deductible by a corporate                individual partners protection against personal liability for
                                       business may not be deductible by a business structured         certain partnership obligations. Exactly what is shielded
                                       as a sole proprietorship. For example, health insurance         from personal liability depends on state law. Since state
                                       premiums, as of this writing, are not fully deductible for a    laws on LLPs vary, make sure you consult competent
                                       sole proprietor.                                                legal counsel to understand the ramifications in your

                                            If two or more people are the owners of a business,        Corporations
                                       then a partnership is a viable option to consider.                    Corporations offer some advantages over sole
                                       Partnerships are organized in accordance with state             proprietorships and partnerships, along with several
                                       statutes. However, certain arrangements, like joint             important drawbacks. The two greatest advantages of
                                       ventures, may be treated as partnerships for federal            incorporating are that corporations provide the greatest
                                       income tax purposes, even if they do not comply with            shield from individual liability and are the easiest type of
                                       state law requirements for a partnership.                       entity to use to raise capital and to transfer (the majority
                                                                                                       stockholder can usually sell his or her stock without
                                             A partnership may not be the best choice of entity for    restrictions).
                                       a business that anticipates an initial public offering (IPO)
                                       in the near future. Although there are publicly traded               However, corporations are generally subject to
                                       partnerships, most IPO candidates are organized as              federal income tax. So, the distributed earnings of your
                                       corporations.                                                   incorporated business may be subject to corporate
                                                                                                       income tax as well as individual income tax.
                                            In a partnership, two or more people form a business
                                       for mutual profit. In a general partnership, all partners
                                       have the capacity to act on behalf of one another in            C Corporations
                                                                                                             A corporation that has not elected to be treated
                                       furtherance of business objectives. This also means that
                                                                                                       as an S corporation for federal income tax purposes is
                                       each partner is personally liable for any acts of the others,
                                                                                                       typically known as a C corporation. Traditionally, most
                                       and all partners are personally responsible for the debts
                                                                                                       incorporated businesses have been C corporations. C
                                       and liabilities of the business.
                                                                                                       corporations are not subject to the same qualification
                                                                                                       rules as S corporations and thus typically offer more
                                            It is not necessary that each partner contribute
                                                                                                       flexibility in terms of stock ownership and equity structure.
                                       equally or that all partners share equally. The partnership
                                                                                                       Another advantage that a C corporation has over an
                                       agreement controls how profits are to be divided. It is not
                                                                                                       S corporation is that a C corporation can fully deduct
                                       uncommon for one partner to contribute a majority of the
                                                                                                       most reasonable employee benefit costs, while an S
  Created by the American              capital while another contributes the business acumen or
                                                                                                       corporation may not be able to deduct the full cost of
  Institute of Certified Public        contacts, and the two share the profits equally.
  Accountants and
                                                                                                       certain benefits provided to two percent shareholders.
  the California Society of                                                                            Virtually all large corporations are C corporations.
                                            Partnerships are a recognized entity in the sense
  Certified Public Accountants

38 • 2010 Financial Fitness Kit
                                                     Chapter 8 • What to Consider When You Become Your Own Boss

S Corporations
      A corporation must satisfy several requirements to
be eligible for treatment as an S corporation for federal
income tax purposes. However, qualification as an S
corporation offers a potential tax benefit unavailable
to a C corporation. If a qualifying corporation elects
to be treated as an S corporation for federal income
tax purposes, then the income, gains, deductions and
losses of the corporation are generally passed through
to the shareholders. Thus, shareholders report the S
corporation’s income, gains, deductions and losses on
their individual federal income tax returns, eliminating the
potential for double taxation of corporate earnings in most

      However, many employee benefit deductions
are not available for benefits provided to two percent
shareholders of an S corporation. For example, an S
corporation can provide a cafeteria plan to its employees,
but the two percent shareholders cannot participate and
receive the tax advantages that such a plan provides.

     It is important to note that S corporation treatment
is not available to all corporations. It is available only
to qualifying corporations that file an election with
the IRS. Qualifying corporations must satisfy several
requirements, including limitations on the number and
type of shareholders and on who can own stock in the

Limited Liability Company
      A limited liability company (LLC) is a type of entity
that provides limitation of liability for owners, like a
corporation. However, state law generally provides much
more flexibility in the structuring and governance of
an LLC as opposed to a corporation. In addition, most
LLCs are treated as partnerships for federal income
tax purposes, thus providing LLC members with pass-
through tax treatment. Moreover, LLCs are not subject
to the same qualification requirements that apply to
S corporations. However, it should be noted that a
corporation may be a better choice of entity than an LLC
if an IPO is anticipated.

Choosing the Best Form of
      There is no single best form of ownership for a
business. That’s partly because the limitations of a
particular form of ownership can often be compensated
for. For instance, a sole proprietor can often buy
insurance coverage to reduce liability exposure, rather
than form a limited liability entity.

Even after you have established your business as a
particular entity, you may need to re-evaluate your
choice of entity as the business evolves. An experienced
attorney and tax advisor can help you decide which form
of ownership is best for your business.

                                                                           Visit our Web site at • 39
       Oklahoma Society of CPAs

 Tax Planning for the Self-Employed

         elf-employment ... the opportunity to be your own boss, to come       benefits. With such a plan, your business may be allowed an immediate
         and go as you please, and oh yes, to establish a lifelong bond with   federal income tax deduction for funding the plan. You can also generally
         your accountant. If you’re self-employed, you’ll need to pay your     place pretax dollars into a retirement account to grow tax deferred until
 own FICA taxes and take charge of your own retirement plan, among             withdrawal. You may want to use one of the following types of retirement
 other things. Here are some planning tips.                                    plans:
                                                                                    •     Keogh plan;
                                                                                    •     Simplified employee pension (SEP);
 Understand self-employment tax and                                                 •     SIMPLE IRA;
 how it’s calculated.                                                               •
                                                                                          SIMPLE 401(k); or
                                                                                          Individual (or “solo”) 401(k).
      As a starting point, make sure that you understand (and comply
 with) your federal tax responsibilities. The federal government uses self-          The type of retirement plan that your business should establish
 employment tax to fund Social Security and Medicare benefits. You must        depends on your specific circumstances. Explore all of your options
 pay this tax if you have more than a minimal amount of self-employment        and consider the complexity of each plan. And bear in mind that if your
 income. If you file a Schedule C as a sole proprietor, independent            business has employees, you may have to provide coverage for them as
 contractor, or statutory nonemployee, the net profit listed on your           well. For more information about your retirement plan options, consult a
 Schedule C (or Schedule C-EZ) is self-employment income and must              tax professional or see IRS Publication 560.
 be included on Schedule SE, which is filed with your federal Form 1040.
 Schedule SE is used both to calculate self-employment tax and to report
 the amount of tax owed. For more information, see IRS Publication 533.        Take full advantage of all business
                                                                               deductions to lower taxable income.
 Make your estimated tax payments on                                                 Because deductions lower your taxable income, you should make
 time to avoid penalties.                                                      sure that your business is taking advantage of any business deductions
                                                                               to which it is entitled. You may be able to deduct a variety of business
         Employees generally have income tax, Social Security tax, and         expenses, including rent or home office expenses, and the costs of office
 Medicare tax withheld from their paychecks. But if you’re self-employed,      equipment, furniture, supplies and utilities. To be deductible, business
 it’s likely that no one is withholding federal and state taxes from your      expenses must be both ordinary (common and accepted in your trade
 income. As a result, you’ll need to make quarterly estimated tax payments     or business) and necessary (appropriate and helpful for your trade or
 on your own (using IRS Form 1040-ES) to cover your federal income             business). If your expenses are incurred partly for business purposes and
 tax and self-employment tax liability. You’ll probably have to make           partly for personal purposes, you can deduct only the business-related
 state estimated tax payments, as well. If you don’t make estimated tax        portion. If you’re concerned about lowering your taxable income this year,
 payments, you may be subject to penalties, interest and a big tax bill at     consider the following possibilities:
 the end of the year. For more information about estimated tax, see IRS
 Publication 505.                                                                   •    Deduct the business expenses associated with your motor
                                                                                         vehicle, using either the standard mileage allowance or your
      If you have employees, you’ll have additional periodic tax                         actual business-related vehicle expenses to calculate your
 responsibilities. You’ll have to pay federal employment taxes and report                deduction.
 certain information. Stay on top of your responsibilities and see IRS
 Publication 15 for details.                                                        •    Buy supplies for your business late this year that you would
                                                                                         normally order early next year.
 Employ family members to save taxes.
      Hiring a family member to work for your business can create tax               •    Purchase depreciable business equipment, furnishings and
 savings for you; in effect, you shift business income to your relative.                 vehicles this year.
 Your business can take a deduction for reasonable compensation paid
 to an employee, which in turn reduces the amount of taxable business               •    Deduct the appropriate portion of business meals, travel and
 income that flows through to you. Be aware, though, that the IRS can                    entertainment expenses.
 question compensation paid to a family member if the amount doesn’t
 seem reasonable, considering the services actually performed. Also,                •    Write off any bad business debts.
 when hiring a family member who’s a minor, be sure that your business
 complies with child labor laws.                                                    •    Self-employed taxpayers who use the cash method of
                                                                                         accounting have the most flexibility to maneuver at year-end.
      As a business owner, you’re responsible for paying FICA (Social
 Security and Medicare) taxes on wages paid to your employees. The             See a tax specialist for more information.
 payment of these taxes will be a deductible business expense for tax
 purposes. However, if your business is a sole proprietorship and you hire
 your child who is under age 18, the wages that you pay your child won’t
                                                                               Deduct health-care related expenses.
                                                                                    If you qualify, you may be able to benefit from the self-employed
 be subject to FICA taxes.                                                     health insurance deduction, which would enable you to deduct up to 100
                                                                               percent of the cost of health insurance that you provide for yourself, your
      As is the case with wages paid to all employees, wages paid              spouse, and your dependents. This deduction is taken on the front of your
 to family members are subject to withholding of federal income and            federal Form 1040 (i.e., “above-the-line”) when computing your adjusted
 employment taxes, as well as certain taxes in some states.                    gross income, so it’s available whether you itemize or not. The portion of
                                                                               your health insurance premiums that is not deductible there can be added
 Establish an employer-sponsored                                               to your total medical expenses itemized in Schedule A.

 retirement plan                                                                    Contributions you make to a health savings account (HSA) are also
       Because you’re self-employed, you’ll need to take care of your own      deductible “above-the-line.” An HSA is a tax-exempt trust or custodial
 retirement needs. You can do this by establishing an employer-sponsored       account you can establish in conjunction with a high-deductible health
 retirement plan, which can provide you with a number of tax and nontax        plan to set aside tax-free funds for health-care expenses.

40 • 2010 Financial Fitness Kit
                                                     Chapter 8 • What to Consider When You Become Your Own Boss

Properly Insuring Your Business

         o matter how careful you are in running your business, accidents             Your business can also purchase life insurance and disability
         happen. And no matter how big or small your business, you’ll           insurance on a key employee — someone who is key to the success
         have to plan for these and other risks if you want your business to    of your business (i.e., this employee brings in substantial accounts or
thrive. One way to do this is with insurance.                                   has specialized knowledge or talent). Again, on the triggering event,
                                                                                your business would receive a sum of money to compensate for the
       Imagine this: Your custom-made cabinetry business is thriving. You       lost income generated by the employee or for the cost of replacing
have a handful of talented employees and a stack of orders. Then, the           the employee.
unthinkable happens. You or one of your employees is severely injured
using the equipment. Or a fire damages all of the cabinets you’ve spent              Note: These types of policies are different from workers’
the last few months building. Or a customer calls to tell you that the new      compensation insurance, which all states require businesses to
cabinets you installed yesterday just fell and crashed onto her kitchen         have. Workers’ compensation insurance provides compensation to
floor.                                                                          your	employees	if	they’re	injured	at	work	or	get	sick	from	job-related	
                                                                                causes.	Once	an	employee	opts	to	receive	benefits	under	such	a	
                                                                                policy, he or she is usually prohibited from suing your business for the
Protect your business from physical                                             same	injuries.
      Your business is situated somewhere — an office park, a                   Protect your business assets if
warehouse, a barn. And just like your home, this structure (and all of
its contents) is susceptible to damage from many causes. Property and           someone threatens or sues your
casualty insurance provides coverage for losses due to the physical
damage or destruction of your business. With the right policy, neither fire     business.
nor exploded boiler can put you out of business. Everything from your                 If your cabinet installation goes awry and your best customer
office building to your cabinets to your water cooler can be covered.           (or so you thought) calls screaming at you on the phone, what will
                                                                                you do? With a liability insurance policy, the insurance company will
      You can buy various types of insurance protection separately, or you      pay (up to policy limits) third parties who claim they were injured or
can purchase one package that covers many potential hazards. Among              their property damaged by your product or service. If a lawsuit is
the forms of coverage you can purchase are:                                     threatened or filed, the insurance company will hire and pay (again,
                                                                                up to policy limits) a lawyer to defend you.
     •    Building and equipment insurance: This protects you if your
          facility or equipment is damaged or destroyed                                You can purchase general business liability insurance separately
                                                                                or as part of a commercial package policy, which combines this
     •    Valuable papers insurance: This protects you if the                   coverage with other types of coverages, such as property and
          documentation supporting your accounts receivable or other            casualty insurance. Certain small businesses, including retail
          valuable business records is lost or destroyed                        outfits, can buy a business owners policy, which includes a general
                                                                                liability insurance line. If your business needs broader coverage
     •    Crime insurance: This protects your business in case of theft         or higher liability limits than these policies offer, you can purchase
                                                                                supplemental liability insurance with a commercial umbrella policy.
     •    Business interruption insurance: This protects you by
          replacing some or all of your operating cash flow if your                   An important point: If you provide professional services (e.g.,
          business is unable to maintain its normal operations for a            doctor, lawyer, accountant), a general liability policy doesn’t cover you
          period of time due to a covered event                                 for losses incurred by third parties arising from your professional acts.
                                                                                In this case, you may need to buy professional liability insurance such
                                                                                as malpractice insurance, which protects you against liability for injury
Keep your business afloat if you or                                             done to others due to your misconduct or lack of skill; or errors and
                                                                                omissions insurance, which protects you against liability for things
a key employee dies or becomes                                                  that you did improperly or failed to do.
      If you were to die prematurely or become permanently disabled and         Attract and keep employees with
could no longer work, would your business survive financially? It’s easy
to believe that such a tragedy won’t befall you. But remember, accidents        insurance-related employee benefits
happen not only on the job but also at home, and illness can strike                  Nowadays, insurance is a crucial component of most employee
anyone. Though the death or disability of an owner may be a minor issue         benefit packages. In fact, the types of insurance that you offer (and
for large businesses, small businesses may find themselves in a bind.           pay for) might be a key factor in a person’s decision to accept a job
And if you’re a sole proprietor, you’re personally responsible for all of the   with you or an employee’s desire to work for your business long
debts of your business, so everything you own could be repossessed if           term. Insurance helps employees feel secure, and this security can
you’re unable to pay your bills.                                                translate into loyalty and strong job performance. Here is a list of
                                                                                group plans that you might decide to offer as part of your employee
      To survive a money crunch, your business can purchase life                benefits package:
insurance and disability insurance to cover you, with the business named             •     Health insurance;
as the beneficiary. Upon a triggering event (death or disability), the policy        •     Dental and vision insurance;
will pay your business a certain amount of money, which it can use to                •     Life insurance;
cover its normal operating expenses like rent, utilities, employee salaries,         •     Disability insurance; or
advertising and maintenance costs.                                                   •     Long-term care insurance.

                                                                                     In each case, the employee receives all of the benefits under the

                                                                                             Visit our Web site at • 41
          Oklahoma Society of CPAs

 Choosing a Credit Card

        ike dandelions in a spring lawn, credit card offers pop up                            on balance transfers;
        everywhere — stuffing your mailbox, flashing on the Internet, even
        falling from the magazines in your doctor’s waiting room. And they               •    A low introductory interest rate that applies only for a very short
 all sound so attractive. “0% APR until next year!” “No fee if you transfer a                 period of time;
 balance now!” “Low fixed rate!” You’re thinking of applying for a card, but
                                                                                         •    Balance transfer fees, particularly uncapped amounts
 how do you decide which offer is best for you?
                                                                                              calculated as a percentage of the balance transferred; and

 Learn the lingo.                                                                        •    Termination fees and retroactive interest charges levied if you
                                                                                              decide to surf the next wave and close the account or transfer
      In order to evaluate credit card offers, you’ll need to learn the
 language they use. Here are some of the more important terms.                                the balance to another card before a specified time period has
      •     Annual percentage rate (APR): the cost of credit as indicated
            by a yearly (fixed or variable) interest rate. This rate and the              When you transfer a balance from an existing card to a new one, it’s
            periodic rate (the APR expressed as a daily or monthly factor)          a good idea to close the account you’re leaving. By doing so, you won’t
            must be disclosed to you before you become obligated on the             be tempted to use the card again (at a higher rate of interest once the
            card.                                                                   introductory offer period has expired), and you’ll minimize the potential
                                                                                    for fraudulent use or identity theft. What’s more, if you don’t close such
      •     Balance computation method: the formula used to determine               accounts and later try to transfer your balance again, a new card issuer
            the outstanding balance on which you’re charged interest for            might turn down your application, afraid you’ll incur too much debt by
            the billing period.                                                     running up new balances on dormant, but open, credit card accounts.

      •     Finance charge: the cost of credit for the billing cycle,
            expressed as a dollar amount and determined by multiplying              Voice your concern if you’re turned
            the outstanding balance by the periodic rate.
      •     Fees: charges (other than the finance charge) that may be                    If you’re turned down for a credit card, the issuer must inform
            levied against your account. Common examples include an                 you specifically why you were turned down or tell you how to get this
            annual fee, cash advance fees, balance transfer fees, late              information. When the rejection is based even in part on information
            payment fees and over-the-limit fees.                                   contained in your credit report, you’re entitled to a free copy of the report
                                                                                    from the credit bureau that issued it. Get the report and review it; if you
      •     Grace period: the length of time prior to your payment due              discover incorrect notations on it, dispute them.
            date during which you may pay off your account without
            incurring any finance charge.                                                Then contact the card issuer to plead your case, informing the issuer
                                                                                    of any corrections made to your credit report. With persistence, you may
 Once you can talk the talk, ask                                                    be able to convince the issuer to approve your credit application.

 questions.                                                                         Speak up for your rights.
      Any credit card will cost you something, but depending on the terms                Your consumer rights related to credit cards are protected by various
 and conditions, some are more costly than others. When evaluating a                federal laws.
 credit card offer, here are some points to consider:
                                                                                         •    The Fair Credit Reporting Act (FCRA) protects your right
      •     What’s the interest rate? Is it fixed or variable? If variable, how               to know what’s in your credit file and sets up procedures to
            is it calculated?                                                                 ensure that credit reporting agencies or credit bureaus furnish
                                                                                              correct information about you.
      •     Will you be charged different interest rates for purchases,
            balance transfers, and cash advances?                                        •    The Fair and Accurate Credit Transactions Act of 2003 (FACTA)
                                                                                              amends and strengthens the FCRA, provides protections
      •     What method determines the outstanding balance used to
                                                                                              against identity theft, improves resolution of consumer
            calculate the finance charge?
                                                                                              disputes, improves the accuracy of consumer records, and
      •     Is there an annual fee, and what other fees may be charged?                       makes improvements in the use of and consumer access to
                                                                                              creditor information.
      •     What’s the length of the grace period (if any)?
                                                                                         •    The Equal Credit Opportunity Act (ECOA) ensures that when
       What you should look for depends in part on how you’ll use the                         you apply for credit, you won’t be discriminated against
 card. If you intend to pay off the balance each month and won’t incur                        because of your gender, race, marital status or age.
 any finance charges, obtaining a low interest rate is less important than
                                                                                         •    The Fair Credit Billing Act (FCBA) offers protection against
 finding a card with no annual fee, minimal transaction fees, and a long
                                                                                              billing errors (including limiting your liability for unauthorized
 grace period. If you’ll carry a balance from month to month, you’ll want a
                                                                                              purchases) and may help you reverse the purchase of inferior
 low interest rate and a balance calculation method that minimizes your
                                                                                              goods or services charged to your credit card.
 finance charges.
                                                                                         •    The Fair Debt Collection Practices Act (FDCPA) spells out what
 About Balance Transfers                                                                      practices collection agents may and may not use to collect a
       Perhaps you’re not currently using your credit card, but you want
 to minimize the finance charge on your existing balance. One way to                     •    If you feel your rights have been violated and you can’t resolve
 do so is to transfer your balance periodically to a new card with a low                      the issue with the creditor, you may file a complaint with one of
 introductory “teaser” rate of interest. If you choose to “surf” in this fashion,             the federal agencies responsible for enforcing consumer credit
 be cautious. Watch out for:                                                                  laws, including the Federal Trade Commission (FTC), or you
      •     A low interest rate on new purchases, but a higher interest rate                  can contact your state’s attorney general.

42 • 2010 Financial Fitness Kit
                                                            Chapter 9 • Managing Credit Cards and Getting Out of Debt

 Understanding Your Credit Report

       our credit report contains information about your past and present               You may be surprised at how many accounts show up on your
       credit transactions. It’s used primarily by potential lenders to            report. If you find inactive accounts (e.g., a retailer you no longer do
       evaluate your creditworthiness. So if you’re about to apply for credit,     business with), you should contact the credit card company, close the
especially for something significant like a mortgage, you’ll want to get and       account and ask for a letter confirming that the account was closed at the
review a copy of your credit report.                                               customer’s request.

You can see what they see: getting a                                               Basing the Future on the Past
                                                                                        What all this information means in terms of your creditworthiness
copy of your credit report.                                                        depends on the lender’s criteria. Generally speaking, a lender feels safer
     Every consumer is entitled to a free credit report every 12 months            assuming that you can be trusted to make timely monthly payments
from each of the three credit bureaus. To get your free annual report, you         against your debts in the future if you have always done so in the past. A
can contact each of the three credit bureaus individually, or you can contact      history of late payments or bad debts will hurt you. Based on your track
one centralized source that has been created for this purpose. Besides             record, a new lender is likely to turn you down for credit or extend it to
the annual report, you are also entitled to a free report under the following      you at a higher interest rate if your credit report indicates that you are a
circumstances:                                                                     poor risk.
     •    A company has taken adverse action against you, such as
          denying you credit, insurance or employment (you must request a               Too many inquiries on your credit report in a short time can also
          copy within 60 days of the adverse action);                              make lenders suspicious. Loan officers may assume that you’re being
                                                                                   turned down repeatedly for credit or that you’re up to something — going
     •    You’re unemployed and plan to look for a job within the next 60          on a shopping spree, financing a bad habit or borrowing to pay off other
          days;                                                                    debts. Either way, the lenders may not want to take a chance on you.
     •    You’re on welfare; or
                                                                                        Your credit report may also indicate that you have good credit, but
     •    Your report is inaccurate because of fraud, including identity theft.    not enough of it. For instance, if you’re applying for a car loan, the lender
                                                                                   may be reviewing your credit report to determine if you’re capable of
    You can order your free annual report online at www.                           handling monthly payments over a period of years. The lender sees that, by calling 877-322-8228, or by completing an               you’ve always paid your charge cards on time, but your total balances
Annual Report Request Form and mailing it to Annual Credit Report                  due and monthly payments have been small. Because the lender can’t
Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.                          predict from this information whether you’ll be able to handle a regular car
                                                                                   payment, your loan is approved only on the condition that you supply an
     Alternatively, you can contact each of the three credit bureaus:              acceptable cosigner.
     •    Experian National Consumer Assistance Center, www.experian.
          com, P.O. Box 2104, Allen, TX 75013-2104, (888) 397-3742;                Correcting Errors on your Credit
     •    Trans Union LLC, Consumer Disclosure Center, www.transunion.
          com, 1000, Chester, PA 19022, (800) 916-8800; and
                                                                                        Under federal and some state laws, you have a right to dispute
     •    Equifax, Inc.,, P.O. Box 740241, Atlanta, GA             incorrect or misleading information on your credit report. Typically, you’ll
          30374, (800) 685-1111.                                                   receive with your report either a form to complete or a telephone number
                                                                                   to call about the information that you wish to dispute. Once the credit
      If you make your request online, you should get access to your report        bureau receives your request, it generally has 30 days to complete a
immediately. If you request your report by phone or mail, you should receive       reinvestigation by checking any item you dispute with the party that
it within 15 days.                                                                 submitted it. One of four things should then happen:
                                                                                        •    The credit bureau reinvestigates, the party submitting the
What’s it all about?                                                                         information agrees it’s incorrect, and the information is
      Your credit report usually starts off with your personal information: your             corrected.
name, address, Social Security number, telephone number, employer, past
                                                                                        •    The credit bureau reinvestigates, the party submitting the
address and past employer, and (if applicable) your spouse’s name. Check
                                                                                             information maintains it’s correct, and your credit report goes
this information for accuracy; if any of it is wrong, correct it with the credit
bureau that issued the report.
                                                                                        •    The credit bureau doesn’t reinvestigate, and so the disputed
     The bulk of the information in your credit report is account information.               information must be removed from your report.
For each creditor, you’ll find the lender’s name, account number, and type of           •    The credit bureau reinvestigates, but the party submitting the
account; the opening date, high balance, present balance, loan terms, and                    information doesn’t respond, and so the disputed information
your payment history; and the current status of the account. You’ll also see                 must be removed from your report.
status indicators that provide information about your payment performance
over the past 12 to 24 months. They’ll show whether the account is or has                You should be provided with a report on the reinvestigation within
been past due, and if past due, they’ll show how far (e.g., 30 days, 60            five days of its conclusion. If the reinvestigation resulted in a change to
days). They’ll also indicate charge-offs or repossessions. Because credit          your credit report, you should also get an updated copy.
bureaus collect information from courthouse and registry records, you
may find notations of bankruptcies, tax liens, judgments, or even criminal              You have the right to add to your credit report a statement of 100
proceedings in your file.                                                          words or less that explains your side of the story with respect to any
                                                                                   disputed but unchanged information. A summary of your statement will
     At the end of your credit report, you’ll find notations on who has            go out with every copy of your credit report in the future, and you can
requested your information in the past 24 months. When you apply for               have the statement sent to anyone who has gotten your credit report in
credit, the lender requests your credit report — that will show up as an           the past six months. Unfortunately, though, this may not help you much
inquiry. Other inquiries indicate that your name has been included in a            — creditors often ignore or dismiss these statements.
creditor’s prescreen program. If so, you’ll probably get a credit card offer in
the mail.

                                                                                                Visit our Web site at • 43
          Oklahoma Society of CPAs

 Credit Traps for the Unwary

     t’s hard to imagine functioning in today’s society without access to             You may also incur a wide variety of fees. Creditors may charge you
     credit. However, you need to be careful not to fall victim to some of      an annual fee to maintain the account. These fees can range from $25 to
     the pitfalls associated with it.                                           $50 or more each year. They may also charge fees to transfer balances
                                                                                from other cards. Generally, these processing fees equal two to four
 Revolving credit can make it hard for                                          percent of the amount you transfer. Many banks levy a similar surcharge
                                                                                on transactions involving conversions from foreign currencies. If you’re
 you to pay off debt.                                                           late with your monthly payment, you may be charged a late payment fee
                                                                                that can be as much as $39 each month you’re overdue. If your account
      Credit cards allow you to spend money you don’t currently have, and       balance rises above your approved credit limit, you will be assessed a
 to repay what you’ve spent over time instead of all at once. When you          monthly overlimit fee until you bring the total balance due under the limit
 use a card, the balance you owe increases, and your remaining available        you’re allowed.
 credit decreases. As you make your payments to reduce your outstanding
 balance, your available credit once again increases. Thus, your credit                When these fees add up, you may find that making your minimum
 revolves around for you to use again.                                          monthly payment won’t bring your balances down. In fact, your balance
                                                                                will increase if your monthly payment isn’t greater than the accumulated
       Since you can spend more than you currently have, you can easily         interest and fees due, since these unpaid charges become a part of the
 spend more than you can afford. As your balance increases, your                principal you owe. Moreover, your account may then be considered past
 minimum monthly payments also increase, and soon you’ll find yourself          due and reported as such to the credit bureaus.
 in over your head — especially if interest rates and a variety of fees are
                                                                                If you surf your debt, beware the wake
 Interest and fees can add to the cost                                                You may periodically transfer your balance from one introductory
                                                                                offer to the next. This is known as surfing. Done successfully, surfing lets
       Credit card debt generally carries a high interest rate. Your minimum    you avoid the higher interest charges that your debt would incur when
 monthly payment — a percentage (often as low as two to four percent) of        the original card offer expires. By the time the interest rate on the original
 the total balance due — may cover little more than the monthly interest        card increases, you’ve surfed over to a new offer at another low rate.
 charge. Consequently, your minimum payment may only minimally
 decrease what you already owe. If possible, increase your monthly                    Although surfing helps keep your interest charges to a minimum,
 payment above the minimum required. The higher you can make the                it’s not without pitfalls. You may be offered a low rate only on balance
 payment, the faster you will pay off the debt.                                 transfers; if new purchases and cash advances are billed at a higher
                                                                                interest rate, these charges could offset the savings you would otherwise
      When opening a new account, always check to see how the finance           enjoy. Moreover, as creditors move to counteract the surfing trend, many
 charge is calculated. Here are some of the methods used:                       stipulate that if you transfer balances to another card within a certain time
      •    Adjusted balance method: Balance due at the beginning                after opening your account, you’ll be retroactively charged a higher rate of
           of the billing cycle less any payments made during the cycle;        interest on the amount you transfer. Thus, surfing before this time period
           excludes new purchases made during the cycle.                        is up eliminates the savings.

      •    Previous balance method: Balance due at the beginning of                   Finally, if you transfer balances to a new card, close the original
           the billing cycle.                                                   account as soon as you’ve paid it off. Write the creditor a letter (keep
                                                                                a copy for your records) asking it to inform the credit bureaus that the
      •    Average daily balance method: Total of the balances due
                                                                                account was closed at your request. This prevents new potential creditors
           each day in the billing cycle divided by the number of days
                                                                                from denying you credit when they see too many open lines of credit, and
           in the cycle; payments made are subtracted as posted to
                                                                                it also deters anyone else from fraudulently using an inactive account.
           determine daily balances; new purchases may or may not be
           added in.
      •    Two-cycle average daily balance method: Same as the
                                                                                Protect yourself against credit fraud
           average daily balance method, but over two consecutive billing
                                                                                and identity theft.
                                                                                      Credit fraud (the illegal use of your accounts) and identity theft
                                                                                (opening new credit using information about you) are two of the fastest-
      The amount of your finance charge can vary widely from method             growing crimes today. In many cases, you may not know you’ve been
 to method. Because finance charges result in higher interest charges,          victimized until it’s too late. Here are some indicators of these crimes:
 creditors favor either of the last two methods mentioned above.
                                                                                     •    A creditor informs you that it received an application in your
       In an effort to attract your business, many lenders offer very low                 name;
 introductory rates — 3.9 percent annually or less. However, these rates
 generally last no more than three to six months and increase to the                 •    You’ve been approved for or denied credit you didn’t apply for;
 current market rate thereafter. Moreover, the introductory rates may                •    You no longer get your credit card statements in the mail; and
 apply only to balances you transfer from other cards. They may not apply
 to new purchases and rarely if ever to cash advances. Finally, if your              •    Your credit card statements include purchases or cash
 monthly payment is late, the interest rate may be automatically raised to                advances you never made.
 the current market rate — and sometimes beyond.
                                                                                      To minimize the chances of being victimized, take precautions
       If you have two different interest rates on one account (e.g., a lower   to safeguard your credit account information. Don’t carry credit cards
 rate for purchases, a higher one for cash advances), the creditor will post    you don’t use often. Be sure to sign your cards, and never sign a blank
 the payments toward the lower interest rate balance, not the higher. To        charge slip. When you use the card, try to keep it within your sight. Save
 avoid this, use two different cards if possible — one for purchases you        your receipts, and obtain and destroy any carbons. Don’t allow a sales
 will pay off when the bill comes (thus incurring no interest charge) and the   clerk to write your credit card number on a check “for identification.”
 second, lower-rate card if you have to carry a balance.                        Finally, never give out your account number over the telephone unless
                                                                                you initiated the call and know the organization to be reputable.

44 • 2010 Financial Fitness Kit
                                                           Chapter 9 • Managing Credit Cards and Getting Out of Debt

Debt Consolidation and

I                                                              Advantages of Debt
    f you have a lot of debt, you’re not alone. Today,
    more and more Americans are burdened with credit
    card and loan payments. So whether you are trying
to improve your money management, having difficulty
making ends meet, want to lower your monthly loan                   •    The monthly payment on a consolidation loan
payments or just can’t seem to keep up with all of your                  is usually substantially lower than the combined
credit card bills, you may be looking for a way to make                  payments of smaller loans.
debt repayment easier. Debt consolidation may be the
answer.                                                             •    Consolidation loans usually offer lower interest
What is debt consolidation?                                         •    Consolidation makes bill paying easier since
     Debt consolidation is when you roll all of your
                                                                         you have only one monthly payment, instead
smaller individual loans into one large loan, usually with
                                                                         of many.
a longer term and a lower interest rate. This allows you to
write one check for a loan payment instead of many, while
lowering your total monthly payments.                          Disadvantages of Debt
How do you consolidate your                                    Consolidation
debts?                                                              •    If you use a home equity loan to consolidate
                                                                         your debts, the loan is secured by a lien on
      There are many ways to consolidate your debts.
                                                                         your home. As a result, the lender can foreclose
One way is to transfer them to a credit card with a lower
                                                                         on your home if you default on the loan.
interest rate. Most credit card companies allow you to
transfer balances by providing them with information,
                                                                    •    If the term of your consolidation loan is longer
such as the issuing bank, account number and
                                                                         than the terms of your smaller existing loans,
approximate balance. Or, your credit card company may
                                                                         you may end up paying more total interest even
send you convenience checks that you can use to pay
                                                                         if the rate is lower. So you won’t actually be
off your old balances. Keep in mind, however, that there
                                                                         saving any money over time, even though your
is usually a fee for this type of transaction, and the lower
                                                                         monthly payments will be less.
rate may last only for a certain period of time (e.g., six
                                                                    •    If you use a longer-term loan to consolidate
                                                                         your debts, it will take you longer to pay off your
      Another option is to obtain a home equity loan. Most
banks and mortgage companies offer home equity loans.
You’ll need to fill out an application and demonstrate to
the lender that you’ll be able to make regular monthly
payments. Your home will then be appraised to determine
                                                               Should you consolidate your
the amount of your equity. Typically, you can borrow an        debts?
amount equal to 80 percent of the value of the equity in
your home. Interest rates and terms for home equity loans            For debt consolidation to be worthwhile, the monthly
vary, so you should shop around and compare lenders.           payment on your consolidation loan should be less than
                                                               the sum of the monthly payments on your individual
      Some lenders offer loans specifically designed           loans. If this isn’t the case, consolidation may not be
for debt consolidation. Again, you’ll need to fill out an      your best option. Moreover, the interest rate on your
application and demonstrate to the lender that you’ll be       consolidation loan should be lower than the average of
able to make regular monthly payments. Keep in mind,           the interest rates on your individual loans. This allows you
however, that these loans usually come with higher             not only to save money but also to lower your monthly
interest rates than home equity loans and, depending on        payment.
the amount you borrow, may require collateral on the loan
(e.g., your car or bank account).

                                                                                            Visit our Web site at • 45
                    Oklahoma Society of CPAs

                                       Retirement Issues to Watch in

                                               ecent years have seen a flurry of legislation            conversion, so speak with a financial professional first to
                                               affecting retirement plans. Here are some of the         make sure this strategy works for you.
                                               more significant changes that take effect in 2010.

                                                                                                        Employer plan conversions for
                                       Nonspouse Rollovers Must Be
   360 Degrees of Financial Literacy

                                       Permitted                                                              Beginning in 2008, employees and beneficiaries
                                              The Pension Protection Act of 2006 allowed, for           were permitted for the first time to essentially “convert”
                                       the first time, nonspouse beneficiaries to make a direct         employer plan distributions by rolling the funds over to a
                                       rollover of inherited funds from an employer plan to an          Roth IRA. This was allowed, however, only if the payee
                                       IRA. While the provision seemed fairly straightforward           satisfied the income and marital status limits that applied
                                       at the time, confusion arose as to whether plans were            to traditional IRA conversions. The elimination of those
                                       actually required to allow these rollovers. Congress             restrictions by TIPRA, described above, also applies
                                       addressed this in the Worker, Retiree and Employer               to distributions from employer plans — so beginning in
                                       Recovery Act of 2008 — beginning in 2010, employer               2010, anyone who receives an eligible distribution of
                                       plans must let nonspouse beneficiaries make a direct             non-Roth funds from an employer plan can roll those
                                       rollover to an IRA if they so choose. The new law also           funds over to a Roth IRA, regardless of income or marital
                                       clarified that prior to 2010 employer plans could, but were      status. This applies even to nonspouse beneficiaries
                                       not required to, allow the rollovers.                            — but only if the transfer to the IRA is done in a direct
                                       IRA conversions for (almost)                                           While the special 2010 deferral rule described
                                       everyone!                                                        earlier doesn’t apply to rollovers from employer plans to
                                                                                                        Roth IRAs, there’s another potential workaround—you
                                            Beginning in 2010, if you own a traditional IRA, you’ll     can simply roll your employer plan distribution over first
                                       be able to convert it to a Roth IRA. The income limits           to a traditional IRA, and then convert that traditional
                                       and marital status requirements that previously applied          IRA to a Roth in 2010. (Again, however, you’ll need to
                                       to Roth conversions were repealed by the Tax Increase            aggregate all your traditional IRAs to determine the tax
                                       Prevention and Reconciliation Act of 2005 (TIPRA).               consequences of the conversion, so first make sure this
                                                                                                        strategy works for you.)
                                              In addition, if you convert a traditional IRA to a Roth
                                       IRA in 2010, you’ll be able to report half the income on
                                       your 2011 tax return and half on your 2012 return. Or, if        Here comes the DB(k) ...
                                       it’s to your benefit, you can instead elect to include the             Beginning in 2010, “small employers” (those that
                                       entire amount in income on your 2010 return. It’s up to          generally employ at least 2 and no more than 500
                                       you.                                                             employees) can adopt a DB(k) plan — a single plan that
                                                                                                        incorporates both a 401(k) plan and a defined benefit plan
                                             If you inherit a traditional IRA from your spouse,         (including a cash balance plan). A single trust is used, but
                                       and you elect to treat that IRA as your own, you’ll also be      there is separate accounting for the defined benefit and
                                       able to convert the inherited IRA to a Roth IRA in 2010,         401(k) portions of the plan.
                                       regardless of your income or marital status. Nonspouse
                                       beneficiaries, however, still can’t convert an inherited              The plan must meet certain benefit, contribution,
                                       traditional IRA to a Roth.                                       vesting and nondiscrimination requirements. In return,
                                                                                                        the plan will be exempt from top-heavy rules and certain
                                             Note that the income limits for contributing to a Roth     401(k) testing.
                                       IRA haven’t changed for 2010. If your income is high
                                       enough, your ability to make regular contributions to a                 Because the DB(k) plan is one plan instead of two,
                                       Roth IRA in 2010 may be limited, or even eliminated.             it is expected that the plan will be simpler to administer
                                       The ability to convert a traditional IRA to a Roth               and less costly than maintaining two separate plans.
                                       without income limits, however, provides a potential             This, in turn, may provide an incentive for employers to
                                       workaround—you can make your annual contribution                 begin offering defined benefit plans to their employees in
                                       to a traditional IRA, and then immediately convert that          addition to 401(k) plans. Whether this proves to be the
                                       traditional IRA to a Roth. You’ll have to aggregate all your     case, however, remains to be seen.
                                       traditional IRAs when calculating the tax effect of the

  Created by the American
  Institute of Certified Public
  Accountants and
  the California Society of
  Certified Public Accountants

46 • 2010 Financial Fitness Kit
                                                               Chapter 10 • Investments, Retirement and Estate Planning

Annuities and Retirement Planning
       ou may have heard that IRAs and employer-sponsored plans                         income.
       (e.g., 401(k)s) are the best ways to invest for retirement.                 •    You don’t have to meet income tests or other criteria to invest in an
       That’s true for many people, but what if you’ve maxed out your                   annuity.
contributions to those accounts and want to save more? An annuity may              •    You’re not subject to an annual contribution limit, unlike IRAs and
be a good investment to look into.                                                      employer-sponsored plans. You can contribute as much or as little as
                                                                                        you like in any given year.
Get the lay of the land.                                                           •    You’re not required to start taking distributions from an annuity at age
                                                                                        70½ (the required minimum distribution age for IRAs and employer-
      An annuity is a tax-deferred investment contract. The details on how              sponsored plans). You can typically postpone payments until you
it works vary, but here’s the general idea. You invest your money (either               need the income.
a lump sum or a series of contributions) with a life insurance company
that sells annuities (the annuity issuer). The period when you are funding    But annuities aren’t for everyone. Here are some potential drawbacks:
the annuity is known as the accumulation phase. In exchange for your               •    Contributions to nonqualified annuities are made with after-tax
investment, the annuity issuer promises to make payments to you or a                    dollars and are not tax deductible.
named beneficiary at some point in the future. The period when you are             •    Once you’ve elected to annuitize payments, you usually can’t change
receiving payments from the annuity is known as the distribution phase.                 them, but there are some exceptions.
Chances are, you’ll start receiving payments after you retire.                     •    You can take your money from an annuity before you start receiving
                                                                                        payments, but your annuity issuer may impose a surrender charge
Understand your payout options.                                                         if you withdraw your money within a certain number of years (e.g.,
                                                                                        seven) after your original investment.
     Understanding your annuity payout options is very important. Keep
in mind that payments are based on the claims-paying ability of the                •    You may have to pay other costs when you invest in an annuity (e.g.,
issuer. You want to be sure that the payments you receive will meet your                annual fees, investment management fees, insurance expenses).
income needs during retirement. Here are some of the most common                   •    You may be subject to a 10 percent federal penalty tax (in addition to
payout options:                                                                         any regular income tax) if you withdraw your money from an annuity
     •    You surrender the annuity and receive a lump-sum payment of                   before age 59½, unless you meet one of the exceptions to this rule.
          all of the money you have accumulated.                                   •    Investment gains are taxed at ordinary income tax rates, not at the
     •    You receive payments from the annuity over a specific number                  lower capital gains rate.
          of years, typically between five and 20. If you die before
          this “period certain” is up, your beneficiary will receive the
          remaining payments.
                                                                              Choose the right type of annuity.
                                                                                   If you think that an annuity is right for you, your next step is to decide
     •    You receive payments from the annuity for your entire lifetime.     which type of annuity. Overwhelmed by all of the annuity products on the
          You can’t outlive the payments (no matter how long you live),       market today? Don’t be. In fact, most annuities fit into a small handful of
          but there will typically be no survivor payments after you die.     categories. Your choices basically revolve around two key questions.
     •    You combine a lifetime annuity with a period certain annuity.
          This means that you receive payments for the longer of your               First, how soon would you like annuity payments to begin? That probably
          lifetime or the time period chosen. Again, if you die before the    depends on how close you are to retiring. If you’re near retirement or already
          period certain is up, your beneficiary will receive the remaining   retired, an immediate annuity may be your best bet. This type of annuity starts
          payments.                                                           making payments to you shortly after you buy the annuity, typically within a
     •    You elect a joint and survivor annuity so that payments last        year or less. But what if you’re younger, and retirement is still a long-term goal?
          for the combined life of you and another person, usually your       Then you’re probably better off with a deferred annuity. As the name suggests,
          spouse. When one of you dies, the survivor receives payments        this type of annuity lets you postpone payments until a later time, even if that’s
          for the rest of his or her life.                                    many years down the road.
      When you surrender the annuity for a lump sum, your tax bill on               Second, how would you like your money invested? With a fixed annuity,
the investment earnings will be due all in one year. The other options        the annuity issuer determines an interest rate to credit to your investment
on this list provide you with a guaranteed stream of income (subject to       account. An immediate fixed annuity guarantees a particular rate, and your
the claims-paying ability of the issuer). They’re known as annuitization      payment amount never varies. A deferred fixed annuity guarantees your rate for
options because you’ve elected to spread payments over a period of            a certain number of years; your rate then fluctuates from year to year as market
years. Part of each payment is a return of your principal investment. The     interest rates change. A variable annuity, whether immediate or deferred, gives
other part is taxable investment earnings. You typically receive payments     you more control and the chance to earn a better rate of return (although with
at regular intervals throughout the year (usually monthly, but sometimes      a greater potential for gain comes a greater potential for loss). You select your
quarterly or yearly). The amount of each payment depends on the               own investments from the subaccounts that the annuity issuer offers. Your
amount of your principal investment, the particular type of annuity, the      payment amount will vary based on how your investments perform.
length of the payout period, your age if payments for lifetime payments
and other factors.                                                                 Note: Variable annuities are sold by prospectus. You should consider the
                                                                              investment	objectives,	risk,	charges	and	expenses	carefully	before	investing.	
Consider the pros and cons.                                                   The prospectus, which contains this and other information about the variable
                                                                              annuity, can be obtained from the insurance company issuing the variable
    An annuity can often be a great addition to your retirement portfolio.
Here are some reasons to consider investing in an annuity:                    annuity	or	from	your	financial	professional.	You	should	read	the	prospectus	
    •     Your investment earnings are tax deferred as long as they           carefully before you invest.
          remain in the annuity. You don’t pay income tax on those

          earnings until they are paid out to you.
           An annuity may be free from the claims of your creditors in
                                                                              Shop around
                                                                                   It pays to shop around for the right annuity. In fact, doing a little homework
          some states.                                                        could save you hundreds of dollars a year or more. Why? Rates of return
    •     If you die with an annuity, the annuity’s death benefit will pass   and costs can vary widely between different annuities. You’ll also want to
          to your beneficiary without having to go through probate.           shop around for a reputable, financially sound annuity issuer. There are firms
    •     Your annuity can be a reliable source of retirement income,         that make a business of rating insurance companies based on their financial
          and you have some freedom to decide how you’ll receive that         strength, investment performance and other factors. Consider checking out
                                                                              these ratings.

                                                                                           Visit our Web site at • 47
                    Oklahoma Society of CPAs

                                       Estate Planning: An Introduction

                                       B                                                               Married Couples
                                                y definition, estate planning is a process designed
                                                to help you manage and preserve your assets
                                                                                                             Married couples have unique estate planning
                                                while you are alive and to conserve and control
                                                                                                       challenges and opportunities. On the one hand, you can
                                       their distribution after your death according to your
                                                                                                       transfer your entire estate to your spouse gift and estate
                                       goals and objectives. But what estate planning means
                                                                                                       tax free under the unlimited marital deduction. This will
                                       to you specifically depends on who you are. Your age,
                                                                                                       postpone taxation until the death of the surviving spouse.
                                       health, wealth, lifestyle, life stage, goals and many other
                                                                                                       While this may be a good outcome for couples with
                                       factors determine your particular estate planning needs.
                                                                                                       smaller estates, couples with combined assets in excess
                                       For example, you may have a small estate and may be
                                                                                                       of the estate tax exemption amount ($3.5 million per
   360 Degrees of Financial Literacy

                                       concerned only that certain people receive particular
                                                                                                       person in 2009) may wind up paying more in estate taxes
                                       things. A simple will is probably all you’ll need. Or, you
                                                                                                       than is necessary because they’ve wasted the exemption
                                       may have a large estate, and minimizing any potential
                                                                                                       of the first spouse to die. Couples in this situation need
                                       estate tax impact is your foremost goal. Here, you’ll need
                                                                                                       to plan in advance to avoid this result (perhaps by using
                                       to use more sophisticated techniques in your estate plan,
                                                                                                       a “credit shelter” or “bypass” trust, or some combination
                                       such as a trust.
                                                                                                       of marital trusts, often referred as an “A/B or A/B/C trust
                                            To help you understand what estate planning means
                                       to you, the following sections address some estate
                                                                                                             Note: Funding a bypass trust with funds from
                                       planning needs that are common among some very
                                                                                                       a retirement plan could have adverse income tax
                                       broad groups of individuals. Think of these suggestions
                                       as simply a point in the right direction, and then seek
                                       professional advice to implement the right plan for you.
                                                                                                            Note: In the states that have “decoupled” their death
                                                                                                       tax systems from the federal system, using a formula
                                       Over 18                                                         provision to fund a bypass trust may increase the chance
                                                                                                       of having to pay state death taxes.
                                            Since incapacity can strike anyone at anytime, all
                                       adults over 18 should consider having:
                                                                                                             Married couples where one spouse is not a U.S.
                                       •    A durable power of attorney: This document lets            citizen have special planning concerns. The marital
                                            you name someone to manage your property for you           deduction is not allowed if the recipient spouse is a non-
                                            in case you become incapacitated and cannot do so.         citizen spouse (although a $133,000 annual exclusion,
                                                                                                       for 2009, is allowed). If certain requirements are met,
                                       •    An advanced medical directive: The three main              however, a transfer to a qualified domestic trust (QDOT)
                                            types of advanced medical directives are (1) a living      will qualify for the marital deduction.
                                            will, (2) a durable power of attorney for health care
                                            (also known as a health-care proxy), and (3) a Do
                                            Not Resuscitate order. Be aware that not all states
                                                                                                       Married with Children
                                                                                                              If you’re married and have children, you and your
                                            allow each kind of medical directive, so make sure
                                                                                                       spouse should each have your own will. For you, wills are
                                            you execute one that will be effective for you.
                                                                                                       vital because they can name a guardian for your minor
                                                                                                       children in case both of you die simultaneously. If you
                                       Young and Single                                                fail to name a guardian in your will, a court may appoint
                                             If you’re young and single, you may not need              someone you might not have chosen. Furthermore,
                                       much estate planning. But if you have some material             without a will, some states dictate that at your death some
                                       possessions, you should at least write a will. If you don’t,    of your property goes to your children and not to your
                                       the wealth you leave behind if you die will likely go to your   spouse. If minor children inherit directly, the surviving
                                       parents, and that might not be what you would want. A will      parent will need court permission to manage the money
                                       lets you leave your possessions to anyone you choose            for them.
                                       (e.g., your significant other, siblings, other relatives or
                                       favorite charity).                                                    You may also want to consult an attorney about
                                                                                                       establishing a trust to manage your children’s assets in
                                                                                                       the event that both you and your spouse die at the same
                                       Unmarried Couples                                               time.
                                              You’ve committed to a life partner but aren’t legally
                                       married. For you, a will is essential if you want your               Certainly, you will also need life insurance. Your
                                       property to pass to your partner at your death. Without a       surviving spouse may not be able to support the family on
                                       will, state law directs that only your closest relatives will   his or her own and may need to replace your earnings to
                                       inherit your property, and your partner may get nothing.        maintain the family.
                                       If you share certain property, such as a house or car, you
                                       should consider owning the property as joint tenants with
                                       rights of survivorship. That way, when one of you dies,
                                       the jointly held property will pass to the surviving partner

  Created by the American
  Institute of Certified Public
  Accountants and
  the California Society of
  Certified Public Accountants

48 • 2010 Financial Fitness Kit
                                                                 Chapter 10 • Investments, Retirement and Estate Planning

Comfortable and Looking
Forward to Retirement
       If you’re in your 30s, you’re probably feeling
comfortable. You’ve accumulated some wealth and you’re
thinking about retirement. Here’s where estate planning
overlaps with retirement planning. It’s just as important
to plan to care for yourself during your retirement as
it is to plan to provide for your beneficiaries after your
death. You should keep in mind that even though Social
Security may be around when you retire, those benefits
alone may not provide enough income for your retirement
years. Consider saving some of your accumulated wealth
using other retirement and deferred vehicles, such as an
individual retirement account (IRA).

Wealthy and Worried
    Depending on the size of your estate when you die,
you may need to be concerned about estate taxes.

      Current federal estate tax law (1) increases the
estate tax exemption from $2 million in 2008 to $3.5
million in 2009, (2) imposes a top estate tax rate of 45
percent, (3) repeals the estate tax for 2010 only and
(4) reinstates the estate tax in 2011, with an exemption
amount of $1 million and a top tax rate of 55 percent.

      There is uncertainty about the exact form the federal
estate tax system will take in future years. However, it
appears that individuals with estates valued at under
$1 million need not worry too much about federal estate
taxes, those with estates between $1 million and $3.5
million should have some flexibility built into their plans,
and those with over $3.5 million need to implement plans
now to avoid having to pay federal estate tax.

      Whether your estate will be subject to state death
taxes depends on the size of your estate and the tax laws
in effect in the state in which you are domiciled.

Elderly or Ill
      If you’re elderly or ill, you’ll want to write a will or
update your existing one, consider a revocable living
trust, and make sure you have a durable power of
attorney and a health-care directive. Talk with your family
about your wishes, and make sure they have copies of
your important papers or know where to locate them.

                                                                                  Visit our Web site at • 49
                    Oklahoma Society of CPAs

                                       Trust Basics

                                                  hether you’re seeking to manage your own           and financial professional before you proceed:
                                                  assets, control how your assets are distributed
                                                  after your death, or plan for incapacity, trusts        •    A trust can be expensive to set up and maintain
                                       can help you accomplish your estate planning goals.                     — trustee fees, professional fees, and filing
                                       Their power is in their versatility — many types of trusts              fees must be paid.
                                       exist, each designed for a specific purpose. Although
                                       trust law is complex and establishing a trust requires the         •    Depending on the type of trust you choose, you
                                       services of an experienced attorney, mastering the basics               may give up some control over the assets in
                                       isn’t hard.                                                             the trust.
   360 Degrees of Financial Literacy

                                                                                                          •    Maintaining the trust and complying with
                                       What is a trust?                                                        recording and notice requirements can take up
                                            A trust is a legal entity that holds assets for the                considerable time.
                                       benefit of another. Basically, it’s like a container that
                                       holds money or property for somebody else. You can put             •    Income generated by trust assets and not
                                       practically any kind of asset into a trust, including cash,             distributed to trust beneficiaries may be taxed
                                       stocks, bonds, insurance policies, real estate and artwork.             at a higher income tax rate than your individual
                                       The assets you choose to put in a trust depend largely                  rate.
                                       on your goals. For example, if you want the trust to
                                       generate income, you may want to put income-producing
                                       securities, such as bonds, in your trust. Or, if you want     The Duties of the Trustee
                                       your trust to create a pool of cash that may be accessible          The trustee of the trust is a fiduciary, someone who
                                       to pay any estate taxes due at your death or to provide for   owes a special duty of loyalty to the beneficiaries. The
                                       your family, you might want to fund your trust with a life    trustee must act in the best interests of the beneficiaries
                                       insurance policy.                                             at all times. For example, the trustee must preserve,
                                                                                                     protect, and invest the trust assets for the benefit of
                                             When you create and fund a trust, you are known         the beneficiaries. The trustee must also keep complete
                                       as the grantor (or sometimes, the settlor or trustor). The    and accurate records, exercise reasonable care and
                                       grantor names people, known as beneficiaries, who             skill when managing the trust, prudently invest the trust
                                       will benefit from the trust. Beneficiaries are usually your   assets, and avoid mixing trust assets with any other
                                       family and loved ones but can be anyone, even a charity.      assets, especially his or her own. A trustee lacking
                                       Beneficiaries may receive income from the trust or may        specialized knowledge can hire professionals such as
                                       have access to the principal of the trust either during       attorneys, accountants, brokers and bankers if it is wise
                                       your lifetime or after you die. The trustee is responsible    to do so. However, the trustee can’t merely delegate
                                       for administering the trust, managing the assets, and         responsibilities to someone else.
                                       distributing income and/or principal according to the terms
                                       of the trust. Depending on the purpose of the trust, you             Although many of the trustee’s duties are
                                       can name yourself, another person, or an institution, such    established by state law, others are defined by the trust
                                       as a bank, to be the trustee. You can even name more          document. If you are the trust grantor, you can help
                                       than one trustee if you like.                                 determine some of these duties when you set up the

                                       Why create a trust?
                                            Since trusts can be used for many purposes, they         Living (Revocable) Trust
                                       are popular estate planning tools. Trusts are often used             A living trust is a special type of trust. It’s a legal
                                       to:                                                           entity that you create while you’re alive to own property
                                            •    Minimize estate taxes;                              such as your house, a boat, or mutual funds. Property
                                            •    Shield assets from potential creditors;             that passes through a living trust is not subject to probate
                                            •    Avoid the expense and delay of probating your       — it doesn’t get treated like the property in your will.
                                                 will;                                               This means that the transfer of property through a living
                                            •    Preserve assets for your children until they are    trust is not held up while the probate process is pending
                                                 grown (in case you should die while they are        (sometimes up to two years or more). Instead, the trustee
                                                 still minors);                                      will transfer the assets to the beneficiaries according to
                                            •    Create a pool of investments that can be            your instructions. The transfer can be immediate, or if you
                                                 managed by professional money managers;             want to delay the transfer, you can direct that the trustee
                                            •    Set up a fund for your own support in the event     hold the assets until some specific time, such as the
                                                 of incapacity;                                      marriage of the beneficiary or the attainment of a certain
                                            •    Shift part of your income tax burden to             age.
                                                 beneficiaries in lower tax brackets; and
                                            •    Provide benefits for charity.                             Living trusts are attractive because they are
                                                                                                     revocable. You maintain control — you can change the
                                             The type of trust used, and the mechanics of its        trust or even dissolve it for as long as you live. Living
                                       creation, will differ depending on what you are trying to     trusts are also private. Unlike a will, a living trust is not
                                       accomplish. In fact, you may need more than one type of       part of the public record. No one can review details of the
  Created by the American
                                       trust to accomplish all of your goals. And since some of      trust documents unless you allow it.
  Institute of Certified Public        the following disadvantages may affect you, discuss the
  Accountants and                      pros and cons of setting up any trust with your attorney
  the California Society of
  Certified Public Accountants

50 • 2010 Financial Fitness Kit
                                                                Chapter 10 • Investments, Retirement and Estate Planning

      Living trusts can also be used to help you protect
and manage your assets if you become incapacitated. If
you can no longer handle your own affairs, your trustee
(or a successor trustee) steps in and manages your
property. Your trustee has a duty to administer the trust
according to its terms, and must always act with your best
interests in mind. In the absence of a trust, a court could
appoint a guardian to manage your property.

     Despite these benefits, living trusts have some
drawbacks. Assets in a living trust are not protected from
creditors, and you are subject to income taxes on income
earned by the trust. In addition, you cannot avoid estate
taxes using a living trust.

Irrevocable Trusts
      Unlike a living trust, an irrevocable trust can’t be
changed or dissolved once it has been created. You
generally can’t remove assets, change beneficiaries, or
rewrite any of the terms of the trust. Still, an irrevocable
trust is a valuable estate planning tool. First, you transfer
assets into the trust — assets you don’t mind losing
control over. You may have to pay gift taxes on the value
of the property transferred at the time of transfer.

      Provided that you have given up control of the
property, all of the property in the trust, plus all future
appreciation on the property, is out of your taxable estate.
That means your ultimate estate tax liability may be less,
resulting in more passing to your beneficiaries. Property
transferred to your beneficiaries through an irrevocable
trust will also avoid probate. As a bonus, property in an
irrevocable trust may be protected from your creditors.

      There are many different kinds of irrevocable trusts.
Many have special provisions and are used for special
purposes. Some irrevocable trusts hold life insurance
policies or personal residences. You can even set up an
irrevocable trust to generate income for you.

Testamentary Trusts
      Trusts can also be established by your will. These
trusts don’t come into existence until your will is probated.
At that point, selected assets passing through your will
can “pour over” into the trust. From that point on, these
trusts work very much like other trusts. The terms of the
trust document control how the assets within the trust are
managed and distributed to your heirs. Since you have
a say in how the trust terms are written, these types of
trusts give you a certain amount of control over how the
assets are used, even after your death.

                                                                                 Visit our Web site at • 51
       Oklahoma Society of CPAs

 Wills — The Cornerstone of Your Estate

 I                                                                              Wills specify how to pay estate taxes
     f you care about what happens to your money, home, and other
     property after you die, you need to do some estate planning. There
     are many tools you can use to achieve your estate planning goals,
 but a will is probably the most vital. Even if you’re young or your estate
                                                                                and other expenses.
                                                                                     The way in which estate taxes and other expenses are divided
 is modest, you should always have a legally valid and up-to-date will.         among your heirs is generally determined by state law unless you direct
 This is especially important if you have minor children because, in many       otherwise in your will. To ensure that the specific bequests you make to
 states, your will is the only legal way you can name a guardian for them.      your beneficiaries are not reduced by taxes and other expenses, you can
 Although a will doesn’t have to be drafted by an attorney to be valid,         provide in your will that these costs be paid from your residuary estate.
 seeking an attorney’s help can ensure that your will accomplishes what         Or, you can specify which assets should be used or sold to pay these
 you intend.                                                                    costs.

 Wills avoid intestacy.                                                         Wills can create a testamentary trust.
       Probably the greatest advantage of a will is that it allows you                You can create a trust in your will, known as a testamentary trust,
 to avoid intestacy. That is, with a will you get to choose who will get        that comes into being when your will is probated. Your will sets out the
 your property, rather than leave it up to state law. State intestate           terms of the trust, such as who the trustee is, who the beneficiaries
 succession laws, in effect, provide a will for you if you die without one.     are, how the trust is funded, how the distributions should be made, and
 This “intestate’s will” distributes your property, in general terms, to your   when the trust terminates. This can be especially important if you have a
 closest blood relatives in proportions dictated by law. However, the state’s   spouse or minor children who are unable to manage assets or property
 distribution may not be what you would have wanted. Intestacy also has         themselves.
 other disadvantages, which include the possibility that your estate will
 owe more taxes than it would if you had created a valid will.
                                                                                Wills can fund a living trust.
 Wills distribute property according to                                               A living trust is a trust that you create during your lifetime. If you
                                                                                have a living trust, your will can transfer any assets that were not
 your wishes.                                                                   transferred to the trust while you were alive. This is known as a pourover
                                                                                will because the will “pours over” your estate to your living trust.
       Wills allow you to leave bequests (gifts) to anyone you want. You
 can leave your property to a surviving spouse, a child, other relatives,
 friends, a trust, a charity or anyone you choose. There are some limits,
 however, on how you can distribute property using a will. For instance,
                                                                                Wills can help minimize taxes.
                                                                                       Your will gives you the chance to minimize taxes and other costs.
 your spouse may have certain rights with respect to your property,             For instance, if you draft a will that leaves your entire estate to your U.S.
 regardless of the provisions of your will.                                     citizen spouse, none of your property will be taxable when you die (if your
                                                                                spouse survives you) because it is fully deductible under the unlimited
        Gifts through your will take the form of specific bequests (e.g., an    marital deduction. However, if your estate is distributed according to
 heirloom, jewelry, furniture or cash), general bequests (e.g., a percentage    intestacy rules, a portion of the property may be subject to estate taxes if
 of your property), or a residuary bequest of what’s left after your other      it is distributed to heirs other than your U.S. citizen spouse.

 Wills allow you to nominate a guardian                                         Assets disposed of through a will are
 for your minor children.                                                       subject to probate.
                                                                                      Probate is the court-supervised process of administering and
      In many states, a will is your only means of stating who you want         proving a will. Probate can be expensive and time consuming, and
 to act as legal guardian for your minor children if you die. You can name      probate records are available to the public. Several factors can affect
 a personal guardian, who takes personal custody of the children, and a         the length of probate, including the size and complexity of the estate,
 property guardian, who manages the children’s assets. This can be the          challenges to the will or its provisions, creditor claims against the
 same person or different people. The probate court has final approval,         estate, state probate laws, the state court system and tax issues.
 but courts will usually approve your choice of guardian unless there are       Owning property in more than one state can result in multiple probate
 compelling reasons not to.                                                     proceedings. This is known as ancillary probate. Generally, real estate
                                                                                is probated in the state in which it is located, and personal property is
 Wills allow you to nominate an                                                 probated in the state in which you are domiciled (i.e., reside) at the time
                                                                                of your death.
      A will allows you to designate a person as your executor to act
 as your legal representative after your death. An executor carries out
                                                                                Will provisions can be challenged in
 many estate settlement tasks, including locating your will, collecting your
 assets, paying legitimate creditor claims, paying any taxes owed by your
                                                                                     Although it doesn’t happen often, the validity of your will can be
 estate, and distributing any remaining assets to your beneficiaries. Like      challenged, usually by an unhappy beneficiary or a disinherited heir.
 naming a guardian, the probate court has final approval but will usually       Some common claims include:
 approve whomever you nominate.
                                                                                     •    You lacked testamentary capacity when you signed the will;
                                                                                     •    You were unduly influenced by another individual when you
                                                                                          drew up the will;
                                                                                     •    The will was forged or was otherwise improperly executed; or
                                                                                     •    The will was revoked

52 • 2010 Financial Fitness Kit
                                                                    Chapter 10 • Investments, Retirement and Estate Planning

    Investment Planning: The Basics

W                                                                   Before you Start
          hy do so many people never obtain the financial
          independence that they desire? Often it’s because              Organize your finances to help manage your
          they just don’t take that first step — getting started.   money more efficiently. Remember, investing is just one
Besides procrastination, other excuses people make are that         component of your overall financial plan. Get a clear picture
investing is too risky, too complicated, too time consuming         of where you are today.
and only for the rich.
                                                                         What’s your net worth? Compare your assets with
      The fact is, there’s nothing complicated about common         your liabilities. Look at your cash flow. Be clear on where
investing techniques, and it usually doesn’t take much time         your income is going each month. List your expenses. You
to understand the basics. The biggest risk you face is not          can typically identify enough expenses to account for at
educating yourself about which investments may be able to           least 95 percent of your income. If not, go back and look
help you achieve your financial goals and how to approach           again. You could use those lost dollars for investing. Are
the investing process.                                              you drowning in credit card debt? If so, pay it off as quickly
                                                                    as possible before you start investing. Every dollar that you
Saving Versus Investing                                             save in interest charges is one more dollar that you can
                                                                    invest for your future.
      Both saving and investing have a place in your finances.
However, don’t confuse the two. With savings, your principal
typically remains constant and earns interest or dividends.              Establish a solid financial base: Make sure you
Savings are kept in certificates of deposit (CDs), checking         have an adequate emergency fund, sufficient insurance
accounts, and savings accounts. By comparison, investments          coverage, and a realistic budget. Also, take full advantage
can go up or down in value and may or may not pay interest          of benefits and retirement plans that your employer offers.
or dividends. Examples of investments include stocks, bonds,
mutual funds, collectibles, precious metals and real estate.        Understand the Impact of Time
                                                                          Take advantage of the power of compounding.
Why invest?                                                         Compounding is the earning of interest on interest, or the
     You invest for the future, and the future is expensive. For    reinvestment of income. For instance, if you invest $1,000
example, college expenses are increasing more rapidly than          and get a return of eight percent, you will earn $80. By
the rate of overall inflation. And because people are living        reinvesting the earnings and assuming the same rate of
longer, retirement costs are often higher than many people          return, the following year you will earn $86.40 on your
expect.                                                             $1,080 investment. The following year, $1,166.40 will
                                                                    earn $93.31. (This hypothetical example is intended as
      You have to take responsibility for your own finances,        an illustration and does not reflect the performance of a
even if you need expert help to do so. Government                   specific investment).
programs such as Social Security will probably play a less
significant role for you than they did for previous generations.         Use the Rule of 72 to judge an investment’s potential.
Corporations are switching from guaranteed pensions to              Divide the projected return into 72. The answer is the
plans that require you to make contributions and choose             number of years that it will take for the investment to
investments. The better you manage your dollars, the more           double in value. For example, an investment that earns
likely it is that you’ll have the money to make the future what     eight percent per year will double in nine years.
you want it to be.

      Because everyone has different goals and expectations,
                                                                    Consider Working with a
everyone has different reasons for investing. Understanding         Financial Professional
how to match those reasons with your investments is simply                Whether you need a financial professional depends
one aspect of managing your money to provide a comfortable          on your own comfort level. If you have the time and energy
life and financial security for you and your family.                to educate yourself, you may not feel you need assistance.
                                                                    However, don’t underestimate the value of the experience
What is the best way to invest?                                     and knowledge that a financial professional can offer in
                                                                    helping you define your goals and objectives, creating a net
     •    Get in the habit of saving. Set aside a portion of        worth statement and spending plan, determining the level
          your income regularly.                                    and type of risk that’s right for you and working with you to
     •    Invest in financial markets so your money can grow        create a comprehensive financial plan. For many, working
          at a meaningful rate.                                     with a professional is the single most important investment
                                                                    that they make.
     •    Don’t put all your eggs in one basket. Though
          it doesn’t guarantee a profit or ensure against
          the possibility of loss, having multiple types of         Review Your Progress
          investments may help reduce the impact of a loss
          on any single investment.                                       Financial management is an ongoing process. Keep
                                                                    good records and recalculate your net worth annually.
     •    Focus on long-term potential rather than short-term
                                                                    This will help you for tax purposes, and show you how
          price fluctuations.
                                                                    your investments are doing over time. Once you take
     •    Ask questions and become educated before                  that first step of getting started, you will be better able to
          making any investment.                                    manage your money to pay for today’s needs and pursue
     •    Invest with your head, not with your stomach or           tomorrow’s goals.
          heart. Avoid the urge to invest based on how you
          feel about an investment.

                                                                                                  Visit our Web site at • 53
                    Oklahoma Society of CPAs

                                       Mutual Fund Basics

                                                mutual fund pools the money of many investors          to put cash, short term, until it is needed elsewhere. Index
                                                to purchase securities.The fund’s manager buys         funds attempt to duplicate a standardized, broad-based
                                                securities to pursue a stated investment strategy.     index such as the Standard & Poor’s 500 (S&P 500) stock
                                       By investing in the fund, you’ll own a piece of the total       index or Moody’s bond index by holding a portfolio of the
                                       portfolio of securities, which could be anywhere from           same securities used by the index in an attempt to match
                                       a few dozen to hundreds of stocks. This provides you            the index’s performance as closely as possible.
                                       with both a convenient way to obtain personal money
                                       management and instant diversification that would be
                                       harder to achieve on your own.                                  What are the benefits of
   360 Degrees of Financial Literacy

                                                                                                       investing in a mutual fund?
                                       Types of Mutual Funds
                                             There are many mutual funds to choose from. The           •    Diversification: Most mutual funds own dozens or
                                       two most common types are stock mutual funds and bond                even hundreds of securities. The managers often
                                       mutual funds. A stock fund invests in common stocks                  spread the fund’s assets over more than one type of
                                       issued by U.S. and/or international companies. Funds                 investment (e.g., both stocks and bonds, or stocks
                                       are often named and classified according to investment               from a variety of industries). This exposes you to
                                       style or objective, which can be stated in various ways.             less potential risk than buying just a few individual
                                       For example, some stock mutual funds buy stocks in                   securities. If some of the fund’s holdings perform
                                       companies believed to have potential for long-term growth            poorly, they may be offset by others doing well,
                                       in share price. Other stock mutual funds look for current            (though diversification cannot guarantee a profit or
                                       income by focusing on companies that pay dividends.                  ensure against a loss).
                                       Sector funds buy stocks in a particular sector, such as
                                       technology or health care. Still other mutual funds may         •    Professional money management: When you buy
                                       purchase stocks based on the size of the company (e.g.,              shares in an actively managed mutual fund, part of
                                       stocks of large, midsize, or small companies).                       what you pay for is the fund manager’s expertise.
                                                                                                            The manager analyzes hundreds of securities (both
                                             Although the name of a stock mutual fund generally             current and contemplated holdings) and makes
                                       offers insight into its investment style and objective, it is        decisions on what and when to buy and sell.
                                       important to not rely on the name alone in determining
                                       whether a particular fund is what you want. The fund            •    Small investment amounts: Depending on
                                       prospectus is like an owner’s manual and contains                    fund rules, you can open an account and make
                                       information about the kind of investment style that the              subsequent contributions with a very small initial
                                       manager(s) employ, and the kinds of stocks that the fund             investment. You can even set up automatic
                                       will buy.                                                            investments through a transfer of funds from your
                                                                                                            bank account.
                                            Note: Before investing in any mutual fund,
                                       carefully	consider	its	investment	objectives,	risks,	fees,	     •    Liquidity: You can convert your mutual fund
                                       and expenses, which are discussed in the prospectus                  investment into cash (i.e., redeem your shares) by
                                       available from the fund. Read the prospectus carefully               making a request to the fund company in writing,
                                       before investing.                                                    over the phone or on the Internet on any business
                                             A bond fund is made up of debt instruments that
                                       governments or corporations issue to raise capital. They             Of course, mutual funds are not guaranteed
                                       are designed to provide investors with interest income in       investments. The price of all mutual fund shares can
                                       the form of regularly scheduled dividends. If you bought        change daily, and you’ll receive the current value of your
                                       individual bonds, you would need to concern yourself            shares when you sell — which may be more or less than
                                       with their maturity dates and the reinvestment of your          you paid.
                                       funds. Buying shares of a bond fund relieves you of these
                                       concerns; the fund manager handles them for you.
                                                                                                       Choosing a Fund
                                                                                                             Choosing a mutual fund to invest in requires more
                                             Bond funds are primarily classified according to the
                                                                                                       than picking a fund from the Top 10 list of the best past
                                       issuers of the bonds in the fund’s portfolio and/or to the
                                                                                                       performers. Choosing a mutual fund requires careful
                                       term of the bonds. For example, municipal bond funds
                                                                                                       thinking about numerous factors. The most important of
                                       buy bonds issued by municipalities. The income from
                                                                                                       these to consider include your investment objectives, risk
                                       these is free from federal tax (however, a portion of the
                                                                                                       tolerance and time horizon.
                                       income may be subject to the federal alternative minimum
                                       tax) and may be free from state and local taxes. Similarly,
                                                                                                             Spend some time considering these factors, then do
                                       some funds invest only in U.S. Treasury debt instruments
                                                                                                       as much research as you can. Many financial magazines
                                       (e.g., bonds, bills and notes) or high-grade (or low-grade)
                                                                                                       and websites are good sources of information to use in
                                       corporate bonds. Some bond funds, from all types of
                                                                                                       an initial screen for suitable mutual funds. Review the
                                       issuers, limit themselves to bonds maturing in the short,
                                                                                                       fund prospectus. It provides a great deal of information
                                       intermediate or long term.
                                                                                                       that you’ll want to know about the fund, such as the
  Created by the American                                                                              fund’s investment objective and style, and the fund’s
                                             There are other types of mutual funds that you will
  Institute of Certified Public                                                                        expenses. To get a prospectus, contact the mutual fund
                                       encounter. Funds that invest in both stocks and bonds
  Accountants and                                                                                      company directly, or go on-line to the company’s website
                                       (or stocks, bonds and cash alternatives) are often known
  the California Society of                                                                            to download one.
  Certified Public Accountants         as balanced funds. A money market fund buys extremely
                                       short-term debt instruments and is often used as a place

54 • 2010 Financial Fitness Kit
                                                                 Chapter 10 • Investments, Retirement and Estate Planning

Sales Charge and Other Costs
      All mutual funds have expenses that investors must
pay for, but the sales charge, or load, is probably the most
significant and varied among funds. These sales charges
are generally paid as commissions to stockbrokers,
financial advisors and insurance agents. The sales
charge may be deducted at the time you purchase shares
of the mutual fund (front-end load), leaving less to work
for you, or it may be charged at the point of redemption
(back-end load). Some mutual funds, known as no-load
funds, have no sales charges.

      Pay attention to a mutual fund’s other fees and
expenses, as well. Look at a fund’s expense ratio, which
is calculated by dividing the fund’s annual expenses by
the fund’s average net assets. Expenses affect a fund’s
net return. The higher the expense ratio, the less money
is being put to work for you.

Turnover Ratio
      Portfolio turnover reflects the value of a fund’s trades
during a year compared to the total value of its assets.
and is often used as an indicator of how actively a fund
manager trades. If the value of a fund’s trades equals
that of its entire portfolio, its turnover ratio would be 100

     Aggressively managed funds generally have higher
portfolio turnover ratios than do conservative funds, which
buy and hold for the long term. High turnover generally
adds to the expenses of a fund because of the brokerage
commissions paid for each transaction.

      More important, however, is that when the fund
sells stock at a gain, the gain must be distributed to
shareholders. You will then be liable for income tax on
your portion of the gain, even if the gain was reinvested,
and even if your fund’s share value actually decreased
that year.

      A tax-efficient approach minimizes the tax effect
by implementing strategies such as offsetting gains
by selling other stocks at a loss or holding stocks for
long periods. Note that if you own a mutual fund in
an individual retirement account (IRA) or a qualified
retirement plan at work (e.g., a 401(k)), tax efficiency is
not as important. This is because no tax is immediately
paid on realized gains in these retirement accounts and
plans; tax is deferred until the money is withdrawn.

Past Performance
      Although past performance is no guarantee of future
results, a fund’s track record over the past 3, 5, and 10
years is certainly worth considering. How does it compare
with its peers — funds with similar risk and investment
strategies? Apples-to-apples comparisons of funds are
difficult, so a variety of broad market indexes are used
as comparison benchmarks. For example, the S&P 500
is often used as a proxy for the U.S. stock market as a
whole. Relative to the S&P 500, examine how well the
fund that you are looking at has performed in both good
and bad years.

Fund Managers
      One of the advantages of purchasing shares in an
actively managed mutual fund shares is professional
money management. The past performance of the
fund is a reflection of the fund manager’s ability to
effectively manage its assets. You should research the
current manager’s history with the fund; was the fund’s
performance his or her achievement? If the fund has a
new manager, make sure that individual’s investment
style matches your expectations.

                                                                                  Visit our Web site at • 55
                    Oklahoma Society of CPAs

                                       Six Keys to More Successful

                                              successful investor maximizes gain and minimizes        against the possibility of loss, you can minimize your risk
                                              loss. Here are six basic principles that may help       somewhat by diversifying your holdings among various
                                              you invest more successfully.                           classes of assets, as well as different types of assets
                                                                                                      within each class.
                                       Long-term compounding can
                                                                                                      Spread your wealth through
   360 Degrees of Financial Literacy

                                       help your nest egg grow.
                                             It’s the “rolling snowball” effect. Put simply,          asset allocation.
                                       compounding pays you earnings on your reinvested                     Asset allocation is the process by which you spread
                                       earnings. The longer you leave your money at work for          your dollars over several categories of investments,
                                       you, the more exciting the numbers get. For example,           usually referred to as asset classes. These classes
                                       imagine an investment of $10,000 at an annual rate             include stocks, bonds, cash (and cash alternatives),
                                       of return of 8 percent. In 20 years, assuming no               real estate, precious metals, collectibles and in some
                                       withdrawals, your $10,000 investment would grow to             cases, insurance products. You’ll also see the term
                                       $46,610. In 25 years, it would grow to $68,485, a 47           “asset classes” used to refer to subcategories, such
                                       percent gain over the 20-year figure. After 30 years,          as aggressive growth stocks, long-term growth stocks,
                                       your account would total $100,627. (Of course, this            international stocks, government bonds (U.S., state,
                                       is a hypothetical example that does not reflect the            and local), high-quality corporate bonds, low-quality
                                       performance of any specific investment.)                       corporate bonds, and tax-free municipal bonds. A basic
                                                                                                      asset allocation would likely include at least stocks, bonds
                                             This simple example also assumes that no taxes           (or mutual funds of stocks and bonds) and cash or cash
                                       are paid along the way, so all money stays invested. That      alternatives.
                                       would be the case in a tax-deferred individual retirement
                                       account or qualified retirement plan. The compounded                 There are two main reasons why asset allocation
                                       earnings of deferred tax dollars are the main reason           is important. First, the mix of asset classes you own
                                       experts recommend fully funding all tax-advantaged             is a large factor — some say the biggest factor by far
                                       retirement accounts and plans available to you.                — in determining your overall investment portfolio
                                                                                                      performance. In other words, the basic decision about
                                             While you should review your portfolio on a regular      how to divide your money between stocks, bonds and
                                       basis, the point is that money left alone in an investment     cash is probably more important than your subsequent
                                       offers the potential of a significant return over time. With   decisions over exactly which companies to invest in, for
                                       time on your side, you don’t have to go for investment         example.
                                       “home runs” in order to be successful.
                                                                                                            Second, by dividing your investment dollars among
                                       Endure short-term pain for                                     asset classes that do not respond to the same market
                                                                                                      forces in the same way at the same time, you can help
                                       long-term gain.                                                minimize the effects of market volatility while maximizing
                                                                                                      your chances of return in the long term. Ideally, if your
                                            Riding out market volatility sounds simple, doesn’t       investments in one class are performing poorly, assets in
                                       it? But what if you’ve invested $10,000 in the stock           another class may be doing better. Any gains in the latter
                                       market and the price of the stock drops like a stone one       can help offset the losses in the former and help minimize
                                       day? On paper, you’ve lost a bundle, offsetting the value      their overall impact on your portfolio.
                                       of compounding you’re trying to achieve. It’s tough to
                                       stand pat.
                                                                                                      Consider liquidity in your
                                             There’s no denying it — the financial marketplace
                                       can be volatile. Still, it’s important to remember two         investment choices.
                                       things. First, the longer you stay with a diversified                Liquidity refers to how quickly you can convert an
                                       portfolio of investments, the more likely you are to reduce    investment into cash without loss of principal (your initial
                                       your risk and improve your opportunities for gain. Though      investment). Generally speaking, the sooner you’ll need
                                       past performance doesn’t guarantee future results, the         your money, the wiser it is to keep it in investments with
                                       long-term direction of the stock market has historically       comparatively less volatile price movements. You want to
                                       been up. Take your time horizon into account when              avoid a situation, for example, where you need to write a
                                       establishing your investment game plan. For assets             tuition check next Tuesday, but the money is tied up in an
                                       you’ll use soon, you may not have the time to wait out         investment whose price is currently down.
                                       the market and should consider investments designed
                                       to protect your principal. Conversely, think long-term for           Therefore, your liquidity needs should affect your
                                       goals that are many years away.                                investment choices. If you’ll need the money within
                                                                                                      the next one to three years, you may want to consider
                                             Second, during any given period of market or             certificates of deposit or a savings account, which are
  Created by the American              economic turmoil, some asset categories and some               insured by the FDIC, or short-term bonds or a money
  Institute of Certified Public        individual investments historically have been less volatile    market account, which are neither insured or guaranteed
  Accountants and                      than others. Bond price swings, for example, have              by the FDIC or any other governmental agency. Your rate
  the California Society of            generally been less dramatic than stock prices. Though         of return will likely be lower than that possible with more
  Certified Public Accountants         diversification alone cannot guarantee a profit or ensure      volatile investments such as stocks, but you’ll breathe

56 • 2010 Financial Fitness Kit
                                                                Chapter 10 • Investments, Retirement and Estate Planning

easier knowing that the principal you invested is relatively
safe and quickly available, without concern over market
conditions on a given day.

      Note: If you’re considering a mutual fund, consider
its	investment	objectives,	risks,	charges,	and	expenses,	
all of which are outlined in the prospectus, available
from the fund. Consider the information carefully before

Dollar Cost Averaging:
Investing Consistently and
      Dollar cost averaging is a method of accumulating
shares of stock or a mutual fund by purchasing a fixed
dollar amount of these securities at regularly scheduled
intervals over an extended time. When the price is high,
your fixed-dollar investment buys less; when prices are
low, the same dollar investment will buy more shares. A
regular, fixed-dollar investment should result in a lower
average price per share than you would get buying a
fixed number of shares at each investment interval.

      Remember that, just as with any investment
strategy, dollar cost averaging can’t guarantee you a profit
or protect you against a loss if the market is declining. To
maximize the potential effects of dollar cost averaging,
you should also assess your ability to keep investing even
when the market is down.

      An alternative to dollar cost averaging would be
trying to “time the market,” in an effort to predict how the
price of the shares will fluctuate in the months ahead so
you can make your full investment at the absolute lowest
point. However, market timing is generally unprofitable
guesswork. The discipline of regular investing is a much
more manageable strategy, and it has the added benefit
of automating the process.

Buy and hold, don’t buy and
      Unless you plan to rely on luck, your portfolio’s long-
term success will depend on periodically reviewing it.
Maybe your uncle’s hot stock tip has frozen over. Maybe
economic conditions have changed the prospects for a
particular investment, or an entire asset class.

      Even if nothing bad at all happens, your various
investments will likely appreciate at different rates, which
will alter your asset allocation without. For example, if
you initially decided on an 80 percent to 20 percent mix
of stocks to bonds, you might find that after several years
the total value of your portfolio has become divided 88
percent to 12 percent (conversely, if stocks haven’t done
well, you might have a 70-30 ratio of stocks to bonds).
You need to review your portfolio periodically to see if you
need to return to your original allocation. To rebalance
your portfolio, you would buy more of the asset class
that’s lower than desired, possibly using some of the
proceeds of the asset class that is now larger than you

     Another reason for periodic portfolio review:
your circumstances change over time, and your asset
allocation will need to reflect those changes. For example,
as you get closer to retirement, you might decide to
increase your allocation to less volatile investments, or
those that can provide a steady stream of income.

                                                                                 Visit our Web site at • 57
                    Oklahoma Society of CPAs

                                       Contemplating Bankruptcy

                                               iling bankruptcy can be complex and difficult, and     that remain unpaid are then discharged, with certain
                                               it can have lasting effects. You should consider       exceptions such as tax debts, student loans, domestic
                                               what’s involved carefully before deciding if it’s      support payments, and debts resulting from fraud or
                                       the right answer for you. Don’t expect bankruptcy              driving while intoxicated.
                                       to offer you an easy solution to your overspending
                                       habits or financial mismanagement. It’s intended to                 If you go bankrupt against a secured debt, such as
                                       relieve you of burdensome debts incurred due to                a mortgage or a car loan, the collateral securing the debt
                                       unfortunate circumstances such as medical problems or          — the house or the car — will either revert to the lender
   360 Degrees of Financial Literacy

                                       unemployment.                                                  or be sold with the proceeds going to the lender as at
                                                                                                      least a partial satisfaction of that secured debt.

                                       To File or Not to File
                                             How do you know if you should go bankrupt? If            How Chapter 13 Works
                                       your situation is temporary and will change for the better          Under Chapter 13, often referred to as wage
                                       in the near future, you may just need some breathing           earner’s bankruptcy, you aren’t required to sell assets
                                       room. Contact your creditors; they may offer to lower          to satisfy creditors. Instead, your debts are reorganized
                                       your payments or interest rate under a hardship program.       under a plan and you repay them, fully or partially, over
                                       Or perhaps a credit counseling service can help you            a three-year or five-year period with your disposable
                                       restructure your debt and get on your feet again. In fact,     income (money you have left over after meeting your
                                       for bankruptcy filings, credit counseling is a prerequisite.   normal monthly living expenses). If you complete the plan
                                                                                                      successfully, unsecured debts that remain unpaid are
                                            Then again, you may not see your income going             then discharged, with certain exceptions.
                                       up in the foreseeable future, or maybe you can’t cut
                                       your living expenses any further. Perhaps your pleas to              Chapter 13 is often used to forestall and ultimately
                                       restructure your debt have fallen on deaf ears or the relief   prevent foreclosure on real property, such as your home.
                                       you’ve been offered isn’t enough to help. Maybe now it’s       To accomplish this, you would have to continue to make
                                       time to consider bankruptcy.                                   your regular monthly payments directly to the mortgage
                                                                                                      lender, plus you make separate catch up payments on
                                       Personal Bankruptcy in                                         overdue amounts according to a schedule spelled out
                                                                                                      in the Chapter 13 plan. If you complete the repayment
                                       General                                                        schedule successfully, your mortgage would again be
                                                                                                      considered up to date.
                                             There are two types of personal bankruptcy, Chapter
                                       7 and Chapter 13. Under Chapter 7, assets are sold to
                                       pay creditors and the debt that’s left is discharged. If you   Determining Whether to File
                                       file under Chapter 13, on the other hand, you probably
                                       won’t have to sell assets, but all of your disposable          under Chapter 7 or Chapter 13
                                       income will go to pay creditors for a specified period of           An income eligibility test will be applied to all
                                       time, most likely five years.                                  Chapter 7 petitions; if your income is above the median
                                                                                                      income level in your state, and you’re capable of repaying
                                            Each chapter has its own rules regarding what             a specified portion of your unsecured debt, you’ll be
                                       assets you can keep (so-called exempt property) and            required to file under Chapter 13.
                                       what debts you can be discharge (some debts, such
                                       as student loans, are nondischargeable), among other
                                       things.                                                        Life After Bankruptcy
                                                                                                           A bankruptcy notation will appear on your credit
                                                                                                      report for 10 years. It’s a serious blemish that can affect
                                       How Chapter 7 Works                                            you in many ways. Aside from the difficulty it will cause
                                             Generally, Chapter 7 is a liquidation proceeding with    when you try to get new credit, insurance companies may
                                       the court determining what property, if any, you have to       correlate your ability to pay your debts with your ability
                                       sell to pay your debts.                                        to make premium payments. As a result, a bankruptcy
                                                                                                      notation on your credit report may make it difficult (and
                                            By law, you get to keep certain exempt property.          more expensive) to get certain types of insurance. What’s
                                       There are federal bankruptcy exemptions and each               more, an employer may take your credit history into
                                       state has its own exemptions. Depending on the state in        account when deciding to hire or promote you.
                                       which you live, you may be able to choose between the
                                       federal or state exemptions, or you may have to use your             Of course, you’ll be able to get credit again, but
                                       state’s exemptions. Exemptions generally include specific      you may have to pay higher interest rates or provide a
                                       amounts for your home, car, jewelry, tools of trade,           cosigner or collateral to get started. Getting new credit
                                       household goods and furnishings and retirement savings.        will help you establish a new track record. But be careful;
                                                                                                      you won’t be able to declare bankruptcy again for several
                                            Property that is not exempt may be sold to repay          years.
                                       your creditors (at least in part). Unsecured debts

  Created by the American
  Institute of Certified Public
  Accountants and
  the California Society of
  Certified Public Accountants

58 • 2010 Financial Fitness Kit
                                                       Chapter 11 • Financial Preparedness and Recovery for Life Crisis

Starting Over: Eight Steps for
Rebuilding Your Finances

        erhaps you’re recently divorced or widowed.             your checkbook carefully. If you excessively bounce
        Maybe you just landed a job after a long period         checks and pay finance charges, this may be reflected in
        of unemployment or you recently completed               your credit report.
bankruptcy proceedings. All of these life events present
a common challenge: the need to reestablish yourself
financially. The following steps can help get you back on       Review your credit report.
sound financial footing.                                             It’s important that you monitor your credit report
                                                                regularly for errors. Order a copy of your credit report
                                                                from all three of the major credit bureaus: Equifax, 800-
Prepare a net worth statement.                                  685-1111; Experian (formerly TRW), (888) EXPERIAN
     A net worth statement is a basic financial                 (397-3742); and Trans Union, 800-916-8800.
management tool used to make financial decisions and
to measure progress. To determine your family’s financial             If your report contains information you believe
net worth, add all your assets including: balances in any       is incorrect, contact the bureau and request that they
bank, investment, or retirement savings accounts; the           investigate the error. If the dispute cannot be resolved,
value of your home and its furnishings; any real estate         you have the right to submit a 100-word statement that
or automobiles you own; and personal property such as           tells your side of the story.
jewelry and antiques.

      Next, identify your liabilities. These might include      Get a credit card.
outstanding balances on your mortgage and home equity                 The best way to establish good credit is to get a
loans, credit cards, automobile loans, student loans and        credit card. Depending on your credit history, this may
other obligations. Subtract your liabilities from your assets   or may not be an easy task. A secured credit card is an
to arrive at your family’s net worth. You should calculate      excellent way for someone with bad credit to build a good
your net worth once a year to identify significant changes.     rating. With a secured card, you give the bank or credit
                                                                card company a deposit and your card has a credit limit
                                                                for the same amount. To establish a good credit history,
Create a budget.                                                you need to use the card and pay off the debt on a timely
      Identify sources of income, including your salary,        basis. CPAs suggest that you only charge what you
social security or pension benefits, child support or           can afford to pay back at the end of the month. A good
alimony, and interest and dividends on your savings             strategy is to use credit for a specific purpose, such as
and investments. Next, list all your fixed and flexible         buying gas for your car. After using the secured card and
expenses. Fixed expenses are the same every month.              paying your bill regularly for a year, try to negotiate with
These include rent or mortgage payments, credit card            the company for an unsecured card.
payments, insurance premiums, and utility payments.
Flexible expenses, like food, gifts, dining out and
recreation can be reduced or eliminated by tightening           Establish an emergency fund.
your belt. If your expenses exceed your income, you                   Setting up an emergency fund is the best way to
need to change one or both. Consider cutting some               prepare for any future financial setbacks. Consider the
discretionary spending, taking on a second job, or moving       amount of money you need to pay your bills for housing,
to a less expensive area.                                       food, insurance, medical care, and other necessities for
                                                                six months to a year. Then work at setting aside small
                                                                amounts each month until you have an emergency fund
Open bank accounts in your                                      equal to the amount you would need to cover six months
                                                                to a year’s worth of living expenses. Resist the urge to
name alone.                                                     tap into this money unless you are facing a real financial
     Open your own savings and checking accounts.               crisis.
This is particularly important if you are heading toward
a separation or divorce. Having your own account will
eliminate the possibility of your spouse writing bad checks     Get good financial advice.
or otherwise misusing the account. It is also a vital first          Rebuilding your financial life requires planning, hard
step in achieving financial independence.                       work and discipline. If you can’t seem to manage on your
                                                                own, enlist the help of nonprofit credit counseling services
Pay all your bills on time.                                     to implement your new budget and help you work with
                                                                creditors to create a realistic repayment plan.
       Regardless of what is going on in your personal life,
it is important that you pay your bills on time and balance

                                                                                             Visit our Web site at • 59
                    Oklahoma Society of CPAs

                                       Be Prepared for a Disaster

                                                atural or manmade disasters can strike at any           personal concerns to address. The following advice from
                                                time. Of course, your family’s health and security      the Oklahoma Society of Certified Public Accountants can
                                                are the most important considerations. Once             help you through a crisis.
                                       safety concerns have been addressed, regaining order
                                       in your finances is essential for returning to normal life.          In the wake of a disaster, take time to absorb
                                       Proper planning and preparation before disaster strikes is       what happened, seek advice and refrain from making
                                       crucial. Here are some tips on how to do it.                     immediate financial decisions.
   360 Degrees of Financial Literacy

                                       Keep your records in order                                             The first step toward financial recovery is to prepare
                                                                                                        a plan for managing your income, expenses and debt.
                                             In the wake of a disaster, documentation, including        If you’re in need of cash, determine whether you’re
                                       personal identification, insurance papers and banking            eligible for disaster relief funds from federal, state or local
                                       and investment information may be necessary. CPAs                governments. Make every effort to keep up with your bills
                                       advise that you keep all of these important materials in a       and call your creditors to explain the situation and work
                                       bank safe deposit box or a secure, fireproof home safe.          out a revised payment plan.
                                       Documents to store include birth, death and marriage
                                       certificates; divorce and custody agreements; passports,               Estimate the losses you have sustained as a result
                                       military records; copies of drivers’ licenses; deeds and         of the disaster, gather your policy numbers, and then
                                       contracts to real property; and stock and bond certificates.     file appropriate insurance claims. Claims are frequently
                                       Other important papers include those with information            settled in the order in which they are received. If you do
                                       and contact details for your insurance policies, as well as      not have a complete listing of household items, check
                                       retirement plan beneficiary information. You’ll also want        with relatives and friends for photographs taken in your
                                       easy access to information on checking, savings and              home that may help to support your claim.
                                       investment accounts; car titles; copies of wills, living wills
                                       or medical powers of attorney; and trust documents. You               Additionally, if you’ve been injured and cannot
                                       may also consider storing copies of some documents with          work, you may be eligible for monthly disability insurance
                                       a trusted relative or friend who lives in another location.      benefits. Apply as soon as possible to protect your
                                       That’s added protection in case you are unable to gain           income flow.
                                       access to a home safe or even your local bank after a
                                       disaster.                                                             If your property has been damaged or destroyed
                                                                                                        by a casualty and your loss meets IRS deductibility
                                            When storing a will, remember that the original is          guidelines, you may be eligible for a tax refund based
                                       necessary in the event of your death. Since a bank safe          on your losses. Usually, this means claiming the loss
                                       deposit box may be sealed after a death, do not store            on your next income tax return. However, if the property
                                       an original will there. Instead, keep the original at your       is declared a federal disaster area, you may be able to
                                       lawyer’s office or other secure and accessible location.         accelerate your deduction by amending your return for
                                                                                                        the prior tax year.
                                       Take pictures.                                                          Determine the extent to which the disaster has
                                             Among your records, remember to store photos of            resulted in the loss of valuable personal and financial
                                       your home and what’s inside it, including the contents           records, such as your Social Security card, driver’s
                                       of closets, garages, attics and basements. Photograph            license, bank statements, stock certificates and recent
                                       your cars, as well, and any other belongings that could          bills. Remember to make a complete list of these
                                       be damaged in a disaster. It’s also a good idea to make          documents and obtain copies.
                                       an inventory of your possessions, along with your best
                                       estimates of what it would cost to replace them. The                   Inevitably, disasters compel you to reconsider the
                                       photos and inventory will come in handy when you make            role of insurance. Evaluate whether you have the right
                                       an insurance claim for lost possessions.                         type and amount of property, health, disability and life
                                       Have some cash on hand.                                               Once you recover from a disaster, take steps to
                                            How will you pay for food, a hotel or other needs if
                                       you are forced to leave your home? If the power goes out         establish a financial cushion. Keep these funds in a safe,
                                       in your area, banks or ATMs may be unavailable. That’s           easily accessible account and use them only during an
                                       why it’s a good idea always to have enough cash on hand          emergency.
                                       to cover your family’s expenses for at least five days.
                                       Keep this money in a safe location where it can be easily             For many people, disasters demonstrate the
                                       accessed.                                                        importance of having a will. A will names your heirs
                                                                                                        and appoints a guardian if you have young children. If
                                                                                                        you die without a will, the state decides who gets your
                                       Financial Recovery After a                                       possessions — for a fee.

                                       Disaster                                                              People who have been through a traumatic
                                                                                                        experience often have difficulty making sound decisions.
  Created by the American                   The weeks and months following a disaster can be            A CPA can help you develop a financial recovery plan for
  Institute of Certified Public        confusing and difficult. When confronting a personal or          regaining your financial footing following a disaster.
  Accountants and                      national crisis, there are numerous financial issues and
  the California Society of
  Certified Public Accountants

60 • 2010 Financial Fitness Kit
                                                                                             Chapter 12 • Help for the Unemployed

Job Loss

Preparing for a Job Loss                                                      Plan Ahead
                                                                                   When a company is having financial problems, most employees
Conserve cash:                                                                can see the signs long before a layoff or bankruptcy occur. If you think
                                                                              your job is in jeopardy, now’s the time to set up an emergency saving
     •    If you are paying more than the required payment on your
                                                                              fund. Simply open a special savings account and deposit as much as you
          mortgage, auto or student loans, pay only the required
                                                                              can each week. A severance package and unemployment benefits are
          amounts and conserve your cash for living expenses.
                                                                              unlikely to cover all your costs, so this nest egg will come in handy if you
     •    Build liquidity for up to six months of expenses through            need it. If you are quite certain you are going to be laid off, you might also
          checking accounts, money market accounts and (last choice)          consider changing your income tax withholding to have less tax taken
          equity lines.                                                       out of each paycheck. If you do lose your job and don’t find a new one
                                                                              immediately, your income will be lower this year. That means you should
Plan ahead                                                                    owe less tax. However, keep in mind that you will end up owing tax
     •    Consider whether it makes sense to refinance your home              next April if you lower your withholding and your income level does not
          mortgage in order to reduce the payment                             change.

     •    Get an equity line of credit before you lose your job.
     •    Review your assets to determine which would be the best
                                                                              Ask for Severance
                                                                                   Companies are not legally required to give employees a severance
          sources of liquidity, if needed. Set up a plan for how you will     package, but they are often willing to offer one to someone with a good
          liquidate assets if your six months of liquidity is depleted.       track record, especially if that person has been with the business a long
                                                                              time. So, be sure to try to negotiate a package. Ask, too, about receiving
Medical Coverage                                                              pay for any unused vacation days you may have accumulated.
     •    Examine the options available through your employer.
     •    Does severance package include ongoing medical coverage?            File for Unemployment Insurance
     •    What are the COBRA options?                                              The sooner you file for this benefit, the sooner you will start
                                                                              receiving checks. Remember that you are eligible for unemployment
Other Insurance                                                               insurance even if you have received a severance package or buyout. The
                                                                              Economic Policy Institute Web site ( provides a calculator
     •    Is the life insurance portable? If not, consider other sources      to help you determine how much you would receive. At their site, click
          for purchasing coverage (affinity programs or permanent             on “Online Calculators,” then go to “Unemployment Insurance (weekly
          coverage).                                                          benefit allowance) calculator.” Find out now how much you are eligible to
     •    Is the disability coverage portable?                                receive so that you can better calculate how much you will need in your
                                                                              emergency fund.
Retirement/benefit Plans
     •    If you have a loan outstanding, consider how to repay. If you       Get Health Insurance Coverage
          take a lump sum distribution, the outstanding loan will be                Most people receive health insurance through their employer, so
          taxable and may incur 10% penalty as well.                          this benefit could be a significant loss if you are laid off. However, it’s very
     •    When is the employer match paid? Does timing of your                likely that you will be able to retain employer coverage for a certain period
          severance affect whether you receive the match?                     of time, but you will have to pay the premium yourself. If you are married
                                                                              and your spouse works, you may also be able to pay extra to receive
     •    Will stock vest immediately or follow the existing vesting          coverage under your spouse’s plan. Find out what options are open to
          schedule?                                                           you and compare their costs so you can make the best choice.
     •    What options are available for the pension? If possible, take
          a lump sum distribution and rollover so you don’t have to
          remember to call your former employer about the annuity when
                                                                              Don’t Panic
                                                                                    Many people drift into bad financial habits in an emergency,
          you reach retirement age.                                           including dipping into their retirement accounts or running up high credit
                                                                              card balances. If you withdraw money from a retirement account before
Other                                                                         retirement age, not only will you have to pay taxes on the distribution,
     •    Determine eligibility for unemployment benefits through your        you may also be hit with an early distribution penalty of 10 percent, which
          state unemployment commission.                                      means that a good chunk of your withdrawal will go to the IRS. At the
                                                                              same time, the interest rates on credit cards tend to be very high, so this
     •    Read the severance agreement and all other information from         should be your borrowing option of last resort. Financial institutions are
          your employer!                                                      also tightening up their credit card limits — even for their best customers
                                                                              — so you may find that this option is not even available to you.
Five Smart Steps to Take If You’re Laid                                            The 360 Degrees of Financial Literacy Web site offers general
Off                                                                           information for managing personal finances and does not recommend
      In a troubled economy, many companies are cutting back on jobs.         specific financial actions. For financial advice tailored to your situation,
But if you are laid off, there’s no need to panic, here are some strategies   please contact an expert such as a CPA or a personal financial advisor.
for keeping your finances in order even if you lose your job.

                                                                                           Visit our Web site at • 61
                    Oklahoma Society of CPAs

                                       Receiving Unemployment

                                                o you worry about changes in the economy? Have       When filling out the application, you’ll be asked a lot of
                                                you recently been fired or a victim of downsizing?   questions, so have the following information handy:
                                                Whatever your situation, you may be wondering
                                                                                                          •    Your Social Security number;
                                       if you’re eligible for unemployment benefits. For a basic
                                       understanding of how unemployment benefits work, read              •    Your last employer’s name, address and phone
                                       on!                                                                     number;
   360 Degrees of Financial Literacy

                                                                                                          •    Your last day of work and the reason that you’re
                                       Am I eligible?                                                          no longer working;
                                             Although specific eligibility requirements vary from         •    Your salary history; and
                                       state to state, most states have the same basic standards
                                       for collecting unemployment benefits. They include:                •    Your proof-of-citizenship status.

                                            •     You must be unemployed or working less than
                                                  full time;                                         How are benefits calculated?
                                                                                                           Regardless of which state you live in, you’ll receive
                                            •     You must meet certain income requirements;         a weekly unemployment benefit based on how long
                                            •     You must be ready, willing, and able to work; or   you were employed and your prior wages. The state
                                                                                                     will calculate your average weekly wage, and you will
                                            •     You must have involuntarily left your job.
                                                                                                     receive a percentage of that wage based on your state’s
                                                                                                     formula. You can figure out your average weekly wage
                                       In general, you won’t be eligible for benefits if:
                                                                                                     by adding up 12 months’ worth of pay stubs and dividing
                                            •     You quit your job simply because you didn’t        that number by 52. If you were salaried, just divide your
                                                  like it;                                           annual salary by 52.
                                            •     You’re fired for committing a crime (e.g.,
                                                  stealing); or                                      How long can I receive
                                            •     You’ve never worked before.
                                             For more information, contact your state’s                    In most states, you can receive benefits for up to
                                       local employment office. You can also look in the             26 weeks. However, federal laws and some state laws
                                       state government section of your phone book under             provide for additional benefits to be paid to workers who
                                       Unemployment Insurance, Unemployment Compensation,            exhaust their regular benefits during periods of high
                                       Employment Insurance, or Employment Service. Or, you          unemployment. These additional benefits may be paid up
                                       can try surfing the Internet using these same key terms.      to 13 weeks (20 weeks in some states) and are funded
                                                                                                     partly by state governments and partly by the federal
                                       Where does the money come
                                       from?                                                         Are unemployment benefits
                                             In most states, unemployment compensation is
                                       financed by employer contributions through a payroll tax.     taxable?
                                       In a few states, employees are also required to contribute           The answer to this question comes as a big surprise
                                       a minimal amount to the fund.                                 to many people. Yes, the unemployment compensation
                                                                                                     you receive is taxable. It’s not a free gift from Uncle Sam,
                                                                                                     and you must report this money as income. In some
                                       How do I apply?                                               states, you can ask that taxes be withheld from your
                                            Most states will allow you to apply for benefits:        unemployment check. This could save you from a big tax
                                                                                                     bill at the end of the year. For more information, consult
                                            •     In person;                                         your tax advisor.
                                            •     By telephone; and
                                            •     By mail.

  Created by the American
  Institute of Certified Public
  Accountants and
  the California Society of
  Certified Public Accountants

62 • 2010 Financial Fitness Kit
                                                                                                Chapter 12 • Help for the Unemployed

What to Do When Layoffs Loom

        etting laid off sometimes seems to be inevitable,        by taking advanced courses, even if your employer
        but short of going out of business, employers            isn’t paying for them. But if your company offers tuition
        usually keep employees who are most valuable             assistance or programs to defray education costs, take
and productive. Here are some things you can do to               advantage of those opportunities. The more you know,
increase your value to your employer and enhance your            the harder it will be to replace you.
prospects of avoiding that next round of layoffs.

                                                                 Dress for success.
Separate yourself from the                                             How you dress can leave a lasting impression as
                                                                 well. If you interviewed for your job, you probably dressed
pack.                                                            in a manner befitting the position for which you were
     If a layoff is in the offing, try standing out from other   applying. Thereafter, your attire may have become more
employees through your efforts and performance. By               casual. While overdressing isn’t recommended, spruce
the same token, aim to be helpful and maintain a good            up your wardrobe with some new work clothes. Look well-
working relationship with your coworkers.                        groomed and ready to work. Sometimes a change in your
                                                                 work attire gives your bosses the perception of a new,
      One surefire way to separate yourself from the             re-energized employee.
majority of your fellow employees is to concentrate on
work while you’re on the job. Sounds simple, but it’s
easy to get distracted by activities unrelated to work.          Change jobs within the
It’s especially easy to get distracted if your employer is
experiencing some difficulties. Workers tend to become           company.
less productive when their employer faces business                    Another way to keep your job is by working in a
downturns. You can stand out during these times by doing         department that’s performing well. Depending on the size
more.                                                            of your company, some areas may be underperforming,
                                                                 while other sections are surging. Find out which
                                                                 departments are holding their own and which sections are
Make yourself more visible.                                      lagging. If you’re in an area that’s performing up to par or
     Standing out also means making yourself as visible          better, now’s not the time to ask for a change.
within the company as possible. Attend staff meetings and
company events, even if they’re not mandatory. Arrive on               But if you happen to work in an underperforming
time and be prepared. Participate during staff meetings,         sector, try to be part of the solution and not the problem.
even if it’s simply to express support for someone else’s        Don’t complain about what’s not working; rather, try to
idea or proposal.                                                figure out what you can do to enhance your department’s
                                                                 performance. In addition, offer to spend time working
     You’ll also get noticed if you volunteer for tasks          with growth segments—even if on a voluntary basis.
and projects whenever you can. Let your boss know                If a position becomes available in a department that’s
you’re willing to assume more responsibilities and spend         prospering, consider making an internal move to that
more time at your job. If your boss offers you extra tasks       area.
and responsibilities, seize that opportunity to separate
yourself from the rest of the pack. And if there are no new
assignments, come up with a project on your own. Make            As a Last Resort
your boss look good while adding value to your position.               Despite all your best efforts, if your boss tells you
                                                                 your job is on the chopping block, you may be able to
     And don’t shy away from discreetly communicating            keep your position by offering to take a pay cut or a
your accomplishments. Periodically update your boss on           reduction in hours. If the company really values your
progress you’re making with a new task or project. It’s          performance, they may be able to justify keeping you on
another way to demonstrate your value to the company.            at a reduced cost. You may then be able to hang on until
                                                                 the company is in a better position to increase your pay or
                                                                 hours. This would allow you to continue to work while you
Increase your education.                                         map out your strategy for a different job, either with your
   You can also stand out by continuing your education.          current employer or with a new company.
Demonstrate that you’re trying to enhance your job skills

                                                                                              Visit our Web site at • 63
                    Oklahoma Society of CPAs

                                       Health Insurance Options After a
                                       Job Loss

                                           t’s hard enough facing the financial and emotional        your spouse qualifies for coverage, you and your family
                                           trauma of losing your job. One of the issues you may      can enroll in your spouse’s plan without having to wait
                                           confront is the loss of your employer-provided health     until the plan’s regular enrollment period, and you can’t
                                       insurance as well. While there may not be a simple            be excluded for pre-existing health conditions.
                                       solution to your health insurance dilemma, you should
                                       understand your options.                                            But don’t jump to your spouse’s plan just because
   360 Degrees of Financial Literacy

                                                                                                     it’s cheaper than your COBRA coverage without
                                                                                                     considering some important factors. Your spouse’s plan
                                       COBRA                                                         may not offer as many benefits as your COBRA coverage.
                                            The Consolidated Omnibus Budget Reconciliation           For example, your spouse’s insurance plan may not cover
                                       Act of 1985 (COBRA) provides for continued access to          your doctor or your preferred medical facility. And while
                                       health insurance for people who lose their employer-          that plan may cost less because of greater employer
                                       sponsored coverage due to termination of employment           contributions, if your spouse gets sacked, your spouse’s
                                       (among other triggering events).                              COBRA coverage might cost more than your COBRA
                                                                                                     coverage. So before switching health plans, compare
                                             Under federal law, employers with 20 or more            your spouse’s plan benefits to your COBRA coverage,
                                       employees that provide health insurance are required          consider the security of your spouse’s job, and find out
                                       to offer COBRA coverage. As a qualifying employee,            what your spouse’s COBRA coverage would cost.
                                       you can remain on your employer’s plan for up to 18
                                       months. However, you must pay the cost of COBRA
                                       insurance, plus a two percent administrative fee, unless      Insurance through an
                                       your employer pays some of the cost. But you can’t be
                                       turned down due to pre-existing health conditions, and the    Organization
                                       coverage will include your family if they were also covered         Often, various groups and organizations such
                                       under your employer-sponsored plan.                           as fraternal clubs, religious groups, unions, and local
                                                                                                     chambers of commerce offer health insurance to their
                                             Note: The American Recovery and Reinvestment Act        members. Because the coverage is based on a group, its
                                       of 2009 (ARRA) provides that, for involuntary terminations    cost is usually less than comparable private insurance.
                                       that occur on or after Sept. 1, 2008, and before Jan. 1,      But coverage may be offered through only one insurer,
                                       2010, assistance-eligible individuals will only need to pay   the plan benefits may be limited, and co-payments and
                                       35 percent of COBRA premiums for a period of up to nine       deductibles may be higher than under your current plan.
                                       months. The remaining 65 percent of premium cost will be
                                       subsidized by the federal government.
                                                                                                     Private Health Insurance
                                                                                                          Another alternative is private individual or family
                                       State Programs                                                health insurance. Private insurance gives you the greatest
                                             If your employer has gone out of business, stopped      choices for plan benefits, but it most likely will cost more
                                       offering health insurance, or is too small to qualify for     than coverage through your former employer. Also, you
                                       COBRA, you may still be protected. Many states have           or members of your family could be denied insurance
                                       laws that provide health insurance continuation programs      coverage due to pre-existing medical conditions unless
                                       similar to COBRA. However, the laws of each state may         you meet specific HIPAA qualifications.
                                       differ as to employee qualifications, length of coverage,
                                       spousal and dependant benefits, etc. Check with your
                                       state’s labor department or insurance commissioner’s          More Options
                                                                                                           Other cost-effective choices include high deductible
                                       office for more specific information.
                                                                                                     individual plans and the federally subsidized, state-
                                                                                                     administered Children’s Health Insurance Program
                                       Your Spouse’s Coverage                                        (CHIP), which is available for families with modest
                                           If you have a spouse who is working, he or she may        incomes. Contact your state insurance department for
                                       have access to employer-sponsored health insurance. If        more information.

  Created by the American
  Institute of Certified Public
  Accountants and
  the California Society of
  Certified Public Accountants

64 • 2010 Financial Fitness Kit
Our CPAs Know What Counts
We focus on the details, so you can take care
      of the things that really matter.

                                 Visit our Web site at
                                 org	for	FREE	financial	
                                 resources,	including:
                                 •   Know What Counts, our FREE

                                 •   A	FREE CPA Referral and
                                     30-minute consultation;

                                 •   Ask-A-CPA, where you can
                                     get your questions answered
                                     by	one	of	our	Certified	Public	
                                     Accountants;	and	

                                 •   Downloadable information
                                     on	financial	records,	disaster	
                                     recovery, money milestones,
                                     paying down debt and so more!

                   Oklahoma Society of CPAs
                              50 Penn Place
                         1900 NW Expy, Ste. 910
                        Okla. City, OK 73118-1898
                     (405) 841-3800 • (800) 522-8261

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