In order to achieve your financial goals, you need to save on a consistent basis. But most people complain that they have no money to invest after all the bills are paid. If you’re one of those people, you need to take a hard look at how you spend money. Track your spending for just a week. Write down every dollar you spend during that time. Then analyze your expenditures – you’ll probably find dozens of ways to reduce your expenses.

Take the money you save and invest it, even if it’s only a few dollars a week. The important thing is to get in the habit of saving. You may be surprised at how much you can save by cutting out a few inconsequential expenditures.

To see the impact, let’s assume you are saving for retirement. The graph at the right shows how much you would accumulate by the age of 65 if you earn 8% after-tax on those savings and you save $1 a day, $5 a day, $10 a day, and $15 a day beginning at various ages. (This example is for illustrative purposes only and is not intended to project the performance of any specific investment.)

Someone with the good sense to start saving at 20 can accumulate massive sums of money by age 65. Let’s look at the $5 a day example. If you start saving at the age of 20, you’ll accumulate $705,000 by age 65. If you wait until the age of 30, you’ll contribute $18,250 less but will have $391,000 less than the person who started saving at 20. Waiting until the age of 40 will leave you with $572,000 less than the 20-year old. Thus, by starting early and saving consistently, even modest savings programs can provide substantial rewards.

UNDERSTANDING THE RATINGS

One of the factors you should consider when evaluating municipal bonds is the credit-risk rating of the bond. Several companies rate municipal bonds, but the two primary rating agencies are Standard & Poor’s Corporation and Moody’s Investor Services.

Moody’s rates municipal bonds in nine categories from Aaa (the highest) to C (the lowest), while Standard & Poor’s uses a ten category system from AAA (the highest) to D (the lowest). Both rating agencies consider the top four categories to be investment-grade quality. The analysis of the credit of municipal bonds is based on four categories of information:

The issuer’s debt structure and overall debt burden.

The issuer’s ability to maintain balanced budgets.

The taxes and intergovernmental revenue available to the issuer.

The issuer’s economic environment, including an analysis of employment trends, population growth, personal income trends, and real estate property valuation.

Although both credit agencies analyze the same four categories of information, they tend to place differing emphasis on these categories, which can result in significantly different ratings on the same debt issue. Moody’s considers the debt burden and budgetary operations of the issuer the most important factors, while Standard & Poor’s emphasizes the economic environment.

When evaluating state obligations, Moody’s uses the same criteria as that for local obligations. Standard & Poor’s, however, believes that states’ broader taxing powers, broader revenue bases, and more diversified economics make state obligations stronger than the obligations of local governments.

If a government does not issue financial reports in accordance with generally accepted accounting principles (GAAP), this is a negative factor in Standard & Poor’s rating process. Moody’s, on the other hand, does not require GAAP reporting, but does consider the timeliness of financial information important.

Credit rating companies earn revenue by selling information regarding bond ratings to the investing public and by charging issuers to rate their bonds. Most large issues of municipal bonds receive a rating before the bonds are sold to the public. Municipalities are very interested in obtaining as high a credit rating as possible. The rating agencies continue to monitor bonds after issuance and may change a bond rating over the years.

Keep in mind that the rating applies to a specific bond issue and is not an overall rating of the issuer. Municipalities issue different types of bonds, making it possible for each type to have a different credit rating.

AVOID THESE ESTATE PLANNING MISTAKES

In order to ensure that your estate plan is sound, it is important to avoid some common mistakes:

Mistake: Assuming that estate planning is only appropriate for the very wealthy. Although estate taxes generally won’t affect estates with less than $600,000 of assets (valued at fair market value), there are other reasons to consider estate planning. If you have minor children, you need to make provisions for guardians and to provide for their support in the event of your death. Individuals who are involved in second marriages need to make special arrangements to ensure that children from a first marriage are protected.

Mistake: Placing too much reliance on the unlimited marital deduction. By leaving all of your assets to your spouse, you forfeit the use of your $600,000 estate and gift tax exclusion, compounding the problem of estate taxes when your spouse dies. For estates in excess of $1,200,000, full use of each spouse’s $600,000 exclusion will save the heirs $235,000 in estate taxes.

Mistake: Believing that joint ownership of property eliminates the need for more formal estate planning. Although joint ownership of assets can simplify estate planning, this may not be the most appropriate or cost-effective way to distribute your assets.

Mistake: Waiting until death to use the $600,000 estate and gift tax exclusion. The $600,000 exclusion can be used to make gifts in excess of $10,000 per year during your lifetime. It may make sense to gift an appreciating asset to your heirs during your lifetime to remove all future appreciation from your estate.

Mistake: Not using the annual gift tax exclusion of $10,000 ($20,000 with spouse) per donee. Over a number of years, an annual gifting program can remove a substantial portion of your estate from estate taxes. In addition, any income generated by the gifted assets becomes taxable income to the donees.

Mistake: Believing that a revocable living trust will save estate taxes. Although living trusts can provide substantial estate planning benefits, such as removing assets from probate and preserving the use of the $600,000 estate and gift tax exclusion, they have no impact on estate taxes.

Mistake: Not sheltering life insurance proceeds from estate taxes if your total estate, including those proceeds, will exceed $1,200,000. Although the proceeds will be free from income taxes, they will only be free from estate taxes if you set up an irrevocable trust or make your heirs the owners of the policy. Specific tax guidelines must be followed to ensure the property tax treatment of the proceeds.

Mistake: Not updating beneficiaries. Beneficiaries can be named for many assets, including life insurance policies, retirement plans, brokerage accounts, and bank accounts. Review these beneficiaries after major changes, such as marriage, death, or the birth of a child.

Mistake: Relying on the marital deduction for a spouse who is a U.S. resident, not a U.S. citizen. The unlimited marital deduction is not available for spouses who are not U.S. citizens, unless a special kind of trust is established. Annual gifts of $100,000 may be made tax-free to spouses who are not U.S. citizens.

Any one of these mistakes can cost your heirs a significant amount of money. Feel free to call if you’d like to discuss your estate planning needs.

CHECKS AND BALANCES

Memories of the failures of banks, savings and loans, and insurance companies may cause you to wonder about the regulations governing mutual funds. The industry is governed by the Investment Company Act of 1940, which utilizes several effective checks and balances. The assets of the mutual fund are organized as a separate company and cannot be claimed by any creditors of the fund’s sponsor, adviser, or underwriter. The fund manager does not have direct control of the assets; the assets are held by a financial custodian, usually a bank. Every day, the records of the bank are reconciled to the records of the mutual fund. Each fund is audited annually by independent accountants and is inspected periodically by the Securities and Exchange Commission.

In addition, mutual funds generally invest in assets whose market value is readily ascertainable. Mutual funds calculate their net asset value on a daily basis, so that shareholders are aware of the most current market values and any changes in that value.

In the 70 years mutual funds have existed, none has ever gone bankrupt, although some funds with poor performance records have merged with more successful funds or have been dissolved.

BUDGETS AS AN AID TO FINANCIAL SUCCESS

Although inefficient and wasted expenditures are often major obstacles to achieving financial goals, most people dread the exercise of analyzing and budgeting expenditures. View your budget as a flexible tool to control your finances and you are to control your finances and you are likely to find that it is a significant aid in achieving your financial goals.

To get the maximum benefit from the budgeting process, follow these three steps:

List your past expenditures on a monthly or annual basis by category. First, list expenses that are fixed and absolutely necessary, such as housing, insurance, taxes, and savings. Next list essential variable expenses, including food, housing repairs, medical care, utilities, transportation, and clothing. Finally, list less essential variable expenses, such as entertainment, recreation, contributions, travel, gifts, and hobbies. Even if you haven’t been keeping track of your expenditures, canceled checks, credit card receipts, and tax returns will provide much of the needed information. If you are unable to account for large sums of money, you may want to keep a journal for a month.

Evaluate your expenditures, paying particular attention to variable expenditures. Review each expenditure carefully, ranking it as important, moderately important, or unimportant. You may find that you are spending too much on items such as credit card interest or entertainment. Eliminate unimportant expenditures, allocating those sums to savings.

Prepare a budget for future spending that incorporates your financial goals. When preparing your budget, keep the following points in mind:

Don’t merely assume that you will spend the same amount as last year. Make conscious decisions about how you want to spend your income.

On a periodic basis, compare your actual expenditures to this budget to ensure that you stay on track.

Make the budget flexible. Nothing goes exactly as planned and your budget should be able to deal with emergencies.

Make saving and investing an important part of your budget.

Be sure to budget for large, once-a-year expenditures.

Use consistent groupings so that you can compare your budgets over time.

Don’t try to be too precise – you don’t have to account for every dollar that is spent. Give everyone in the family a reasonable personal allowance and permit them to spend it without accounting for it.

Keep it short, simple, and easy to implement.

NEWS AND ANNOUNCEMENTS

DID YOU KNOW . . .

Mutual fund assets grew from $135 billion in 1980 to $1.8 trillion by June 30, 1993                     (Source: Securities Industry Trends, October 15, 1993, p. 6).

Acquisitions of equities by mutual funds accounted for 96% of all dollars spent on stocks during the first half of 1992                                                                                                                           (Source: Business Week’s Guide to Mutual Funds, 1993, p. 1).

26% of all IRA assets were invested in mutual funds, 21% in bank products, and 13% in thrift products (Source: Business Week’s Guide to Mutual Funds, 1993, p. 8).

(Source: Life Association News, October 1993, p. 48)