Review of American Express Prepaid Card

Limited Time Offer Through June 30, 2012: Load an American Express Prepaid Card with $200 or more, get a $25 gift card for free. No catches, no sneaky fees, just a free $25 bonus. (You can get up to $75 by opening up three cards per household: one for you, one for your spouse, and one for one of your kids to get $75 total out of this offer.) You could even open the cards, get the bonuses, and withdraw the money via ATM for absolutely free. (Of course AMEX would prefer you try out the card and use it; I'm just saying')

This offer ends on June 30 so you just have a few days to snag the free cash!

American Express is known for having great credit card products backed with award winning customer service.

But can you do business with them if you don't want a credit card?

Now you can with the American Express Prepaid Card.

Benefits of Using the American Express Prepaid Card

Before we dive into the details, here are some of the main points:

• No overdraft fees. It is impossible to overdraft the card.
• No annual, monthly, daily, customer service or transaction fees. Virtually fee-free, see below.
• One free ATM withdrawal per month.
• After your first ATM withdrawal you will pay a $2 ATM withdrawal fee ' literally the only fee associated with the prepaid card.
• Use it anywhere American Express is accepted just like you would with an AMEX credit card or gift card.

I think this prepaid card works best for:

• Families that want to provide their college student some spending cash, but don't want to give them the ability to rack up massive overdraft charges or credit card debt.
• Families that are trying to teach their kids about money and spending.
• Individuals that want to keep themselves from spending more money than they have. (You cannot overdraft on the card. It won't let you. That's awesome.)

How to Use the AMEX Prepaid Card

Using the American Express Prepaid Card is a simple process:

Load money onto the card. This can be done via direct deposit, a transfer from your bank account, or through a reload network like Vanilla or MoneyPak. This first two methods are what you want because they don't include fees. Vanilla Reload Network and MoneyPak charge fees usually between $3.95 and $4.95 to put money onto the card. You don't want that. Use your bank account instead.

Spend the money as you would normally. The card can be used anywhere American Express is accepted. Need to buy groceries? You can use this card. Need to buy gas? Same thing. There isn't a catch. Your amount doesn't dwindle over time due to account fees. The only fee you pay is if you withdraw money from the card more than once per month at an ATM. Other than that, there are no fees at all.

Reload the card. Cash getting low? Reload it using some of the same methods you used to load it in the first place. (And remember to avoid paying those extra fees.)

It's that simple. Seriously. Even if you never use the card again you can get the free $25, but only if you act fast. Why wouldn't you do that?

What's the Catch to the American Express Prepaid Card?

I know, I know. You're probably a bit skeptical.

You're probably thinking, 'AMEX is willing to give me $25 for putting $200 onto a card I can use like cash ' or even just withdraw the money straight out of an ATM?'

The answer is absolutely yes. We're talking free cash for using the card. American Express earns transaction fees from merchants when you buy stuff, but it doesn't come out of your pocket. (They would pay the same type of transaction fees to AMEX whether it was a prepaid card or a credit card, so don't worry about costing your favorite merchant more money.)

'Are you sure there aren't any fees?' is probably your next question. Again, there are no fees associated with using the American Express Prepaid Card unless you withdraw funds off of the card more than once per month. Aside from that, there are no fees.

Disclaimer: This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.

Tagged as: American Express Prepaid Card, AMEX Prepaid Card, Bonus, No fee, Prepaid Card

How to Kick the CPA Exam's Butt and Become an Accountant

After studying my butt off and passing the CFP® exam, I have no desire on taking another test again.

None.

There was a brief moment (about 2 seconds to be exact) where I thought about taking the CPA exam.

Then reality set in and I have looked back ever since.

Previously, I shared Amber's personal story on how she passed the CPA exam and became an accountant.

Better her than I. 

Today, I have a guest post from Bisk Education on proven CPA exam test taken strategies.

So if you're brave enough to sit for the CPA exam, this post is for you.  Enter Bisk'..

*******

Have you been deeply embroiled in a CPA exam review course?

You've probably done nothing but eat, breathe and sleep accounting for months.

If you are feeling confident about the subject material but are still looking for ideas on how to best navigate the actual test-taking process, these tips are for you.

The CPA exam is a notoriously difficult test; according to published pass rates, most people fail.

So learning and following some basic tricks of the exam-taking trade can be just the edge you need to snatch victory from the jaws of defeat.

First, don't spend the 24 hours before your exam frantically cramming in a nonsensical (or even sensical) fashion. Most experts recommend spending about 500 hours studying over the course of four to six months before sitting for the CPA exam. If you've followed their advice, you know this stuff. Don't stress yourself out and jumble your orderly, educated brain. Your time in the final hours before the test is much better spent eating healthy and sleeping well. At least eight hours is ideal.

The morning of the exam, focus on the necessary logistics.

• Do you know how to get to the testing center?
• Is your car gassed up?
• Do you have the necessary forms of ID?
• Have you laid out a comfortable outfit?

Remember, you must enter the testing room with only the clothes on your back, and they have to stay on your back. If you are too warm, that sweater can't just be shed and flopped over your chair. You have to sign out of the room, put the sweater in your assigned locker and sign back in ' a waste of precious time.

Budget Your Time

Once you have handled the basic tasks that provide for your mental and physical well-being during the exam, the most important thing you can do is budget your time wisely. Time management is the essential key to passing the CPA exam. The trick is to weigh the amount of time it takes to complete a multiple choice testlet with how long it takes to do a task-based simulation (TBS), but in managing your time, always be guided by how much each is worth in the scoring matrix.

Let's put that theory into practice. In three sections of the CPA exam ' Auditing & Attestation (AUD), Financial Accounting & Reporting (FAR) and Regulation (REG) ' the multiple choice questions are worth 60% of your score, while the task-based simulations make up the remaining 40%. Given that, you'd want to spend roughly 60% (or just under 2.5 hours) of a 4 hour test on the multiple choice testlet and the rest on the task-based simulation testlet.

In the final section of the exam, Business Environment & Concepts (BEC), the multiple choice testlets are worth 85% and the written communication exercises only 15%. Since it only takes 75 points to pass any section, if you did exceptionally well on the multiple choice questions, you could skip the written communication tasks. It's not recommended, but it's something to keep in the back of your mind when budgeting your time.

Familiarize Yourself with the CPA Exam Format

In addition to taking care of yourself and managing your time, the third leg of the CPA exam success stool is to be familiar to the point of comfort with the exam format and software. Any quality CPA review course's materials should help you accomplish that, but also spend as much time as possible reading through the AICPA website for the official CPA exam tutorial and sample tests. If you've done both those things you know a couple hard-and-fast rules of the CPA Exam game :

•  The multiple-choice question testlets must be completed before you are allowed to proceed to the task-based simulations or, in the case of the BEC, the written communication tasks.

• You can jump around within a testlet, skipping back to previous questions and ahead again, but once you've closed out of that testlet, there is no going back. It is a fait accompli, as they say. In fact, because every section of the exam except the BEC is adaptive, you've already been graded on that completed testlet to the extent that your performance has determined how difficult the next set of questions will be.

Within the parameters of those two immutable facts, here are a few quick and dirty strategies to increase your chances of success:

• Double Read & Double Check: Be sure to read each question and all the possible answers thoroughly at least twice to ensure that you understand what the examiner is looking for. The AICPA Board of Examiners isn't above being tricky, and it's easy to overlook a 'not' or some similar word that completely changes the meaning of the question. In the same vein, be sure to re-check your calculations in all TBSs.

• Cherry-Picking is Acceptable: There's nothing wrong with grabbing that low-hanging fruit first. Within every testlet, answer easy questions first and come back to the more difficult ones later. They are all worth the same amount of points anyway, and this plan of attack may just bolster your confidence. This technique can be particularly helpful in the TBS testlets. Scan quickly through each of the 6 or 7 simulations and decide which ones you can knock out of the park quickly and effectively.

• Keep Moving: If you get stuck on a question, skip it and move on. Agonizing over one thing for too long will only serve to frustrate you and undermine your confidence. Besides, by moving forward, you just might uncover a tip or some factoid that triggers your brain to recall the necessary information within a subsequent question.

Don't Let TBSs Psych You Out

Task-based simulations ' they just sound vastly more difficult than multiple choice questions. But you've taken your sample tests. You know that when you strip them down, they are just word problems testing your comprehension ' drop-down menus, spreadsheets, fill-in-the-blanks, true-or-false, and maybe a chance to showcase your Internet research skills. You can do this!

In summary, it goes without saying that no amount of test-taking strategy can replace good, old-fashioned exam prep. Certainly don't depend on it to do so. However, it is only logical to stack the deck in your favor by implementing these common sense tactics. In a difficult, high-stakes test like the CPA Exam, any leg-up you can get may mean the difference between a passing and failing score!

Tagged as: CPA exam test taking strategies, Pass CPA Exam

4 Important Factors in Choosing the Right Life Insurance Policy

When it comes to choosing the right life insurance there are many different factors that come into play.

When I'm working with clients and helping them choose the life insurance that makes the most sense for them, we want to make sure we visit these factors.

Some of these factors include choosing the right life insurance company, choosing the right amount, choosing the right term.

Today, I want to visit the some of the most important factors you should have in choosing life insurance for yourself.

1. Choose the Right Insurance Company

The first factor that comes into play when choosing the right life insurance is make sure that you're choosing the right life insurance company.

• But what do you look for?
• How do you know if it's a good company?

You want to check the ratings and make sure that they're a stable company.There are various rating agencies such as A.M. Best, Moody's, S&P, Weiss. All these different agencies will give the insurance agencies a report card rating to show how financially stable they are.

Typically, if you are looking for a strong solid company you don't want anything below an A- rating. I actually have the link on my blog that shows you all the life insurance company ratings.  If you're not sure on the life insurance company, be sure to check that table.

2. Choose the Best Rate (but be careful)

The second most important factor when choosing life insurance, which I'm sure is very important to you, is making sure you get the best the best rate ' the cheapest rate. How do you know if you're getting the best rate? If you're using the free life insuranece quote engine on my site, we're using various insurance companies making sure that we are getting you the best independent quote. You want to make sure you are using an independent agent.

There are other captive agents such as State Farm, Nation Wide, Country Companies and typically they are quoting their own company's rates. You may get a discount if you pile in your auto and home, but typically I've been able to save my clients a lot of money by going the independent route.

Sometimes the cheapest term rate isn't always the best option.  Why you ask?   If you have some sort of pre-existing health condition (diabetes, high cholesterol, sleep apnea) then going with the cheapest rate might be a sure fire way to get denied.   Before choosing a certain carrier, make sure to work with your agent and be transparent about your health history.   The more information you share up front the better chance your agent has to get you to the right company.  Certain insurance companies are willing to work with certain conditions which would be considered high risk life insurance.

3.  How Long of a Term Do You Need?

Another factor that will also have a bearing on your cost is how long you are purchasing the life insurance for or what's most commonly know as the term. Typically, you're going to see 10-year, 20-year, and 30-year term policies. Although, now I have been seeing some 25-year or 40-year terms, most typically I work in the 10- to 30-year period. Depending on your situation, your age, how long you plan on living for, how much debt you have will determine how long of a term you get.

If you saw a previous post of mine, I talk about how I was able to buy a 30-year term policy for myself, and for me 30 years makes a whole lot of sense. If you're a younger individual, 30 years may make a lot of sense for you, too.

Now if you're a little bit older in the 40- to 50-year-old range, maybe a 10- to 20-year policy will be all that you need. A neat feature with the quote engine on my site is that you can get all these costs on the 10-year to 30-year so you can see and compare how much it cost to go from a 10- to a 20- to a 30-year term.

4. How Much Life Insurance Do You Need?

The last factor that comes into play, and it's a question that I get all the time is how much life insurance do I need. I wish there was a blanket answer. There are some general rules of thumb, which I will share with you real quick.

The first general rule of thumb about how much life insurance you need to buy is to take your income, multiply it by 10 and that will then determine how much you should buy. If you're young, maybe you don't want to buy just 10 times. Maybe you want to buy 20 times because if you plan on getting raises over the course of the next 5-10 years, obviously what you buy today will not be enough 5-10 years from now.

Another way you can determine how much you need to buy is a method I use. I figured how much I want my wife to have as an annual income in case something happened to me. Then, I took that number and I divided it by 5% thinking that if she invested the money she could earn at least 5% and that should get her that number. For us that magic number was 2 million dollars of term life insurance that we ended up buying. (I actually bought $2.5 million for some extra cushion)

As you can see there are many factors that come into play when choosing the right life insurance for you. If you still have more questions, feel free to contact me at the blog or if you want to call me direct, you can email me, leave a comment on the site, whatever you need to do to get in contact with me to make sure you get your questions answered regarding choosing the right life insurance.

Top Merchant Services for Small Businesses

Earlier this year I embarked on a new business venture.

It was mostly dealing with offering an online service so I was forced into researching different merchant services for small businesses.

Was I in for a rude awakening'..

I can't believe all the different options that exist today for small businesses.

Small businesses face a seemingly endless list of unique challenges in attempt to grow in an increasingly competitive marketplace.

Among the most difficult of those challenges is accommodating the demands of customers when it comes to payment.

A small business offering excellent products and services may find itself unable to survive if it is not prepared to accept payment by credit or debit card or other forms of flexible payment, or to establish a viable electronic marketplace for its customers.

Large businesses have the resources'both in terms of finances and personnel to deal with such matters, but small businesses typically do not.

Merchant Services:  Dealing with Small Business Payment Processing

A small business may find itself in need of a merchant services company to assist with payment processing and e-commerce tasks.  The small business that is unable, for instance, to process credit and debit card payments will find itself at a competitive disadvantage, regardless of whether its primary focus is products or services or whether its business model is primarily traditional, digital or a mix of the two.

Merchant service firms can help small businesses by establishing the ability to deal with a variety of payment processing needs.  A merchant service firm can make it possible for small businesses to accept credit cards and debit cards.  This capability can serve a Web-based business or a portable business model. 

For instance, with a wireless credit card processing capability, a trades-based service (plumbing, electrician, heating and air conditioning service, etc.) can accept credit or debit card payments easily despite the mobile nature of the business.

E-Commerce Merchant Services for Small Businesses

Small businesses that rely upon or are looking to expand into the area of e-commerce can utilize a merchant services firm to enable the process. 

Credit and debit card payment processing is critical to running a business with an e-commerce component and that's a readily available merchant service. 

Many merchant service firms, such as Blue Pay, can simplify and streamline the payment checkout process by seamlessly integrating the payment process with popular shopping carts.

The acceptance of electronic checks is yet another flexible payment system that can be enabled by a merchant services firm, safely and securely.  There is tons of information about eWallet Solutions if you do your homework.

PCI Compliance and Account Verification

One of the major bugaboos for small businesses when dealing with credit cards, whether the transaction is of the traditional or electronic variety, is security.  Any merchant services firm worth its salt is in compliance with the Payment Card Industry Data Security Standard (PCI DSS) to assist in the process of keeping your data, and that of your customers, safe from the host of problems involved with credit card fraud.

Similarly, any good data services firm is able to ensure speedy and accurate account verification, making it possible for your payment transactions to be processed quickly, accurately and safely.  Before signing on with any online merchant, do your homework first.  Resources such as the BBB exist to protect you from being scammed by a bad company

 

Tagged as: credit card processing, electronic checks, online merchant services, small business payment processing

How to Avoid Money Problems in Your Marriage

Leaving the toilet seat up. <Guilty>

Not noticing she got her hair trimmed a 1/4 of an inch. <A 1/4 of an inch, really? Does any guy notice this? >

Pretending to not hear the newborn crying in the middle of the night. <Busted!>

Trying to fix the problem instead of just listening. <Still haven't figured this one out>

In the grand scheme of things, the above items are trivial and every marriage should be able to withstand them.

But the #1 thing that all marriages have a problem with is money.

I've seen countless marriages ruined all because money got in the way.

Either there wasn't enough of it. Or there was too much of it. One spouse didn't like how the other was spending it. The other spouse didn't like  to disclose what they were actually spending their money on.

All of these are a recipe for a disastrous marriage.

Here's my tips on how you can have a successful marriage and avoid money problems. I promise it doesn't have to be that hard.

Orange Headband and A Lot of Respect. Taking Down the Tough Mudder.

I'm pretty much a sucker for anything that sounds weird but also physically challenging. A buddy of mine suckered me into trying Crossfit while I was deployed to Iraq and I've been hooked ever since. A another buddy of mine coerced me into signing up for the Urbanathlon in Chicago even though I hate running! Now that same buddy suckered me into competing into my first Tough Mudder race this coming October. Great friend, huh?

I've still got plenty of time to train, so I'm not stressing''yet. Recently, my new junior advisor Tyler couldn't wait to compete in his first Tough Mudder. Personally, I'm glad he went first so I could get a good sense if I have a chance to survive. Here's his recap of the race. And yes, he's the one wearing the Batman costume.

What's the craziest thing you have done lately?

Is it base jumping?

Skydiving?

Or is it running 12 miles through mud, water, sand, uphill, downhill, over 12'ft walls, under barbed wire, through fire, jumping in ice water and being shocked by 10,000 volts of electricity?

For me, it's the last one!

Tough Mudder, advertized as

'Probably The Toughest Event On The Planet'

is a 10-12 mile obstacle course designed by British Special Forces to test your all around strength, stamina, mental grit, and camaraderie.

I first heard of Tough Mudder on CNBC when they interview the creator of Tough Mudder, Will Dean. After watching the interview, and several more videos on YouTube, I knew I had to do it!

Training for Tough Mudder

Training for the event began shortly afterwards. Going to the gym and running became an almost every night event. The event was to be held at Badlands Off-road Course, in Attica Indiana on June 16th, 2012.

I recruited one of my good friends to do it with me. We trained for several months getting prepared for the event. If the event wasn't already hard as is, my friend and I decided it would be fun if we dressed up for it. My friend got a Spiderman costume and I got a muscle Batman costume.

What Did I Sign Up For?

As we arrived at Tough Mudder, I was overwhelmed with the amount of people that were there. A steady stream of cars pulled in from 7AM till noon. My friend and I went through registration where we had to sign a death waiver. Wait a second! Did you just say Death Waiver?

'What am I getting myself into', I thought.

After we got our bib number to identify us on the course, my friend and I decided it was time to unveil our costumes. Everyone around us loved our costumes. We got pictures made with many spectators and participants before the race.

Start Time

We had the 3rd start time at 8:40 A.M. They released 500 people on the course every 20 minutes. Just to get to the start area you had to get over an 8'ft wall. When we got over the wall, they and an MC there to get everyone psyched to start.

The Obstacles

As we ran the 12 miles to the finish line, we also had to get over, under, and through 25 military style obstacles. Some of the toughest ones were:

The Arctic Enema is a large container filled with ice water and a wooden plank that you have to swim under to get to the other side. This feels like jumping in a frozen lake!

The Berlin Walls are a series of 12'ft high walls that you have to get over with the help of your fellow mudders.

Everest, which is a quarter-pipe that you have to sprint up and try to grab onto the ledge or other mudders outstretched arms. The quarter-pipe is usually covered in mud and grease, so it's no easy task getting up this.

Tough Mudder Muddin'

You can't have a Tough Mudder without their signature MUD! This is the thickest mud I have ever seen. I saw many people losing shoes into this muck. Trying to get through this uses all of your lower body strength and zaps you of energy.

Don't forget about about Tough Mudder's electrifying finish, Electroshock Therapy! For this obstacle you have to sprint though a field of live wires with some carrying as much as 10,000 volts of electric shock. Mind your footing too, as you have to run through mud and over hay bells while trying not to get zapped. I took two pretty good shocks on my way through it. One to my left trap muscle, the other one right to my forehead. Luckily I did not go down but it sure didn't tickle.

After running 12 miles through mud, water, sand, uphill, downhill, over 12 ft. walls, under barbed wire, through fire, jumping in ice water and being shocked by 10,000 volts of electricity, there is nothing sweeter than crossing that finish line and they put that orange headband on you.

Overall I had a fantastic time, even though I could not move for the next 2 days. I'm proud to say that I am a Tough Mudder and I am looking forward to the next event!

Are you down for some Tough Mudder action? It's not too late so sign up and see if you're tough enough.

How to Hit it Big with an 'Option' For Your Career

The following is a guest post by Darwin. Darwin takes an evolutionary approach to money, investing and career opportunities. If we've learned anything over the past few years, it's that we need to be constantly adapting to changes in technology, the workplace, investment opportunities. Read more at Darwin's Money.

For those of you that are even vaguely familiar with stock options, you're probably aware of how you can essentially turn a small sum of money into a sizable payoff if things go the right way for you.

As an example, if you bought out of the money call options on Apple a few years ago, the return would have been over 1000%.

What if you could apply this concept to your career and earning power?

You can!

Here are a few real-life examples (including my own endeavors) where side projects can either fizzle out or succeed beyond expectations:

Starting a New Business

If watching Shark Tank doesn't get your creative juices flowing, perhaps consider just re-assessing your skill sets and how you might build a business around it. Here's an awesome example of something I'm involved in.

My old college roommate called me out of the blue last year with an idea he had. He's a civil engineer and he knew I had a fair amount of online/blogging experience. He knows that in engineering and design firms they normally pay AutoCAD drafters anywhere from $30-$75 an hour depending on the complexity of the work. Through some Facebook exchanges with his cousins in the Philippines (also CAD drafters), he discovered that they were creating the same level of quality and volume that a US-based drafter does, but at a fraction of the cost.

He called me for some ideas, we got to collaborating and a business was born. We each put up some money, I managed the initial online activities and he managed the operational aspects of starting up and hiring personnel in the Philippines. We're now at over 20 AutoCAD drafters, 2 US-based Account Managers and we've landed our first six-figure client. Our CAD drafting services business is really taking off. This is an example of a potentially huge payoff.

Our business is less than a year old and we've already attracted more capital by way of another great partner/investor, and we could conceivably bring in over $1 Million in revenues by next year. In terms of the stock option theme, this would be one of those long shots, an 'out of the money call option' which requires very little upfront investment, but can have a huge payoff.

Real Estate Investing

This is another example of a great side business where people can become extremely wealthy. I have a co-worker who started with a single purchase at a college campus 8 years ago and he's grown it into several properties, a large apartment complex, and we've just partnered on a 5 property purchase at another university. This is all while we both maintain pretty demanding full-time jobs.

The up-front investment was it ' from there, the income from the properties and equity pay down from the mortgage payments fund future purchases. For a corollary to stock options, this would be the equivalent of a 'deep in the money option' since there is a sizable up-front investment required to get started, but it grows pretty steadily and in a leveraged fashion from there.

Be an Entrepreneur at Work

While the examples above involved activities outside of work, there's no reason you can't break out in your own workplace or industry. If you're in the type of role where you have the ability to affect change or have some latitude in your responsibilities, you could morph an idea or concept into an entirely new business unit.

For instance, someone I work with started in on a new product line and he is now the 'Managing Director' for a multi-million dollar business in a medical device firm. Here's another one that drives my co-workers crazy. Our company recently laid off a lot of employees.

Shortly thereafter (ironically), our company realized the need for several engineers in another group and started hiring up contractors like there was no tomorrow. One of our colleagues that had been let go saw an opportunity and formed an LLC and contacted all the laid-off employees. He acted as their Temp agency and got many of them back in (including himself) as contractors and consultants, while shaving some off the top himself for placing each person. It may sound a bit fishy, but there was a need and he filled it.

I suppose the company may be OK with the arrangement because they want to cut out fixed assets (things like pensions, healthcare, bonuses, etc) and go to a more flexible model. He saw the need, incorporated, and leveraged his network. Sometimes you can parlay being in the right place at the right time into a leadership role of an entire organization or act as an 'agent' to fill a need and collect a premium for doing so.

These are just a few of the examples of people looking at an opportunity right under their nose to create value, scale a business, and realize leveraged returns.

Has the Concept of Career 'Options Contracts' Spurred Any New Ideas for You?

Darwin also shares various investment strategies at ETF Base and High Yield Edge.

Tagged as: Make Money on the Side, Side Business, Side Poject

How To Repair Credit After Bankruptcy

Have you recently filed for bankruptcy?

Are you feeling defeated and thinking there is no way you will ever be able to repair your credit?

Recovering from a bankruptcy can be challenging both financially and emotionally, but it can be done.

Witnessing both my parents file bankruptcy, I've seen first hand the struggles that ensue afterwards.

Rebuilding your credit is not easy and can be very challenging.

If you are willing and able to put in the hard work, become financially disciplined and know you will need to be in it for the long haul, then you can repair your credit and move to living a financially stable life.

Here is a look at what you will need to do.

Tips For Repairing Your Credit

Use credit

While many people after a bankruptcy may be tempted to switch to just using cash, while smart in some ways, this will not rebuild your credit. In order for your credit to improve you need to have some type of open credit account or accounts that are being reported to the credit bureaus in good standings each month. In order to improve your score you must prove to the credit bureaus that you can manage your accounts.

The only problem is that sometimes it's hard to get approved.  Or if you do get approved, your interest rate is going to be astronomical.  I can remember seeing the rates of some of my dad's cards after his bankruptcy and some were in the high 20% range.  Ouch!

Another option is getting a secured credit card.  Read below how obtaining a secured card might help.

Consider a secure credit card.

While you will need to have open active accounts in order to improve your credit, you will find it extremely difficult and more than likely impossible to be approved for a traditional credit card or receive any other loan. Your best bet is probably going to be to get a secured credit card. Secured cards require a deposit to open and offer very low limits, but at the same time can be a great tool to start rebuilding your credit. Just be aware that some secure cards do not report to the three major credit bureaus and in order to improve your credit you will need to find one that does report each month.

A previous intern of mine who didn't have 'bad credit' per se, he just had no credit history.   In some cases, having no credit history is just as bad as having filed bankruptcy.  His credit score was a pathetic 621 and because of it was denied by two banks in trying to open a credit card.

His solution?   He opened a secured credit card, used it and made payments on time.   The result was a credit score that raised over 100 points in just 5 months.

Use credit wisely.

As already stated, you will need to have open active credit accounts in order to rebuild your credit, but more importantly you will need to use these accounts wisely. First, you will want to make sure that any credit accounts you have are always active. If you have a secure credit card for example, make sure you use it each and every month to make small purchases that you can truly afford.

You then will need to make sure you are paying your bill every single month, on time and in full. This shows to the credit bureaus that you are being responsible with your accounts and your credit score will start to rebound. Also, as soon as your credit improves enough to apply for and receive a traditional credit card you should apply for one and switch to using the unsecured card, as this will also help to improve your score.

Pay all other bills on time.

You will also want to make sure that you are paying all other bills in full and on time as well. This might include your rent, utilities bill, medical bills, etc. Many times these overdue bills are reported to the credit bureaus and you will want to avoid that.

Beware of credit repair scams.

Finally, you need to know that there is no other way to rebuild your credit other than with hard work and financial discipline. Do not fall for scammers who will try to tell you they can repair your credit for a fee.

A guest post by Damon Day outlined the 10 debt settlement scams to avoid.

Have you had to rebuild your credit after bankruptcy? What challenges did you face in doing so?

photo credit: kenteegardin

Tagged as: how to repair credit after bankruptcy, repair credit after bankruptcy, tips to repair credit after bankruptcy

Do You Need Personal Liability Insurance Coverage?

There's nothing  I like more than writing my annual checks for all my insurance protection. <cough>

Not including my long-term disability policy, my $2.5 million 30 year term policy, standard homeowner's and auto policies, and personal umbrella policy; I pay roughly $5,124 per year for my total business insurance coverage.

But we all know that insurance is a necessary evil.

When you damage someone else's property, or cause injury to someone else, you are usually held personally liable for the costs.

This means that you have to pay restitution.

In some cases, these costs can exceed your ability to pay. That is not a good situation!

With the help of personal liability insurance, though, it is usually possible to meet these types of obligations.

Personal liability insurance is a completely different ballgame from life insurance.

What is Personal Liability Coverage?

Chances are that you already have some liability coverage. Most homeowners policies and auto policies include a certain amount of personal liability coverage. If someone is injured at your home, or if you ruin someone's property with your car, the insurance company pays the claims, up to the amount that you are covered for.

Personal liability coverage helps you protect your assets, since the insurance company pays out the claim, and you don't have to dip into your savings, or into your other assets. However, the personal liability coverage that comes with your more common insurance coverage isn't always enough.

Consider Umbrella Insurance

One way to augment your personal liability coverage is to purchase an umbrella policy. Umbrella insurance protects you in larger amounts than what is usually offered with your other policies, but the premium increase isn't as bad.

You can usually buy a popular umbrella coverage amount for about $150 a year, and an increase of $50 for each additional $1 million. Many consumers find that boosting the deductible on auto or home insurance can offset the cost of umbrella insurance.

If you have factors that increase your chances of damaging property, or injuring others, it can be worth it to get umbrella insurance ' especially if you have a high net worth. Someone who knows you have more assets might be more willing to sue you for $2 million after a slip and fall at your home. Umbrella coverage kicks in after your regular insurance is tapped out.

So, if your homeowners policy has $750,000 in liability coverage, and you have $3 million in umbrella insurance, if you are sued for $2 million, your homeowners policy will tapped first. Once the $750,000 has been paid out, the remaining $1.25 million will be paid from your umbrella policy.

We initially started with a $1m umbrella policy but recently increased that to $2m of total coverage.   I also have an umbrella policy for my business, too.

Errors and Omissions

When you are self-employed, you have to be aware of some of the liability issues that can come with your job. If a client holds you responsible for a service you provided, or if the promised results were not realized, or if you are considered liable for a service you didn't provide, this can become an issue. Financial planners, lawyers, cosmetologists, and others who are in positions to provide advice and some services to clients can benefit from this type of liability insurance.

This is my whopper of a premium, but with my profession; it's a necessity.   My total premium is $3,654 per year for E&O coverage.  <gulp>.

Some additional benefits that my E&O coverage policy covers on top of the $1m of coverage are:

• Business travel Accidental Death Benefit: $25,000
• Emergency Real Estate Consulting Fee: $25,000
• Identity Theft Expense: $25,000
• Key Individual Replacement Expense: $25,000
• Kidnap Expense: $25,000
• Theft of Work Materials: $2,500

Should You Buy Personal Liability Insurance?

Make sure you consider your situation, and your position. If it appears that you could be sued for what you have done, it's important to make sure that you have the proper liability insurance. That way, you will protect your assets, and avoid financial ruin if you are held liable for someone else's injury, loss, or property damage.

Tagged as: business liability, E&O insurane, Errors and Omissions, insurance, liability, umbrella insurance

Ready to Start Investing? Here's the Best Online Brokers for Beginners

I can remember the first time I made my first stock trade.

I was an intern at the investment firm that eventually hired me.

It was right around when the tech bubble burst, and tech stocks were trading at extreme discounts.

I didn't have a lot of money, actually I had really almost no money, yet I felt compelled that I needed to buy one of these tech stocks.

The stock that I had in my sight was Lucent.

Lucent was a telecommunication company that once was trading in the $60 to $80 range but had significantly dropped well below $10.

If I recall correctly, I bought it within the $6 to $8 range.  I remember thinking that I landed a good buy.  Ha!

I opened my account, deposited my money, and made my first trade.

Reflecting back, I was such a beginner, it wasn't funny.

If I had known any better,

1.   I wouldn't have bought Lucent, and
2.  I definitely wouldn't have bought it through a full-service brokerage firm.

At the time the commission on the transaction that I paid was $42, and that was just to buy it. If I sold it, I had to pay an additional $42.

Had I know better, I would have gone with an online brokerage and paid next to nothing to make the exact same trade.

If you are a novice investor or a small investor looking to make your first stock trade, let me introduce you to some other best online brokers for beginners.

Best Online Brokerage Firms for Beginner Investors

Of all these firms have accounts that are easy to set up, have very cheap stock trades, and also have an awesome customer service that makes you feel as if you're meeting with somebody in real life. We also highlight firms that encourage investor education by offering deep knowledge bases, webinars, or even online courses for their investors.

Betterment

If the alphabet soup of investing ' Roth IRA, Traditional IRA, SEP IRA, 401k, Roth 401k, and so on ' baffles you, Betterment is a great place to start.

Betterment's philosophy is this: investing is so complicated that many people get analysis paralysis. Instead of making any decision, they freeze and make no decision. Betterment is designed to make investing incredibly simple.

How simple?

You have very few choices to make:

• how much money to invest
• how often you want to invest it (one time or set up to automatically be invested on a schedule)
• what asset allocation you want between stock and bond investments

That's it. Betterment takes care of the rest. No having to look through a bunch of mutual fund tables to decide which funds to go with. The firm automatically invests in a basket of exchange traded mutual funds in two categories: stocks and Treasury bonds. If you go with the most risk (100% stock allocation), all of your money goes into the stock ETF basket. If you want to split it down the middle, 50% goes to the stock basket and 50% to the Treasury bond basket.

It's dead simple, which is why it is a great place for beginners to start. Building up the habit of investing regularly is critically important and Betterment helps you do this without overwhelming you with complicated investment decisions.

ShareBuilder

As mentioned, one of the most difficult parts of investing is getting out of your own way and setting up a habit of investing regularly. We all get inspiration to invest occasionally (usually when we get an emotional high from seeing the stock charts going up), but that isn't an investing strategy that will pay off in the long run. You are much better off setting up an automatic savings plan that allows your brokerage firm to automatically take money from your bank account and put it into designated investments on a set schedule.

That concept is the main methodology behind ShareBuilder. The firm is even named after the idea: to build up shares in an investment.

How does ShareBuilder help you do this?

1. Simply pick your automatic investment schedule
2. Pick the individual stocks or ETFs you want to invest in (ETFs recommended for diversification reasons)
3. Ignore until you're a millionaire

When you invest automatically this way your trade only costs $4. That's the least expensive brokerage trade cost around. (If you choose to invest irregularly your trade cost goes up to $9.95, so automatic investing is definitely the way to go.)

E*TRADE

If you're looking for an industry leader in the online trading space that can help you learn more about investing, E*TRADE is a great option. The company has 20 years of experience in online trading, affordable trades, and a robust investor education center.

Unlike Betterment and ShareBuilder, E*TRADE isn't designed solely for new investors. You get a set of robust tools whether you are new to investing or have been investing for decades.

As a leader in the industry, E*TRADE offers one of the largest inventories of potential investments available:

• Every ETF sold
• 8,000+ mutual funds
• 30,000+ bonds
• Trade stocks, options, and forex
• Multitude of account options: Traditional IRA, Roth IRA, 401k rollovers, normal taxable investment accounts

Some other firms have limited mobile or tablet options. I'm sure you've seen E*TRADE's commercials, but the trading tools for mobile devices ranging from iPhone to Android to Blackberry and iPad is quite robust.

Scottrade

Scottrade is similar to E*TRADE in that it is offers a multitude of investment choices for investors. Betterment and ShareBuilder have a place in the world ' they are great at helping you get started and building up investments automatically ' but discount brokerages like Scottrade give you more options once you know a little bit more about what you're doing.

Scottrade also offers some of the least expensive trades available: just $7 per trade. They have a no-fee IRA, give you access to 3,100+ no-transaction fee mutual funds, and 14,500+ other (load and no-load) mutual funds. As expected you can trade stocks, ETFs, and options as well.

You can open an account with as little as $500. Scottrade will also pay up to $100 of your account transfer fees if you're coming from another broker, but you have to transfer $10,000 or more to qualify for that. Nonetheless, Scottrade is one of our favorite brokerage firms overall and is a great place to get started.

Getting Started with Investing Online

One word of caution in buying stocks when you are just first starting investing is to be careful!  I often discourage young investors to start off buying stocks.   Remember my Lucent stock?   I never made a dime off of it and ended up selling at a loss.

Before you start investing into stocks, I would encourage you do start with mutual funds or an ETF that tracks a larger index ' think S&P 500.   That builds your foundation first before you start taking unnecessary risk trading individual stocks.

Just because you're small investor now doesn't mean that you need to continue to be a small investor because you keep losing money on crappy stock picks. 

 

Tagged as: cheap stock trades, how to start investing, online brokerages, online investing small investors, trading stocks

The Worst Financial Advice I Have Ever Received

We've all received it.

Advice given to us that's supposed to change our lives for the better.

It's always given with good intent.

Even good intent though, doesn't always make it good advice.

Both my parents weren't the best at managing their money.

Despite their struggles, they still felt compelled to pass along the best advice they could.

The Advice

Both my parents insisted that when I start to make money that'..drum roll please'..

You need to save.

How many times have your parents told you that you need to save and they think that they're giving you the best advice ever?

That they had given you the golden keys to life and now that you can go the rest of your life and have complete financial control.

As we know, that's bunch of crap.

My parents telling me that 'I need to save' is like me telling a college graduate that they need to get a good job.  Uhhhhh'..yeah, think?

Great, thanks for the info mom and dad.  Thanks for enlightening me with your infinite wisdom. I hope you're catching the sarcasm here.

Yes, I know I need to do something with my life and I know I need to save. But, why don't you show me how?

The thing is though that my parents never did.   They never showed me specifically how to do it.  How to really save. 

They gave me the same hollow advice that many other parents do.   Because of that I stumbled into my earlier twenties figuring out what it is I actually needed to do.  The right way to save.

More Bad Advice

At first, it wasn't pretty.  The second piece of bad financial advice I got was directly from my father.

He had suggested that I open a credit card.   You're probably thinking that he suggested it so that I could build my credit in preparation for my financial future.

Not quite.

He suggested I do it so that I could buy stuff.   And no that's not a joke.

I started down a path of racking up debt and NOT saving for my financial future.

By the grace of God, I became a financial advisor and I learned on my own.  I was one of the lucky ones.

Most people aren't so lucky. They don't realize until they are in their late 40's (or later) how they need to save.

How to Really Make a Difference

If you're in a situation where it's your turn to give advice, whether to be family or friends, don't do what my parents did.

Make the advice specific.

I wish my dad would have shown me the way on how to invest.  Even though he didn't know the ins and outs of it, we could have learned together.

That's something that I've committed to myself in teaching my kids.   It's not just 'giving advice'.  It's about teaching them, nurturing them and making they sure they understand the path you've laid out before them.

That's how you give good financial advice.

What's the worst piece of financial advice you've received?   How were you able to overcome it?

Tagged as: Bad Finanical Advice

Can A Random Number Generator Beat the Market and 70% of Investment Professionals?

The following is a guest post from Jacob with My Personal Finance Journey.

For quite a while now, I have been a big fan, supporter, and practitioner of passive investing.

In my investing strategy, I set forth a target asset allocation, review my positions once per month, and rebalance if necessary (usually ends up being 1-2 times a year) in order to maintain the appropriate % levels by investing in index mutual funds with Vanguard.

For me, investing in individual stocks is simply too risky, and I don't trust myself to do it. This is especially true when you consider that 70% or more of investing 'professionals' fail to outperform the market.

If most people that devote 10 hours a day to this game can't do it, what makes me think that I'm special enough to magically outperform the market?

A question that has become a topic of heated debate (especially in the camps of the critics of Mad Money's Jim Cramer's stock investing advice) is whether or not stocks picked by non-humans, such as a monkey throwing darts at a board to select stocks, would actually perform better than those chosen by the 'pros.'

I think this question has arisen due to the inability (mentioned above) of many investment advisors to beat the market with their stock selections, along with the random-walk hypothesis developed by Burton Malkiel in his book, A Random Walk Down Wall Street.

Regardless of the specific cause of this speculation, it makes for an interesting thought exercise. One thing I recently was interested in particularly was the question below.

What kind of performance would I achieve by basing my buying and selling decisions on a random number generator in Excel?

And furthermore, how would this performance compare to the selections of investing professionals? So, I soldiered off to try to obtain some answers to these questions.

Baseline Market Comparison

In order to obtain a baseline to which to compare the results of my random number generator investment strategy, let's take a look at how the S&P 500 performed in the ~ 2 months that I conducted this experiment (started on 28-Feb-2011). I chose this date range in 2011 because it coincided with a time when the market pretty much stayed the same. I figured that by choosing a neutral time for the market, the effect of using the random number generator would show through more greatly one way or another.

Study Set-Up

Having established our baseline, I then set up the analysis in the following way, assuming an initial value of the portfolio of $1,000:

• In an Excel spreadsheet, I would predict the performance for each day that the stock market was open using the random
  number generator function, =RANDBETWEEN(-1,1). 
• This function randomly generates one of three integers = 1, 0, or -1. I then correlated each of these integers to a direction of the market, as described below.

• 1 = Market will go up more than or equal to 0.5% that day. Therefore, I would buy more (5% of total portfolio value)
  shares of an S&P 500 index fund at the open of the market.
• 0 = Market will stay the same (change less than +/- 0.5%) that day. Therefore, I would hold all shares and experience whatever fluctuation was dealt by the market that day.
• -1 = Market will go down that day more than or equal to 0.5%. Therefore, I would sell all shares at the open of the market in anticipation of the drop and temporarily hold the money in a safe cash account (assume no interest is obtained on the cash account).

• After each day's trading was over, I would record the actual performance of the market to determine whether or not the random number generator predicted correctly and adjust the overall portfolio value accordingly. 
• Note: Source for all this data was Google Finance. Also, for simplicity, I decided to ignore commissions/trading fees. However, in reality, these would further decrease the returns observed.
• You can view the spreadsheet I set up at the Google Docs link below.
• Google Docs Spreadsheet ' Predicting Market with Random Number Generator

Results

The results of this exercise were quite interesting! I've summarized the details below:

• The random number generator actually predicted the correct market movement a pretty impressive 45% of the time! Wow! It was incorrect 55% of the time.
• I'm going to get on the soap-box here and propose that if we were to look at the performance of market-timing investment professionals, I'd suspect that they would be correct about the movements around this same 50% of the time.
• Out of curiosity, I did some research to try to find some data on the % of times that portfolio managers/investment professionals correctly predict the market, and I was not able to find any specific stats. However, I did find that in order to make money with a market timing strategy, you have to be correct in your predictions 74% of the time. (Source - QuickMBA.com)

• The total return (excluding trading fees of course, as mentioned above) was interesting as well. The results showed that NO, you cannot use a random number generator to beat the performance of simply investing in an S&P500 index fund! The specifics of my findings are described below:

• Using the buying, selling, and holding system described above in the study set-up, the following results were seen:

• Total Amount Invested = $1,801.62
• Ending Account Value = $1,136.64
• Holdings Sold During Analysis = $675.24
• Total Return = +0.57%

• So, even though the total return realized with this random number generator market prediction strategy did not beat the market return of +1.33%, it was still in the same ballpark.
• In fact, it's fascinating to me to think that a positive return can be generated by choosing random numbers in the first place, especially during a time when the market didn't go up very much.

Summary

So, overall, by basing my buying and selling decisions from the results of a random number generator available on any computer worldwide, I was able to achieve a total return slightly less (but still in the same positive percentage range) compared to the S&P 500 index during the same time period (0.57% vs. 1.33%) and correctly predict the market movements 45% of the time.

Because 70% of investing professionals fail to obtain returns on par with the market, this is quite an interesting find! Of course, more long-term analysis would be necessary before I would deploy this strategy with real money. However, it makes one question the effectiveness of active stock picking and market timing and in my mind, strengthens the case for a passive investing approach.

How about you all? Do you use a passive or active investing approach? Have you been satisfied with the success of your approach? What's your take on the results of this random number generator analysis?

Share your experiences by commenting below!

How to Find a Trustworthy Online Course

There are a never ending assortment of online courses to choose from, and many people are turning to them to learn from the comfort of their own homes.

They are easier to attend as well when most people have a very busy schedule and don't have time to go to a university or other location.

But just because they are easier to attend, does that mean they are easier to pass?

My experience = a big fat 'No'.

I've attempted a few online course, one in college and one for my professional career and both failed miserably.

As I've learned, I need to actually be a classroom environment if I have any hope in learning anything.

Despite my struggles, online courses are even gaining in global popularity because of the flexibility there is in training from your own home.

Plus the other great advantage to these online courses is the fact that you can learn at your own pace while you continue working, and online courses are updated regularly and are usually very affordable.

Where to Find Your Courses

In the education world, Virginia and Washington, D.C. have some of the best colleges and centers for education. This holds true for the online course community as well. When looking for an online course to study from your home, you will find that the ones based out of training centers in Virginia and Washington, D.C. will have the best education, career placement and diploma programs.

This is because they work with education professionals to create these courses, so you will get the best training that you could get from the comfort of your home. These online classes also keep you updated on the latest curriculum available so that you stay informed and are able to choose a career that will do well in the world.

Who Takes Online Courses

Many people want to take online courses because they want to learn a new career path while they are still working their current job. That is why, again, the convenience of these online courses has risen in popularity.

People do not have to quit their jobs to take them and can set their own schedule and pace. Other people who like to take these online courses are people looking to further their knowledge in their current job for career advancement or just improve their overall knowledge.

What to Watch Out For

Although there are many other good places to find online courses, there are as with just about everything else, people out there who are trying to scam you to take your money. It will depend a lot on what the area of your study is as well.

Don't get fooled into thinking that there are any completely hands-off courses in areas of study such as nursing. If you find nursing courses online that claim this, then they are most likely a scam and you should find a different one.

Also, do your research and make sure you find out about the university or place of education that is offering the online courses. You can easily find information about them online and reviews from other students.

Do You Think Online Courses are Worth It?

Curious on what other people's experiences were with online courses, I took to social media to gather some input. Here are some of the responses:

Facebook friends

Twitter love

Tim from Faith and Finance had this to share about his online courses,

I've taken quite a few classes online: history, psychology, money and banking, English lit, and probably a few more I'm forgetting right now.  I almost even did an MBA online at Southeast Missouri State! (opted for a sit in program locally at the last minute ' but I was close to doing the MBA online)

Finding the Best Online Course For You

If they are legit you will be able to find the facts that you need to decide if this is the right school for you, and people who have had negative experiences with certain institutions will also have put their thoughts up online for you to read.

photo credit: CEThompson

Tagged as: finding online course, how to find online course, online course

Review: SaveUp.com. Get Prizes and Awards for Saving!

Savers are getting the shaft right now.

Those who behave responsibly with their money are finding that, between very low savings yields and stock market volatility, earning returns is quite difficult.

Enjoying the rewards for your smart financial decisions has never been tougher.

Which is why it's refreshing to see SaveUp, a startup trying to reward consumers for saving money and getting out of debt.

How SaveUp Works

SaveUp started in 2011, and offers a rewards program for those who want to save their money. The web site recognizes that many rewards programs are based on spending. Whether you are spending money with a credit card rewards program, or with the help of a debit program like PerkStreet, the idea is that you are rewarded for getting rid of your money ' not saving it.

In order to change that dynamic, SaveUp decided to offer rewards for saving money and paying down debt. You link your accounts to SaveUp (much as you would with a site like Mint.com), and the startup monitors them. As your savings account balances improve, and as you reduce your debt, you earn points. It's that simple. SaveUp also features educational videos and surveys that can help you earn points. And, if you refer others to the program, you also earn points.

Once you start earning points, you can enter various drawings for a chance to win prizes. Unfortunately, this rewards program doesn't guarantee that you will get anything. You have three plays each day, and you can use your points to enter drawings that are instant win, as well as as monthly drawings.

SaveUp also has a $2 million jackpot available.

The points/credits you earn only allow you to enter the drawings, though. It's not a shopping-type experience where you can use your points to 'buy' specific items.

SaveUp is able to offer these prizes, and be free for users, because some of the prizes are provided by partners. Additionally, there is a lead aspect to it, since you answer financial questions, or click through on product suggestions. SaveUp is paid for these items as well. If you are uncomfortable having your accounts linked through an outside site, or if you don't want to be part of a lead generation situation, this may not be the rewards program for you.

Bottom Line

If you need a little more encouragement with reaching your savings goals, SaveUp can be a great option. SaveUp rewards you for good financial behaviors, and it makes it easy to track your progress. Plus, you have the chance to win great prizes. It's unfortunate that you can't directly redeem your points for rewards, and that you can only redeem them for drawing entries, but since you aren't paying anything, it's no real loss ' except of time.

It's an interesting idea, and perhaps in the future SaveUp will be able to begin adding more direct rewards. But, for now, it can be a fun way to join a community, encourage your good savings habit, and perhaps even win some really cool prizes. Who knows, maybe you'll even win the $2 million jackpot.

My Take

Jeff:  Save Up has been on radar for quite some time as I was intrigued with the concept.  It's hard to knock a company that inspires those to save more and get out debt. They've made a special offer to Good Financial Cents readers for 100 points if you sign up through my site.  What more of an incentive do you need? 

Sign up for your free Saveup account now and thank me later.

What You Need to Know Before Buying an Equity Indexed Annuity

Several years ago while tuning into Dateline on NBC, I watched as they conducted one of their typical undercover operations.

This one was a bit different though and more closer to home as they were running sting operations on financial advisors.

To be clearer, it was more on independent life insurance agents that were pitching equity indexed annuities to seniors.

At the time I had only been in the business for around four years, and while I was familiar with fixed annuities and variable annuities, I didn't quite understand what equity indexed annuities were all about.

The gist of the Dateline Special was showing how crooked financial advisors (aka advisors I would like to punch in the face) were using every sales tactic possible to try to generate a sale, otherwise known as a big fat commission.

While I have no problem with anybody trying to earn a living, I do have a problem with someone trying to line their pockets while putting some else's best interest out of sight.   And that's what these advisors were doing, selling equity indexed annuities while not conveying the whole truth.

At that point in time I got a really bad taste from equity indexed annuities. I have to confess, I still didn't know much about them, though with Dateline promoting them as the worst investment product ever made, I decided it would be in my best interest to stay away.

Note: I want to stress here that these advisors weren't selling an inferior product.  In the right situation, Equity Index Annuities can make sense.   In the Dateline sting situations, these advisors were not being truthful with how these products really worked.

In the market collapse of 2008, equity indexed annuities have become much more popular.

I've talked to several individuals that have purchased them merely for the fact that they are fed with the stock market.

They are looking for a guarantee and don't mind locking up their money for an extended period of time while also taking a lower interest rate in exchange for less risk and volatility.

Knowing that I should be versed on how these products worked, I knew that I should start doing some research.

Sharing the Basics

With this post I wanted to share some of the basics of how an equity indexed annuity works and to see if it might be a good investment for you.

I also have a loyal Good Financial Cents reader who is a big fan of equity indexed annuities, and I've asked him to share his reasoning on why he purchased them for his own retirement planning (he'll be sharing in the comments).

 What is a Fixed or Equity Indexed Annuity?

Good question.

Like all other annuities, an equity indexed annuity is a contract between you and the insurance company where they guarantee some sort of payment.

Essentially, a equity indexed annuity (sometimes referred to as EIA's) is sorta of a hybrid between a standard fixed annuity and a variable annuity.   I say 'sorta' because while do have similar characteristics, there are significant differences.    According to FINRA's website, they describe them as the following:

'EIAs are complex financial instruments that have characteristics of both fixed and variable annuities. Their return varies more than a fixed annuity, but not as much as a variable annuity. So EIAs give you more risk (but more potential return) than a fixed annuity but less risk (and less potential return) than a variable annuity. EIAs offer a minimum guaranteed interest rate combined with an interest rate linked to a market index. Because of the guaranteed interest rate, EIAs have less market risk than variable annuities. EIAs also have the potential to earn returns better than traditional fixed annuities when the stock market is rising.'

There's no doubt that equity index annuities are confusing.   When variable annuities started offering their income benefit riders (these are special add-ons that annuity products offer to give investors a guaranteed income stream), I became overwhelmed with all the mechanics behind them because every insurance company had something slightly different.   To compound the problem, they were constantly making small tweaks to their offerings making it difficult to sort out which one was which.

Now imagine if it's difficult for the advisor to understand how these products work, how do you think the clients feel?  Exactly.

To best understand how these annuities work, I thought it would be best to break it down into two parts.   The first part we'll look at is the index option and explain how that works.  The second part we'll explore the 'income rider' or 'guaranteed benefit withdrawal' that most of these products offer.   This income rider is one of the major selling points for most individuals so I definitely want to take a closer look at that.

How a Equity Indexed Annuity Works

A common selling point in regard to fixed indexed annuities is the guarantee of principal {meaning that you will never lose a dime of your money that you pay to it}.

While yes that is certainly the case, one thing that you need to be aware of is that all annuities come with some form of surrender charge meaning that if you were to cash out your annuities early, you would pay a significant surrender just to get your principal back. (We'll look at a sample surrender schedule so that you can see exactly how much you would pay in penalties.)

Going back to the original point, yes your principal is guaranteed so as long as you keep the annuity for the entire length of the contract.  As you can imagine, for many investors that scorn the stock market this is a valuable characteristic to have.

How does the index option work? 

For the sake of this post, I want to keep it very simple and just explore one of the indexed options that are currently available.  Please keep in mind that all indexed annuities have various indexed options and various cap strategies so understanding what you're actually getting into is essential.

In this scenario that I have a screen shot of it shows investing $250,000 into an equity indexed annuity.  This particular annuity has a ten-year contract period and is currently using a basic indexed option known as the S & P 500 point-to-point index strategy.  The S&P 500 index strategy is probably the most common index that you will see used in any of the equity indexed annuity products.

I'm starting to see more now use international indexes, other market indexes such as the value index and I've even seen some now use a gold index.

Sample. For illustrative purposes only

In this illustration since we are taking on a ten-year contract, the investor is entitled to a bit of a higher cap on the interest rate.

For example, in this case the election of interest credit is 3.5% (usually referred to as the 'cap rate').  With the rates being at all-time lows, these cap credits are significantly lower than they were in years past.  With this same product, had the investor taken out a five-year product they would've been capped at 3% instead of 3.5%.  Most insurance companies will give you a higher rate if you lock up your money longer.

So how does the interest rate cap work?  Looking at the illustration in year one if an individual was to put $250,000 in and the S&P 500 index performed 7.43%,  the investor would get a cap of 3.5% credited to your account. The remaining difference goes back to the insurance company.  If there is a 'catch' in these type of policies, that would be the big one.

In year 2, the illustration shows the the S&P 500 going up 5.35%.  Once again you're capped at 3.5% with the remaining difference going back to the insurance company.

At this point you're probably wondering why in the heck you would want to be capped on your upside?  Looking at year 9 should put that into perspective for you.

In year 9, when the S&P 500 is down 9.25%, in that year you don't make the 3.5%, but most importantly you don't lose anything showing a net return of zero.  That's one of the attractive features of the equity index annuities.

With equity index annuities, your principal is protected in years the market loses money no matter how steep the losses.

Quick note, personally I'm not a big fan of these types of illustrations.  Why?  Primarily because in the first couple of years they usually show constant growth and as we all know, the market does not work in that way.  We have ups and downs.  Personally, I would like to see an illustration that shows losses in the beginning to not give the potential investor high hopes in their expected returns.

 Surrender Charges Beware!

In the Dateline special that I watched several years ago, one of the main things that they focused on was the disclosure of surrender charges when it came to equity indexed annuities.  A lot of the bad advisors were very misleading or deceptive when sharing if there was, in fact, a surrender charge.  In one case, one independent insurance agent flat out lied to the potential client telling them that they could withdraw their money at any time.  This is far from it.

The first thing that you have to realize that equity indexed annuities come in different contract lengths.  They can be anywhere from four years on up to 15 years.  I've seen them all.

In the illustration above, this was a ten-year contract.  I've enclosed a snapshot of the surrender schedule that you would be included in the documentation for the illustration above.  As you can see, in the first year if you were to liquidate the annuity, there would be a 10% penalty on your interest and principal.  This is very important to note.

Sample Surrender Schedule

 

Often times, bad advisors will sell these to seniors comparing them to CDs in their security and stability.  While the one big fundamental difference is that with the CD, if you cash it out early, you just give up your interest.  A fixed indexed annuity, if you surrender it early, not only do you give up your interest, but you also give up a portion of your principal, and that is a huge difference.

Now keep in mind, most of these annuities do allow for a free withdrawal, meaning that you can withdraw anywhere between 10% to 15% of your principal each year without a surrender charge, but anything over and above that will be subject to the surrender schedule.

Where Equity Index Annuities Really Flourish ' Income Riders

Thus far we looked at the cap rates and principal protection that EIA's offer.   For some people (especially retirees) that's enticing, but it might not be enough for them to invest into one.  Where many retirees find comfort in EIA's is there income riders.

How the income riders work.    Sticking with our $250,000 example above, I'll demonstrate how the income rider works.

Say that a 60 year old invests $250,000 into an EIA and wants to start taking a guaranteed monthly benefit, then using the table below, they would have a $10,000 ($250,000 x 4%) guaranteed annual income for life.  Even if they end up pulling out more than their principal, they would still continue to receive payments.

A 65 year-old individual with the same amount would get a bit more collecting $12,500 guaranteed per year.

Guarantees for retirement

Where income riders get even sweeter.  If you're a 60 year-old individual that has $250,000 to invest but doesn't plan on retiring until 65 or later, then the income benefit riders becomes that much more attractive.   Insurance companies will give an additional credit to the income account that, in turn, gives you a potential higher payout when you need it.   Let me explain''

A 60-year old may get a 5% income credit increase each year up until the day they decide to start taking their money.    That means that the insurance company will add 5% a year to original deposit (in this case $250k) each year.   Once you start taking your income, the payout will be the amount in your income account multiplied by the withdrawal percentage based on your age.

The table below illustrates this over a 10 year period.

The 5% income credit is for hypothetical purposes.  Each insurance company will have their own set interest rate.  Recently, I've seen anywhere from 5% all the way up to 7%.

Another thing to consider is that the maximum withdrawal percentage is typically lower if you're looking for a lifetime guarantee for you and your spouse.  Typically, it will be about .50% lower.

Beware:  The income credit and the maximum withdrawal percentage are used to determine your payout guaranteed payout.   It is NOT the same thing as 'making 5% on a CD'.   I've encountered many advisors that sell these as investments with a '5% guaranteed return'.

Yes, there is a guarantee but most people associate that return like a CD or a bond would pay.  These are two totally different animals.  If an advisor presents this to you as a 'CD like investment' I would be cautious.   Very cautious.

Who Should Buy a Fixed or Equity Index Annuity?

So with all that thorough analysis, you're probably wondering for whom does it make sense to purchase an equity indexed annuity.  Typically I think if you meet some of the following criteria, then you might be a good candidate.

1. You absolutely hate the stock market.  If you're tired of seeing your investments rise and fall with the Dow Jones, then an equity indexed annuity might be a good fit.
2. If you have five to ten years before you actually need to draw income.  Personally I think the income riders are a viable option for those that want to avoid the market and want to have a guaranteed income stream at retirement.  With the income account increasing each year for each year that you're not touching it, this can be a huge benefit for someone who has a big chunk of money that can invest it and sit on it for a few years.
3. You want to diversify. You might be a strong believer in the markets, but a little certainty never hurt anyone.   Taking some money and locking it up in annuity with a guaranteed income rider could make sense.

As always, make sure that you ask plenty of questions and make sure you have a solid understanding before many any investment.  Annuities are long-term investments so don't use this if you're looking for a short-term solution.

Have you purchased an equity indexed annuity?  What was your experience?

 

 

Tagged as: Annuity Riders, Annuity Scams, Equity Index Annuity, fixed annuities