Category Archives: Tax Tips

Terms you need to Know in order to Understand Financial Risk

When it comes to investing there are a lot of terms that you really need to know in order to be able to make educated decisions. Many of those terms deal with the financial risk that you take when investing, and knowing those terms is vitally important to your success. Below you’ll find the most important financial risk terms that you need to know. Enjoy.

Probably the most important term is Market Risk or what’s known as “principal risk”. This term refers to the chance that a downturn in the market, or a bad investment, lowers the value of any asset you might have. It’s used mostly for stocks and bonds.

At the other end of the spectrum from market risk is Risk of Avoiding Risk. This usually applies to investors who are too conservative and whose investments don’t grow fast enough to keep up with inflation.

Many consumers seek the elusive risk-free return by putting their money into CDs. The problem with this is Interest Rate Risk, which you face if your assets get stuck at a below average rate of return because interest rates have risen.

One term that applies to an individual more than the market is Shortfall Risk, the risk that an investor won’t have enough money to make their goals. Being too conservative or, on the other hand, too aggressive, can open an investor up to shortfall risk. For consumer that doesn’t believe their portfolio is strong enough, saving more is the key to addressing shortfall risk.

A similar term is Special Situation Risk, which applies to an individual investor with special needs like a wedding, home purchase or college costs. A couple that is so worried about paying college for their child that it distracts them from saving for their own retirement, for example, is suffering from special situation risk.

Timing Risk is similar to special situation risk in that it depends on the individual investor as well as the specific timing that they’ll need to keep up with in order to have enough money by the time a specific event occurs. For example, if an investor is going to be purchasing a home in four years but it doesn’t appear that their stocks will make enough money to enable them to do that, their timing risk is high.

If government decisions could possibly damage the value of any of your investments or assets, you have Political Risk. Obamacare, tax law changes and changes to Social Security are all specific political risks in that all of them may negatively affect your investments.

Looking at everything from a “big picture” perspective, Societal Risk is the risk that your assets and investments face due to world events like terrorist attacks, wars and natural disasters.

Unless you’re a complete newb  investor, you should already know that Diversification is one of the best ways, if not the best way, to lower your risk from any of the factors above. Diversification means simply spreading your money around in different assets and asset classes so that, if one were to falter or fail, the others will still continue to grow, keeping you from losing everything.

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Stock Buybacks are Booming!

After faltering for a couple of months, buyback announcements from many major US companies shot up to a three month high recently, putting 2014 on track to be one of the biggest years ever for buybacks. Companies from 21st Century Fox Inc. to several airlines and many other businesses continue to buy back shares of their own stocks, even though they’re being criticized by many analysts for doing so.  Here are 3 reasons why buybacks have become so popular in the last decade or so.

First of all, this is what they call “financial engineering”. When a company has earnings that aren’t doing so well, they can actually maintain and even boost their earnings per share by repurchasing those shares. What this does is shrink the denominator/shares outstanding, and many businesses have realized that it’s an excellent way for them to bolster their per-share earnings and sustain any momentum that their stock might have.

Second, businesses have realized that buybacks are a great way to return money to shareholders. While some are quick to criticize companies for buying back their shares instead of investing in things like new equipment or hiring better people, that criticism is a akin to criticizing them for paying dividend payments. The fact is, buybacks are just another way to distribute corporate profits to shareholders and, since it avoids double-taxation, it’s seen as a better way to do it as well.

Finally, many businesses have realized that buybacks are an excellent way to offset employees who cash in. While there is certainly criticism of companies that ramp up buybacks after their stocks have climbed, what most of these critics simply don’t understand is the need for these companies to “buy high” in order to offset employees cashing in. The fact is, when stock prices go higher, employees begin exercising their in-the-money stock options and, when they drop, the same employees hold back from exercising these options.

So far in 2013 businesses have announced about $ 300 billion worth of buybacks, and July saw $ 55 billion, the highest amount since April. What this means is that, even though buybacks are still extremely popular, it’s unlikely that they’re going to top the $ 669 billion total of 2013 or the all-time record that was reached in 2007.

Nevertheless, buybacks are more and more an option that companies are using in order to maintain their earnings, pay shareholders and offset employee cash-ins. Whether or not analysts like them, they certainly will continue to happen into the future.

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If you are single do you need to invest in life insurance?

Life insurance is a very important acquisition as it allows you to provide for the people left behind after you die. In the vast majority of cases this means your dependents such as a partner and any children you may have.

Life insurance is normally intended to help these dependents meet the financial burdens of life when they no longer have the benefit of your income. These burdens can include the payment of a mortgage, or the cost of education. If you don’t have any dependents then is it really necessary to have life insurance?

If you are single, how does life insurance apply to you?

Firstly, it’s about more than just being single. You can be single and still have children who you want to provide for if you die. It’s also about the costs involved. In the majority of cases if you are single and have no dependents then the only thing you really have to be concerned about is the cost of your funeral. You may want to consider the benefits of a funeral pre-payment plan. It should be noted that these plans do have some risks attached to them and you also have the option of approaching your bank to set up a fund to pay for your funeral expenses.

What if you’re only young and you don’t know what the future may bring?

No-one really knows what is just around the corner; you may be single with no dependents today but that situation can change very quickly. Is it worth taking out a life insurance policy while you are young and healthy, just in case? It’s certainly true that life insurance premiums are cheaper when you are young and in good health but even so is it really worth paying out for life insurance when there is no-one to benefit, probably not.

When should you think about life insurance?

As soon as you have dependents to provide for, and a mortgage to pay, then it’s a good idea to purchase HBF life insurance. Once you have a policy in place then you no longer have to worry about what will happen should you die. You just need to make sure that you are insured for enough value to make sure that the mortgage can be paid off, and that the ongoing costs of raising your children can be met. This means that your family will at least have some financial stability whilst they are dealing with the emotional trauma of losing you.

It’s likely that you will need to purchase term life insurance which is normally suited to younger people in good health. You can take out the policy for a set number of years and if you die within that period then your family is paid a lump sum. In most cases this time period is long enough for your children to have grown up and for your mortgage to be mostly paid off. After these two things happen it may no longer be necessary to have a life insurance policy, depending on what other expenses will exist if you die.

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Low Interest Rates Are Still a Reason to Act

Every financial quotation that uses history as part of its marketing always qualifies its use by stating it is no guarantee of what will happen in the future. It is often used as an illustration of what growth an investor could expect if history was to repeat itself over a given period. Property is generally recognised as a good investment beyond the very short term. There are occasions when values fall; it happened during the recession but it is generally a temporary setback.  One aspect of investment that is extremely interesting is the prevailing interest rate and certainly the current position is very interesting.

Fixed Rates

Thirty years ago the average house price in the UK was around £30,000 with interest rates around 12%. Today the average is just under £180,000, a few thousand lower than the peak of 2007 before the financial crash. Values are rising again however and it is also encouraging that interest rates are so low. They dropped to single figures two decades ago but historically they have never been so low. There are now fixed rate mortgages for those with good sized deposits as low as 2 – 3% for a number of years.

Personal Finance

In this financial environment and with decent job security within the UK there has rarely been a better time to look at personal finance, everything from buying a house, remortgaging, consolidating debt or taking out a loan.  It is an opportunity that is not available to everyone; those who got into real financial trouble during the recession and those setting out on a career and yet to build up assets.

Even for those people however it is an opportunity. Those with current debts would be well advised to look at their financial problems to see whether they can reduce their monthly outgoings. There are indications that interest rates are unlikely to rise until the second half of the year and then only very slowly. There is a fairly new breed of financial institution; those that operate primarily online and place more store on an applicant’s ability to repay a loan over the specified period rather than deciding purely on the applicant’s credit history.


The Internet is full of information. It cannot create financial experts overnight but there is enough online to get people thinking and asking questions. It would be time well spent. No one should lock themselves in to expensive deals unnecessarily.

Cheap Money?

Credit cards are convenient yet interest rates on outstanding balances are crippling. There is plenty of cheap money round to pay such balances off and the temptation to build one up again should be resisted at all costs. Every financial decision must be thought through to see whether there are any major disadvantages in a course of action. Interest rates and the term of any borrowing are the two parts of any financial ‘contract’ that get the headlines but it is the practical detail that needs close examination. What is the total to be repaid and the monthly commitment to do so?

There is always help available from people who are involved in finance every day. It does not mean that such advisers are right on every occasion. After all the whole industry was found out when the recession hit. What is certain is that someone that carefully considers their personal finances and asks the right questions is more likely to be on the right track as not.

Everyone has the opportunity to improve their financial position with a little care. It can be by reducing mortgage repayments, consolidating expensive ‘money’ into more affordable loans or simply showing a level of responsibility that will make themselves into ‘good risks’ in the future. While rates are at an historic low why not act?

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Property Investment is a Means to Retirement

Have you been thinking about property investment as a means to an end? By means to an end I am referring to the silver lining of retirement on the horizon. We all want to retire today so that we can use our time as we see fit, and not the daily 9 to 5 grind that we have all grown so accustomed to today. In fact, I have many friends and online acquaintances that have used property investment as a means to financial freedom and independence. While I am still working on this goal myself, I’d like to share some of their top tips at how to be successful when investing in property and real estate.

Finding a reliable low cost mortgage company is important in order to keep upfront costs reasonable. Chances are you will be financing the purchase price of these properties and not paying cash outright. For example, Newcastle permanent home loans have reasonable loan fees and fair interest rates. Perhaps you can even bargain with certain costs like reduced appraisal fees if you end up ordering several different loans through the same company.

Be aware of property taxes and school districts. These are two important factors that play into most potential renters and buyers minds when deciding on where to live. Property taxes can be quite expensive depending on what location you live in, and often are a deal breaker when factoring in the cost of a home on one’s budget. Also, parents are naturally concerned with the school district for their children’s sake. You might see a larger and new home for much less money in a poor school district, but turning that house over could take a lot longer.

Unless you have plenty of free time and consider yourself Mr. Fix-It, I would hire a property management company to do all of the heavy lifting. They will collect rent money from borrowers and hound the renter until it is paid. If a furnace goes out or a roof is leaking they will find a reliable low cost contractor to come out and do the work for you. They often times take one month of the rental income as their fee, which isn’t all that much considering the hassle they save you from.

If you think that real estate investment is key to early retirement for you then make sure you do your homework before getting started. Heed the tips and advice above, and happy hunting!

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