Do You Have Too Much Debt?

Leverage, or the use of debt financing, can provide the borrower with significant benefits when used properly. But is it possible to get to the point where you may be taking on more debt than you can handle? Obviously, there are the extreme cases where individuals finance their lifestyle to the point they overextend themselves and cannot meet their debt obligations. These cases usually result in something bad, including bankruptcy. But what about the "everyday" borrower that has a mortgage, car loan, student loan, and possibly a credit card with an outstanding balance. How much debt is too much debt?

Most lenders like to see that your debt payments do not take up more than 36% of your monthly gross income. They determine this ratio percentage by calculating your personal debt-to-income ratio. In general, a lender will consider you an increased risk of default if you are close to or exceed this 36% threshold.

So how do you calculate your own debt-to-income ratio? Let's use the following hypothetical example to illustrate how easy it is to determine if you have too much debt:

1. Joe earns a gross annual salary of $82,000 per year or $6,833.33 per month.



2. Joe has the following personal debt liabilities and associated monthly payments:

-- Home Mortgage $ 1,500
-- Student Loan $ 225
-- Auto Loan $ 350
-- Credit Card(s) $ 50

Total $2,125

To calculate Joe's debt-to-income ratio, we divide the total monthly debt & liability obligation payments by his monthly gross income as noted below:

Total Monthly Debt Payments/Monthly Gross Income or $2,125/$6,833.33 = 31.1%

The 36% threshold noted above is typically used by lenders as a rule of thumb threshold level. Some may require a ratio less than 36% and others may be more liberal and allow for a threshold greater than 36%. Either way, calculating your personal debt-to-income ratio will provide you with the answer to the question: Do I have to much debt?

Deductible IRA Contributions

Its tax time once again and a topic that always seems to come up when people are preparing their returns is can they make a tax deductible contribution into an Individual Retirement Account (IRA). You would think that it would be easy to determine whether or not such a contribution could be made. However, we know all to well that the US Tax Code is hardly ever easy to understand and/or interpret. That being said, I have listed below a summary of the rules or guidelines you should follow to determine whether or not you can make a deductible IRA contribution:

• If neither spouse is an active participant in a retirement plan, $4,000 per IRA for 2007 and $5,000 per IRA for 2008, if earned income exceeds the IRA contribution amount.



• If either spouse is an active participant in a retirement plan in 2007, the AIG phase-out limit for deductible traditional IRA contributions is $52,000 to $62,000 for single filers and between $83,000 and $103,000 for joint filers.



• In 2008, the AIG phase-out for single filers is between $53,000 and $63,000 and for joint filers between $85,000 and $105,000.



• Contributions are phased out for a non-active participant spouse when the joint AGI is between $159,000 and $169,000.

Hopefully the summary above makes the rules a little more clear. However, it is best to consult a qualified tax advisor before making any tax related decisions.

NOTE: I have provided this information for educational purposes only. I am not a practicing tax advisor. This information should not be relied upon without further investigation or consultation with a qualified licensed tax professional.

Financial Markets In Turmoil

The media headlines continue to scream about recession and bear markets and the global stock markets continue to sell off with record volatility. Considering we haven't experienced such a violent downturn in the financial markets in several years, I thought I would provide some insight into the history of the stock market to underscore that fact that successful investing requires discipline and a long-term perspective.

Invariably, the individual investor looks to sell out of the market during turbulent times, hoping to spare themselves the pain of market declines and financial losses. This desire to avoid pain is human nature and natural. But in the end, this "market timing" approach to investing can result in significant long-term under performance of an individuals financial assets.

It is my view that for most investors, market timing does not pay. For example, during the years 1985 through 2006, the stock market was open for trading for a total of 5,297 days. Over that period, the S&P 500 produced an average annual rate of return of 12.12% for an investor who was invested in the market for all 5,297 trading days. However, an investor who missed the 10 best trading days during this period, but was invested for the remaining 5,287 days, achieved an average annual return of only 8.56%. An investor who missed only the 40 best trading days achieved a pitiful return of only 1.87%. Finally, an investor who missed the 70 best trading days during the 5,297 day period actually achieved a negative return of <3.02%>.

Clearly timing the market is a risky proposition for the long-term investor. Although some may be successful at market timing sometimes, most are unsuccessful over the long-term. I believe that having an investment strategy that emphasizes the concepts of Modern Portfolio Theory (i.e. using asset allocation, style management, and portfolio rebalancing) will provide a favorable risk/return result of time by managing a portfolio of financial assets in the most efficient manner possible.

Develop a sound financial plan and investment strategy that is appropriate for your personal goals and tolerance for risk and then stick to the plan for the long run, regardless of the current short-term market conditions.

The Need for Disability Income Insurance

Becoming disabled, whether permanently or temporarily, can be disastrous to one’s personal finances. Although most people think of disability as being confined to a wheelchair or a bed (typically permanent disabilities), temporary conditions can be just as disabling as permanent disabilities. As such, it should be apparent how important it is to protect your self from the perils of such a devastating event.

According to the “Commissioner’s Individual Disability Table A,” the following statistics have been reported :

• One in three employees will become disabled for 90 days or more before the age of 65.


• One in seven employees will be disabled for five years or more before retirement.


• At age 32, disability of three months or longer before age 65 is six times more likely than death.

Further, according to a recent report from the Department of Housing and Urban Development:

• One out of eighteen mortgages is not paid due to a disability of the mortgage holder.


• Almost sixty percent of disability claims are denied by the Social Security Administration.

Such facts are scary and underscore how devastating a disability can become to a person’s finances. Yet given such data, people continue to place more emphasis on obtaining life insurance over disability income insurance. Clearly, both types of coverage are necessary in most cases, to ensure an adequate financial plan has been put into place. However, the statistics don’t lie: ODDS ARE THAT YOU HAVE A BETTER CHANCE OF BECOMING DISABLED THAN YOU DO OF DIEING!

The purpose of my message is not to preach, but to make you aware of the importance of looking more closely at the oft-over-looked disability income insurance coverage. Most employers offer some type of group disability income insurance coverage, so look into enrolling during your benefits open enrollment period. Given the statistics mentioned above, you may be glad you did someday.

DISCLOSURE: I am in no way suggesting or providing any specific or general financial planning or investment advice through this article and I disclaim any assertion to the contrary. The information provided is for informational purposes only. Prior to making any important financial decision, please consult a qualified, licensed professional to discuss your specific situation in detail.

Retirement... Is It A Reality For Generation X?

According to a recent survey conducted by the Oppenheimer Funds, the following eye-opening findings were discovered about the American worker:

• 62% say they live paycheck to paycheck.


• 56% have an outstanding credit-card balance of $3,000 or more.


• 62% of women say they have not bought any investment products ever.


• 45% of women would buy 30 pairs of shoes before saving $30,000 in retirement assets.


• 65% of women and 48% of men said they do not know how a mutual fund works.


• Nearly 65% did not know that when interest rates go up bond prices typically go down.


• 38% of women have not started saving for retirement.

Such statistics may seem appalling, but they are a reality for most, especially the student loan debt laden members of Generation X. Add to the equation regular credit card debt, the cost of home ownership, the ever increasing cost of health care, and all of the other financial surprises life tends to send our way, it is easy to see how the findings noted above are truly reality.

How can we improve our outlook for a secure financial future? I believe the process begins with education and the willingness to begin taking action now. While it is true that there are no guarantees in life, I do believe we have the ability to determine our own financial destinies. The key is to just begin. Start today by enrolling in your company's retirement plan or by opening a savings account.

Even the greatest journey begins with one step. Take that step today, so we can make positive change for our financial futures.