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Ask The Expert

About Richard Barrington, CFA & MoneyRates.com Senior Financial Analyst
Richard Barrington

Richard Barrington, CFA, is the primary spokesperson and personal finance expert for MoneyRates. He is a 20-year veteran of the financial industry, including having served for over a dozen years as a member of the Executive Committee of Manning & Napier Advisors, Inc. He earned his Chartered Financial Analyst designation in 1991 with the Association for Investment Management and Research (AIMR). Richard has written extensively on investment topics, including investments, money market accounts, certificates of deposit, and personal finance as it relates to retirement.

Richard has been quoted by numerous media publications such as The New York Times, The Wall Street Journal, and Pensions & Investments magazine.[...] Read more Richard can discuss economic and market history in detail and is well respected for his ability to relate to a broad audience from a personal financial standpoint. Richard approaches financial topics with an understanding that fresh perspectives are often more valuable than mainstream consensus. He has written for over 50 financial Web sites, such as Investopedia, Yahoo, MSN, Allbusiness, and Encarta, and is most sought after by members of the media for his niche expertise in these topics: Certificates of Deposit, Money Market and Savings Accounts, Saving for Retirement, Housing and Mortgage Meltdown, Interest rates, Investments, Macro Economic and Government Policy Issues, Historical Financial Events, Discerning Long Term Implications

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How should I invest a burial trust?

October 24, 2014

| MoneyRates.com Senior Financial Analyst, CFA

Investing a burial trust

Q: I just set up a burial trust to take care of funeral expenses when I die. I am 80 years old but in good health, so I don't expect to go anytime soon -- though you never know! My question involves how that burial trust should be invested. I'm assuming savings accounts are the best vehicle for this kind of thing because the money is available at any time, but I hate to think of the money earning so little interest. The longer I live, the more ground it will lose to inflation.

A: Certainly, savings accounts are a natural solution for a burial trust -- as you say, their ready availability makes them a good fit for this type of need. As you point out though, the disadvantage is that savings account rates are extraordinarily low at this time. It may be a less conventional solution, but you might also want to consider a CD instead of a savings account.

Right now, according to FDIC averages, five-year CD rates are more than 10 times greater than rates on savings accounts. So, suppose you found a five-year CD with a penalty for early withdrawal equivalent to six months' worth of interest. Five-year CDs earn in about a month what average savings accounts earn in a year. So, as long as the burial trust was not needed for at least seven months, you would come out ahead with the five-year CD, even after paying the penalty.

Whichever vehicle you choose, be sure to shop around for the best CD rates or savings account rates available. Choosing the right bank can make as much of a difference in the rate you get as choosing the right deposit vehicle.

In some cases, there is an alternative to setting up a burial trust. Some states allow deals between funeral homes and their customers in which the customer pre-pays funeral expenses. Obviously though, you would want to make sure you are dealing with a reputable funeral home with a thriving business, so you can be confident that the arrangement will be honored when the time comes. Obviously, you should look over the contract carefully, and provide a copy to your executor or a close family member.

The benefit of this is that it effectively removes the inflation risk -- by paying up front, you lock in the cost of the funeral. The drawback is that paying up front means that the funeral home, rather than your burial trust, gets the benefit of any interest earned between now and when you die. Whether the benefit outweighs that drawback largely comes down to whether you think inflation will continue to exceed deposit rates over the remainder of your life.

Got a question about saving, investing or banking? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left.

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Where should I start my business?

October 21, 2014

| MoneyRates.com Senior Financial Analyst, CFA

Where to start a business?

Q: What is the best state in which to start a business? I am a certified life coach so I can conduct business pretty much anywhere. I am looking for a place with a high income rate vs. cost of living. From a Forbes article I read, the best currently is Washington State. Is this true, or do you think there are better options?

A: Though it looked at conditions for individuals rather than businesses, the MoneyRates.com Best States to Make a Living study might be a good jumping-off point for this discussion, because it factored in the two criteria you mention: incomes and cost of living. Beyond that though, there are some additional factors you may want to consider when choosing where to start your business.

The state of Washington topped the MoneyRates.com survey, and it meets your test of having a high average income -- one of the highest in the nation. The cost of living there is a little above average, but this is offset by the fact that Washington has no state income tax. Other states with relatively high average incomes when adjusted for the cost of living and state taxes are Virginia, Texas and Illinois.

Beyond the relationship of income and cost of living, there are some other things you should take into account when deciding where to start your business:

  1. What is the market for your services? You may want to look at demographic information. Which states have large populations in your average age group, and where is the population growing?
  2. How much competition is there in your field? Be sure to check on the number of similar service providers in your target area to make sure the market is not over-saturated.
  3. Do you plan to hire people? If so, locating in a state where incomes are high could become a liability rather than an asset for you.
  4. What is the regulatory environment for business start-ups? Tight regulations can be a barrier to entry as well as a source of ongoing compliance costs, so look before you locate.
  5. Can you provide your services online? MoneyRates.com has consistently observed that online banks have a cost advantage over traditional banks, which allows them to offer more free checking accounts and higher interest on savings accounts. Similarly, if there are aspects of your services that can be provided online, perhaps you can take a cue from this and locate where you can minimize your operational costs while marketing to more affluent parts of the country.

Good luck with your venture. You are wise to want to pick your spot, because the research you do in advance can pay off every day once your business starts up.

Got a question about saving, investing or banking? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left.

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How should I choose a financial adviser?

October 10, 2014

| MoneyRates.com Senior Financial Analyst, CFA

Couple meets financial adviser

Q: I am getting a very large settlement and want to stay away from typical money advisers. I don't know whom to trust. There are some local advisers at banks around here but they are always pushing their own products of loaded mutual funds and other crap. Do you have any suggestions? It is very hard to find an adviser that has my best interests in mind.

A: You not only should take care in selecting a financial adviser, but you should remain vigilant throughout your relationship with that adviser. Here are three key steps in the process:

Decide what services you need. Start by figuring out whether you need a comprehensive financial plan, covering things like tax advice and estate planning, or whether you have a plan in place and just need investment advice. If you are looking for comprehensive planning advice, you should look for someone with credentials like a Chartered Public Accountant (CPA) or a Certified Financial Planner (CFP). These are people who can provide a range of services, from figuring out how to structure your wealth to advising you on how to invest it.

If your needs are more narrowly defined within the realm of investment selections, mutual funds may be your best bet if you have less than half a million to invest, but above that amount a separately managed portfolio might be more efficient. In either case, an SEC Registered Investment Adviser may be a good choice to choose funds or individual stocks for you.

Know how your adviser is paid. As opposed to commissioned-based practitioners who make money on loads or transactions, someone who charges a flat percentage fee (ideally, 1 percent or below) should have fewer conflicts of interest. This fee should only be paid on actively managed portions of your assets -- if you want to keep some reserves in cash equivalents, you should be able to put it in savings accounts, money market accounts or something of that nature without paying an ongoing fee.

Keep the adviser honest. Choose advisers that are registered with a government agency that discloses the disciplinary history of its registrants, so you can check the background. Also, consider a bank custodian for your assets that is independent from your financial adviser, and do not grant your adviser authority to make withdrawals from your accounts. Finally, meet regularly and review the holdings on your statements, to make sure the money has been legitimately invested.

In short, the selection process is important, but it is just a start. Monitoring your adviser's actions and results should be a continuing process. For more information on selecting a financial adviser, check out the Consumer Financial Protection Bureau website for additional tips.

Got a question about saving, investing or banking? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left.

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Should I consider a 5-year CD at age 80?

October 8, 2014

| MoneyRates.com Senior Financial Analyst, CFA

Depositors at bank

Q: Is it reasonable for me to invest in a five-year CD at 2.20 percent? I am 80 years old. I am concerned about safety but I also want a fair interest rate.

A: At the heart of this question is the issue of how much someone should shorten their investment time horizon as they get older. People often go overboard in doing this, but depending on the details, a five-year CD is probably perfectly fine in your situation.

These are some key issues to consider when making this decision:

  1. Cash flow needs. Naturally, if you have a need for cash within the next five years that would require you to break into the principal of this CD, it might not be the most appropriate investment for you. However, if you can get by comfortably on the interest from this CD and your various other resources, then it may make sense to get a higher interest rate by choosing a five-year CD.
  2. Reliability of income. In assessing your cash flow needs as described above, you have to factor in whether your primary source of income is reliable. If you are comfortable it will continue to meet your needs, that is another argument for considering long-term investments.
  3. Competitiveness of the interest rate. Once you have decided that a five-year CD is appropriate, the next issue is whether the rate you are looking at is competitive. At the time your query was being reviewed, the average rate for a five-year CD was just 0.77 percent, and the 2.20 percent you mention would be among the best CD rates available.
  4. Safety. This entire discussion is based on the assumption that you are looking at an instrument from an FDIC-insured institution, and that the amount of your deposit falls within the $250,000 deposit insurance limit. Otherwise, you would not be getting the total safety you want.
  5. Sustainability. The best approach to your finances at any age is to set them up to be as sustainable as possible. Assuming you have no short-term cash flow needs that have not been accounted for, long-term investments can make your financial situation more sustainable.
  6. Other investments. Consider this decision in the context of your other investments. Would this CD be redundant, or would it complement what you already have?

The irony is that by gravitating toward short-term deposits like savings accounts, people are generally trying to avoid risk, but risk is exactly what bit depositors when short-term rates plummeted to nearly zero. Risk comes in a variety of forms, so assuming you have more money than is necessary for your immediate needs, it is never too late to seek a balance between short-term and long-term investments.

Got a question about saving, investing or banking? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert box on the lower left.

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Is it better to break into a CD or a 401(k)?

September 25, 2014

| MoneyRates.com Senior Financial Analyst, CFA

Q: I am facing a financial emergency where I need to get my hands on $10,000 in cash in a hurry. I have more than that in a CD, but it's not due for another two years. One option would be to pay the penalty to break into that CD. Another might be to borrow against my 401(k) balance, which is well in excess of $10,000. This might be a better option because there is no penalty involved. Which do you think would make the most sense?

A: Most likely, breaking into your CD is going to be the most cost-effective and straight-forward option, though of course that depends on the specific CD terms. First though, here are two reasons why borrowing against your 401(k) plan might not be the best course of action:

  1. Loss of tax-deferred earnings. Between the time you borrow from the plan and when you repay the money, the loan balance will be out of the plan. This means that you will miss out on some investment earnings during that period, which is especially damaging since those earnings are tax-deferred.
  2. Repayment requirement. Loans from a 401(k) plan must be repaid within five years, so you have to ask yourself: If your need for immediate cash is so great, will you have the liquidity to meet that repayment schedule?

You would need to make sure that your 401(k) plan allows loans, and if so under what terms. If you do borrow against your 401(k) balance, it is very important that you do this pursuant to a formal, written agreement. Otherwise, your receipt of the money might be deemed a taxable distribution. That could mean that you would have to pay income tax on the amount of the loan, and possibly a 10 percent penalty.

In contrast, the penalty for early withdrawal from a CD is often just a matter of three to six months of interest. The best CD rates these days are just above 2 percent, so suppose you have a CD with a 2 percent rate and face a six-month interest penalty. Effectively, it would cost you about 1 percent to get out of your CD. If you have had the CD for a while, the penalty might be even less, because some CD penalties diminish over time.

Be sure to check the specifics of your CD before making a decision, but if you really need the cash, a 1 percent penalty may well be a more cost-effective solution than disrupting your long-term retirement program. This is also a good reminder of the benefit of keeping an emergency reserve in savings accounts or money market accounts, which will make your money more accessible in situations like this.

Got a question about saving, investing or banking? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left.

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