Are You Guilty of These Investing Mistakes?

May 25, 2015, 10:00 pm

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Filed under: ETFs, Investing Basics, Index Funds, Investing

By Aleksandra Todorova

To err is human, but when it comes to investing, mistakes can be costly. A third of everyday investors had zero or negative returns in 2014, according to an analysis of the portfolios of more than a quarter million investors by investment firm SigFig. In a year that saw the Standard & Poor's 500 index surge 13.6 percent, the median investor's portfolio rose just 4.2 percent.

Ironically, many investors make mistakes because they're trying to beat the market, and more importantly, because they think they can, says Harold Evensky, chairman of Evensky & Katz wealth management firm and professor of practice at Texas Tech University.

At speaking engagements or lectures, Evensky often asks his audience to raise hands if they think their children or grandchildren are better than average. Typically, everyone does. "Statistically, that can't be," Evensky says. "But it's classic behavior. People don't like the idea of being average." It is in that pursuit of better-than-average performance that investors often fall into one or more traps that may hurt their portfolios in the long run:

Single-Stock Concentration

Six in 10 investors have more than 10 percent of their portfolios invested in a single stock, according to an analysis by SigFig. Moreover, 15 percent of investors have more than half of their portfolios invested in just two stocks.

Many of these investors work (or worked) for a company with a generous employee stock discount program, or one that distributes bonuses in the form of company stock. Alternatively, shares the investor purchased years ago may have appreciated so much that they have thrown their overall asset allocation out of whack. The horror stories of Enron and Washington Mutual employees should provide a sufficient reminder that single-stock concentration exposes investors to excessive risk that can jeopardize their financial future.

Home Bias

Pride in one's home country is patriotic, but letting that patriotism undermine one's investment strategy is ill-advised. Evensky recalls assembling a portfolio for a potential client, who then banged his fist on the desk and stormed out of the office when he saw that a sizable portion would be invested in international funds. "Forget it," the client said. "I'll never invest a penny outside of the United States."

The example may be extreme, but the mistake is common. For 60 percent of investors in SigFig's analysis, international equities represented less than 10 percent of their equity portfolio. At the end 2013, U.S. investors held, on average, 27 percent of their total equity allocation in international funds, according to Vanguard (citing Morningstar data), even though non-U.S. equities accounted for 51 percent of the global stock market. While no one answer fits all, Vanguard recommends "a reasonable starting allocation to non-U.S. stocks of 20 percent, with an upper limit based on global market capitalization."

Paying More for "Better Returns"

With 1,411 exchange-traded funds available at the end of 2014, according to the Investment Company Institute, investors have plenty of options to choose from to build a well-diversified, low-cost portfolio. How low can low-cost go? According to SigFig data, investors paid, on average, 17 basis points for ETFs, with popular ones like State Street's SPDR S&P 500 Trust (SPY) and Vanguard's Total Stock Market Index (VTI) charging 0.09 percent and 0.05 percent, respectively.

However, six in 10 investors represented in SigFig's analysis own at least one fund with an expense ratio of 0.50 percent or higher. "They're buying a good story," Evensky explains. Investors who, in effect, pay a professional to beat the market are doing it because they don't want to feel that they're doing average investing. "They buy the Kool-Aid. The stories of very smart people using technology and research that's going to beat the system," he says.

Study after study has shown that more expensive, actively managed funds do not outperform lower-cost index funds over the long run, even during bear markets. Simply put, paying more doesn't guarantee better returns. So why do it?

Overtrading and/or Timing the Market

More than a decade has passed since University of California - Davis professors Brad Barber and Terrance Odean published their now widely referenced study with the catchy title, "Trading is Hazardous to Your Wealth." Its conclusion -- that frequent trading is associated with lower returns -- holds true today. In a recent analysis, SigFig found that each 100 percent of portfolio turnover (that is, selling all holdings in one's portfolio and buying new ones -- which one in five investors do, the data shows) corresponds to a 50 basis-point decrease in returns.

Even a conservative example shows how much of an impact those extra 50 basis points per year could have over the long term. If you save $10,000 a year for retirement and average a 6 percent annualized return, that total would grow to $816,044 after 30 years. If we reduce that annualized return by 50 basis points to 5.5 percent, you would end up with $70,000 less.

Would you give up a year's worth of retirement living expenses (or more) in the pursuit of better-than-average returns? "We try to educate our clients upfront that we're not always going to beat the market," says Evensky, whose firm manages $1.5 billion. "Our goal is to be in-between, and if we can do as well [as the market] and minimize taxes and expenses, we've done our job right." It's a goal worth pursuing, whether you work with a financial advisor or manage your investments yourself.

Aleksandra Todorova is a blogger for The Smarter Investor and editorial director at SigFig.

 

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Urban Homesteading: 8 Ways to Save by Going Back to Basics

May 25, 2015, 10:00 pm

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Filed under: How to Save Money, Home & Garden, Saving

By Katy Marquardt

Whether it's for political, ideological, economic or environmental reasons -- or because it's just plain fun -- a growing number of people are embracing elements of old-fashioned homesteading. Of course, people have been growing their own food and raising livestock for eons. But in recent years, such practices have taken hold in cities and suburban areas, and they've particularly caught on with younger generations. So-called "urban homesteading" can involve anything from setting up an apartment-balcony container garden to fencing off a section of the backyard for chickens, or even simple projects like canning your own jam.

Saving money is just part of the appeal. Many people also have a strong desire to "do something physical in a world where we're spending lot of time 'liking' things on Facebook and not doing something with our hands," says Erik Knutzen, who co-authored "Making It: Radical Home Ec for a Post-Consumer World," with his wife, Kelly Coyne. The Los Angeles couple also runs RootSimple.com, about DIY living. Here are eight ways DIYers and aspiring homesteaders can snip their spending and embrace a back-to-basics lifestyle:

1. Feed Your Egg Habit

These days, it's more common for city dwellers to have a chicken coop in the backyard, and many cities have allowed residents to keep egg-laying hens. "They're very easy to raise," says James Bertini , co-founder of Denver Urban Homesteading. He adds that chickens require less work than taking care of a dog. The big question: Do you really save money with backyard chickens? "Compared to organic eggs at the supermarket, yes, but if you're talking cheap eggs, no. But we're eating better-quality food," he says. According to BackYardChickens.com, the cost of hens can range from $3 to $30, depending on factors like age and breed, and feed costs approximately $15 a month for three hens. You could construct a coop for free with a little creativity and recycled materials; otherwise, you might purchase one for about $500, according to the site.

2. Be a Backyard Beekeeper

If chicken wrangling isn't your thing, establishing a hive of honeybees might be a better fit (but check local ordinances to see if beekeeping is allowed). "The thing about bees is they take care of themselves, so it's one of the least labor-intensive things you can do," Knutzen says. "It can be a little intimidating at first, but once you get the hang of it, it's not that big of a deal." He estimates that a basic setup, including boxes and a bee suit, costs $100 to $200. One hive could potentially produce 50 pounds of honey a year, he says, although you could also think of it as a community pollination service.

3. Get Into Gardening

Now is an ideal time to plant seeds, which, with a little attention, can become a bounty of homegrown produce you'll enjoy all summer. Don't have a green thumb? Try a low-maintenance herb garden, which can work for small spaces and will save you every time a recipe calls for a teaspoon of thyme or a handful of basil. First-timers might also consider planting a salad garden. "Some of my favorites are lettuces and arugula, simply because they are easy to grow and also don't taste good from the store," Knutzen says. He adds: "When there's a short walk from the garden to your kitchen, things like lettuce, like tomatoes, give you bang for your buck."

4. Brew Your Own Beer and Wine

The basic supplies and ingredients will cost you, but making several gallons of beer or wine -- which can be done in an afternoon -- can be quite economical, says Trent Hamm , U.S. News My Money blog contributor and founder of TheSimpleDollar.com. He estimates that $35 of ingredients will make seven six-packs or porter. Your startup costs will be higher: Figure $80 for a homebrewing kit that includes a primary fermenter, bottling bucket, siphon and other accessories. "Beyond the cost savings, a big part of the pleasure of homebrewing is the ability to experiment and try new beer styles and flavors that you can't buy in stores and to hone your favorite beer styles until they're absolutely perfect for your taste buds," Hamm wrote in an email.

5. Repurpose, Repurpose, Repurpose

Sure, you can buy a top-of-the-line compost bin, but you can also reuse an old garbage can or construct your own with galvanized chicken wire. Want to save on gardening containers? Convert a plastic kiddie pool or plant a lettuce garden in an old tree stump. If you need supplies for a craft or home improvement project, see if there is an organization in your community that sells reclaimed materials, suggests Melissa Massello, editor of ShoestringMag.com. "When people start doing DIY projects on Pinterest, you find there are so many ways to waste thousands of dollars -- you can blow through your savings without anything to show for it," she says. Before hitting up craft stores and home-improvement outlets, first check thrift stores, Craigslist's "free" section and places like Habitat for Humanity's ReStore, she says.

6. Embrace Homemade Cleaning Products

These are popular make-at-home items because their ingredients are simple, cheap and often only require a trip to the pantry. "Cleaning products are a no-brainer and the easiest thing in all of our writing," Knutzen says. "It's something even people in apartments can do -- wherever you are, with the trinity of vinegar, Castile soap and baking soda, you can get rid of commercial cleaning supplies." A bonus: These food-grade supplies are cheap and nontoxic. Massello saves citrus peels and stores them in a jar with white vinegar and a pinch of salt. Six to eight weeks later, she strains out the peels. "It makes the best home cleaner ... it cuts through weeks' worth of stovetop grease better than any infomercial product," she says.

7. Customize Condiments

If you've developed a habit of splurging on high-end hot sauce, your wallet may feel the burn. Sauces, spreads and chutneys are often simple to make and require inexpensive ingredients. Plus, you can customize them to your liking. Have an overabundance of mint or basil? Blend them into pesto, and freeze the extras. "Condiments like mustards, fermented chili sauces ... you can do some amazing stuff, and a lot cheaper and better," Knutzen says.

8. Blend Your Own Personal Care Products

This is an easy introduction to the world of DIY, Massello says, and it also helps you rid the toxins from your cosmetics cabinet. She makes her own sunscreen, mosquito repellent and moisturizer, all of which share a common ingredient. "Ever since coconut oil has become a mainstream marketplace staple, we now joke that coconut oil is the new duct tape." She adds: "It's a little more expensive than olive oil, but not nearly as expensive as anything you'd find at a department store beauty counter."

Other easy-to-make products include sugar and salt scrubs. For example, when grapefruit is on sale, she zests the fruit and adds a few tablespoons of the juice, a cup of melted coconut oil and an equal mix of sea salt and Epsom salt. "It makes the most amazing winter foot slougher and general exfoliant," Massello says. Keep the mixture in the refrigerator so it lasts longer.

 

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How to Get Health Insurance Outside Open Enrollment Period

May 25, 2015, 10:00 pm

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Filed under: Health Care, Health Insurance, Financial Education

By Ellen Chang

For consumers who want health insurance but missed the open enrollment deadline under the Affordable Care Act and its extensions, your best bet is to purchase short-term health insurance to protect you against major medical debt in case of emergencies.

Unpaid medical bills are the leading cause of bankruptcy in the U.S., said Egon Smola, a senior vice president at GetInsured, a Palo Alto, California, health insurance broker. If you are between 25 and 34 years old, you have a 5 percent chance of incurring medical bills of at least $27,000 this year and a 10 percent chance of medical bills of at least $13,000, he said.

Short-term health insurance does not cover preventative care or pre-existing conditions, so it does not meet the requirements for minimum essential coverage under the act. That means you'll pay a tax penalty.

Accident or Critical Injury Policies

Other options include accident or critical injury insurance policies, but they don't meet your coverage requirements under the law either, said Carrie McLean, director of customer care at eHealth.com, an online health insurance exchange in Mountain View, California. Insurance companies can decline you or a family member for such policies based on your personal medical history.

Still, they are "much cheaper than if you become gravely sick while uninsured and go into serious debt or worse, bankrupt," said Michael Stahl, a senior vice president HealthMarkets, a North Richland Hills, Texas online health insurance exchange company.

Life-Changing Events?

Some people can sign up for insurance outside the open enrollment window. If you turn 27 and were insured through your parents, get a new job, move to a new city or get divorced, you qualify to buy insurance, because such scenarios are considered qualifying life events. The other exceptions include getting married, losing coverage from your employer if you quit, get fired or laid off.

If you get a new job and your employer offers coverage for you or your spouse, you may have the opportunity to enroll in a group health insurance plan. Most employer-sponsored health plans will meet your coverage requirements under the act. Keep in mind that you cannot use government subsidies to help reduce your premiums under employer-sponsored plans, but you have the option to opt out and buy insurance from private companies or the government yourself.

Or You Can Negotiate or Appeal to the Crowd

If you decide against buying short-term or critical illness coverage, you still have some options, such as talking to your doctor or hospital about negotiating their fees. "It is not an easy task, but it can result in big savings," said Noah Lang, founder of Stride Health, a San Francisco health insurance exchange. "Medical bill advocates like CoPatient in Boston can also help do this negotiating for you. Make sure to check your medical bills for errors like duplicate charges. Finally, you could turn to crowdfunding sites like YouCaring to crowd-source money for high medical costs."

The next nationwide open enrollment period for Affordable Care Act policies runs Nov. 1 to Dec. 7. The tax penalties for being uninsured during 2015 are higher than they were in 2014, when the penalty for not having insurance was either $95 or 1 percent of your annual income, whichever was greater. In 2015, that penalty skyrockets to the greater of $325 an adult, and $162.50 a child or 2 percent of household income.

 

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Cutting Off Adult Children Who Aren't Financial Grown-Ups

May 25, 2015, 10:00 pm

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Filed under: Family Money, Personal Finance, Financial Education

By Ilana Polyak

It's natural for parents to want to help and support their children. But should that help continue well into adulthood? By helping too much, parents run the risk of imperiling their own financial future and creating dependence.

"The reality is that you are not doing the adult kids any favors at all by always bailing them out," said certified financial planner ReShelle Barrett, a senior vice president with Bill Few Associates. "If children are buying a house and counting on help from Mom and Dad, then it's probably a house they can't afford."​

The Great Recession rewrote some of the rules of financial independence for many young adults. With jobs scarce, student debt soaring and foreclosures hitting, it wasn't uncommon for grown children to take refuge in their childhood homes. "If they're typically financially responsible but have fallen on hard times, you are going to want to be there to help them, and that's fine," said Joe Franklin, a certified financial planner and founder of Franklin Wealth Management.

Buts a general "open wallet" policy is dangerous for parents and children alike. "People don't want to cause their kids any pain or any stress," said Joel Larsen, a certified financial planner and principal of Navion Financial Advisors. "One day you're not going to be around anymore. Do you want your kids learn to deal with the world when they're 60?"

Avoiding Financial Ruin

It's fine to make a lavish gift to adult children now and again, especially for children who are otherwise diligent and make no demands. But always coming to the rescue can jeopardize both your child's drive and your retirement security. "In the final descent to retirement, there's not a huge buffer for you," said Ken Geraghty, a certified financial planner with Eagle Strategies. A child in his or her 30s or 40s has lots of options for income generation; a retiree does not.

Take one of Joel Larsen's clients, a 70-something widow who always swooped in to rescue her three children. "One needed help starting a business; another needed a down payment on a house or a new car," he said. The woman had a comfortable retirement that wasn't too extravagant, but her constant gifts soon depleted her investment account and, later, her emergency savings. When she came clean to Larsen, he called her children and asked for the money back. "They all said, 'Sorry, I can't.' "

Before long, the client had a medical issue and needed care. With her assets gone, the only care she could get was in a Medicaid nursing home. Had she not made those handouts, she could have afforded a better facility or received care at home, Larsen said. Now when clients say they want to help their adult children, he offers to run the numbers for them and tell them how it will impact their retirement plans. "That way, they can say, "My financial planner says I can't afford it.' "

The Right Help

Parents should hesitate before providing a down payment for a home before their children have the maturity that comes with saving for it. Parents are also too quick to help their children start a business. Plenty of small businesses fail, and parents need to protect themselves. "You need to have something legally in writing that protects you as an investor in that business," Barrett said. "If the business defaults and can't pay its creditors, those creditors can come after your personal assets."

Some advisers believe that when parents make substantial cash outlays to help their kids, they should expect to be paid back. Franklin advises his clients to draw up a contract and charge interest. "As a parent, you have to feel proud when they pay your money back, knowing they are on the path to financial independence."

By Internal Revenue Service rules, you must charge a minimum interest rate. In March the Applicable Federal Rate was 0.40 percent for loans up to three years, 1.47 percent for loans of three to nine years and 2.19 percent for loans longer than that. "If they don't pay you back, it's now a gift," Franklin said.

Gifts that are more than $14,000 (or $28,000 per couple) are taxable, though "most people are not even aware about the gift tax," said Geraghty. If tax is not paid, then larger gifts will need to be accounted for and taxed at that time. Some parents go one step further and deduct gifts from their children's inheritance. "I had a client who said that when she passes, her son is not going to get anything, that it was going to the other children because he had already gotten so much from her in the form of handouts," said Franklin.

Of course, financial dependence is a two-way street and the result of a lifetime of financial lessons never learned. The best defense against dependent children, advisors say, is increasing financial responsibility as children grow. And letting them fail when they're young is a lesson that will stay with them long after their parents are no longer there to bail them out.

 

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You Are More Than a Credit Score

May 25, 2015, 10:00 pm

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Filed under: Mortgages, Credit, Personal Finance, Credit Score, Loans

America is obsessed with credit scores. And the obsession is for good reason. Credit scoring algorithms determine whether or not you will be approved for a mortgage, auto loan, credit card or personal loan. Scores also determine how much you will pay for those products. Having a credit score above 750 can get you the lowest interest rate available, which can save you thousands of dollars. Given how much money is at stake, it makes common sense to understand how scores work and how to have the best score possible.

However, like all obsessions, the credit score obsession is unhealthy. Now that websites enable you to track your score weekly, people actually do track their credit scores weekly. And that is an almost pointless exercise.

But ignoring your credit score completely, and pretending that it doesn't exist, doesn't make sense either. Unless you will never need to borrow money, you should have a good score. And contrary to one of the worst myths out there, you don't need to borrow money and pay interest in order to have a good credit score. You can have an excellent credit score for free.

​There Are Hundreds of Credit Scores

FICO is the most well-known credit score. Because Fannie Mae and Freddie Mac use FICO in mortgage underwriting, it has become the most important score in the market. But there are many different versions of FICO credit scores, which are listed on its website. There are scores for credit card companies, mortgage companies and auto lenders. And there are different versions of each score as well.

In addition, the score is calculated based upon data supplied by the credit bureaus. There are three credit bureaus. If the information in those bureaus is different, you could have different scores.

Free credit score websites like CreditKarma don't provide the FICO score. Instead, they provide the VantageScore, which is similar to FICO but not the same.

And when banks make lending decisions, they usually have their own custom scorecard. A version of the FICO score is probably used, but it isn't the only component of the bank's custom score.

People often come to me, worried about a 10-point change in the free score they received from CreditKarma. I tell them not to worry about such a small change, because lenders are probably not using that score anyway.

​A Few Basic Rules Are All You Need

If you follow just a few simple rules, you will likely have an excellent credit score regardless of the model used.

1. Always make your payments on time. Nothing harms your score more than a missed payment.
2. Avoid credit card debt. Make sure you never charge more than 20 percent of your available credit and you pay your balance in full every month.
3. Repeat items 1 and 2.
4. Check your credit report at least once a year (at www.annualcreditreport.com) to make sure all of the information is correct. Dispute any incorrect information.

It really isn't more complicated than that. For people who don't like using credit cards for their everyday spending, I have a very simple suggestion. Find a bill that you can pay with a credit card. Your cellphone is a great example. Open a credit card, and sign up for automatic bill payments, linking your credit card. On your credit card, sign up for automatic payment from your checking account. You can then cut up your credit card and remove any temptation of spending.

By doing this, you will ensure that every month you will have a positive item on your credit report. And you will automate all three rules. Your payment will be made on time. Your cellphone bill should never be more than 20 percent of the limit of your credit card. And by paying the balance in full every month, you will never pay a dime of interest.

If you do this, you will end up with an excellent credit score over time. And it is easy.

But You Are More Than Your Score

People often believe that a credit score is enough to get approved. However, people with high credit scores are often rejected.

In addition to a credit score, lenders will also consider your income, debt burden and potentially your time at your job or address. If your total monthly payments are more than 40 percent of your income, you will find it very difficult to get approved for almost any form of credit. If you don't have stability in your income or your job, you could end up being rejected as well. Increasingly, lenders are relying less upon FICO and more upon your job, your income and your cash flow.

How to Get the Best Deal

You shouldn't be afraid of shopping around for the best deal. If you have a good score, you should use that score to get the best rate.

If you are applying for a mortgage, auto loan or student loan refinance, you can apply as many times as you want in a 45-day period. All of those inquiries will only count as one inquiry. You should shop for the best deal and make your lenders compete.

If you already have credit card debt, you shouldn't be afraid to look for a lower rate. You aren't stuck in a high interest rate. When you have a good credit score, you have options. Marketplace lenders are offering dramatically lower interest rates and an easy way to comparison shop. Most marketplace lenders let you check your interest rate and see how much you can borrow without hurting your credit score. You can see a list of these lender at MagnifyMoney, my website.

And I always recommend talking to your local credit union. They are often able to provide some of the best interest rates for any form of borrowing.

Don't Worry, Be Responsible

If you avoid debt, pay your bills on time and have one positive item a month on your credit report (like the cellphone example), you should have no worries. Whenever you need to borrow money, your score should reflect the responsible life that you are living.

Nick Clements is the co-founder of MagnifyMoney, a price comparison and financial education website. You can follow him on Twitter @npclements.

 

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6 Credit Mistakes Even Those With Stellar Scores Can Make

May 25, 2015, 10:00 pm

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Filed under: Personal Finance, Credit History, Credit Score, Credit Repair, Financial Education

By Meghan Rabbitt

"Good credit can become bad credit in as little as a month," says John Ulzheimer, a credit scoring and reporting pro who's worked for FICO, Equifax and Credit.com. "There are too many under-the-radar factors that can influence your score to just assume you'll sail through the years with great credit."

Think you've got a handle on what can make or break your score?

We're exploring six missteps that even folks with healthy credit can make -- and then offering up advice from credit experts on how to avoid them and maintain that fantastic FICO score you've built up.

Mistake No. 1: You Don't Check Your Credit Reports

What you're risking: No matter how impressive your money habits, failing to regularly pull your credit report could lead to credit score problems.

"That's where the three big signs of identity theft will show up: an address where you've never lived, a new credit inquiry you didn't make and a new account that doesn't belong to you," Ulzheimer says.

So if you don't periodically eyeball this document, you won't spot these clues -- or other potentially damaging errors, like an inaccuracy regarding the current balance of your mortgage.

The credit-savvy move: You can request a free credit report from each of the bureaus -- Equifax, Experian and TransUnion -- every 12 months, although Ulzheimer suggests pulling one from each agency three times a year. Additionally, you can seek out sites that supply registered users with free reports more often, such as CreditSesame or CreditKarma.

"New accounts can take 30 days or longer to show up on your report," he notes. "If you don't check on a regular basis, it's less likely that you'll catch identity theft."

Once you have your report in hand, scan for misinformation like foreclosures, a tax lien, accounts you never opened and late payments that never occurred. These are all errors that could lower your score -- but that can be easily fixed by calling an agency to file a dispute.

"That obligates the credit bureaus to perform an investigation," Ulzheimer says. "After your credit file is corrected, any future score pulled will take into account the new and correct data."

When you know you have a great credit score, it's easy to sit back, relax and trust it will stay that way.

After all, the habits that got you those enviable digits -- like paying your bills on time and keeping your debt under control -- are probably second nature at this stage.

Reality check! Just because your credit score is something to be proud of now doesn't mean it can't drop in the future.

Mistake No. 2: You Overestimate the Power of a Single Score Factor

What you're risking: You think your FICO score is golden because you've never made a late payment. But your sister insists her stellar score came from being debt-free. Who's right?

It's a wash. While it's true that each of these habits is an important ingredient, they're not the only ones that matter.

"Too many people don't know about all of the components that go into their score," says Mary Beth Storjohann, a certified financial planner and founder of Workable Wealth in San Diego. "When you're not educated about this, it's more likely that you'll make a mistake without even realizing it."

Th credit-savvy move: To ensure your misunderstanding doesn't come back to bite you, get familiar with these five important factors (from FICO):

• How timely -- or not -- you are when paying bills accounts for 35 percent of your score.
• The amount of money you owe vs. your credit limits -- aka your utilization ratio -- makes up 30 percent. Ulzheimer recommends keeping this number under 30 percent, but says the optimal figure is less than 10 percent. (Here's how to calculate yours.)
• The length of your credit history influences 15 percent of your score, which explains why pros generally suggest keeping all of your accounts open.
• A balanced mix of accounts, including both revolving credit (such as credit cards) and installment credit (such as mortgages) makes up another 10 percent.
• The number of new credit applications accounts for the last 10 percent.

"These elements don't interact," Ulzheimer notes. "You can be doing well in the payment history category but [lose points because] you have a ton of debt relative to your limits."

"As much as you can, even after marriage, it's wise to maintain credit independence, as it's very difficult to detangle co-liability."

Mistake No. 3: You Co-Sign on Loans

What you're risking: Co-signing a loan may seem so harmless. After all, it's not like your loved one can't make the payments (or so they say). They just need you -- and your good credit -- in order to qualify.

But Stacy Francis, a certified financial planner and president of Francis Financial in New York, says this move can be a risky one.

"Co-signing means your credit reputation is now subject to influence, based on the other person's ability to make payments," Francis says. For example, if you've co-signed your girlfriend's car loan, and she's late on a few payments, those bad marks will show up on her credit report and yours.

And even if the person can afford their payments, their debt still reflects on you. Lenders will consider it a liability when calculating your debt-to-income level, which could mean that you miss out on low interest rates when applying for new loans in the future.

The credit-savvy move: If you feel strongly about co-signing a loan for a child, spouse, partner or friend, be prepared to jump in and assume the payments at any point during the life of the loan. "If you're willing to do that, go ahead," Francis says.

But if that doesn't sit well with you, listen to your gut. "As much as you can, even after marriage, it's wise to maintain credit independence, as it's very difficult to detangle co-liability," Francis says.

Ulzheimer has a tip for handling this delicate situation: "Suggest the person build up his own credit -- and ability to qualify for a loan alone -- by applying for a secured credit card."

Mistake No. 4: You Close Long-Standing Credit Accounts

What you're risking: You're out of debt (at last!), and decide to eliminate temptation by closing the credit card that got you into overspending trouble in the first place. Good idea, right?

Believe it or not, this well-intentioned move can ding your score. Since 15 percent of your score is based on the length of your credit history, if you close a card that you opened 10 years ago, you're shortening your credit span by a decade in one fell swoop.

Plus, closing an account can send your utilization ratio through the roof. For instance, let's say you have two cards, each with a $5,000 limit. On one, you owe $2,500, while the other is balance-free. Right now, your ratio is 25 percent -- but if you close the second card, it jumps to a potentially credit-damaging 50 percent.

The credit-savvy move: It's best to leave cards open, even after you've zeroed out the balances, Francis says, especially those you've had for years.

The one exception: if you have a card -- that's not your oldest account -- with a high annual fee. "The price of a fee on a card you never use could be more damaging to your budget than the temporary credit score dip you might experience," Francis explains.

Still afraid you'll slip back into your splurge-happy habits? Freeze your spending (literally!) by placing your card on ice, instead of in your wallet.

Mistake No. 5: You Defer Payment With Financing Deals

What you're risking: When something seems too good to be true, it typically is -- a notion that applies to those year-long zero-percent financing offers available at furniture and electronics stores.

For starters, big retailers are seen as "lenders of last resort," Francis explains. Translation: This credit isn't ranked as favorably as what you could qualify for with one of the major credit card companies.

Plus, financing the fancy speaker system you've had your eye on means you're applying for -- and taking on -- more debt.

"Every time you apply for credit, your score gets dinged and will take some time to come back," Francis says. "If you're already in credit card debt, this will only make your debt-to-limit ratio worse."

"The best time to ask for a credit limit bump is when you know you've got great credit, and when you have a good, solid income."

The credit-savvy move: Steer clear of these offers -- and save up and buy big-ticket items, like TVs, outright.

While you're at it, remember to say no to pushy salespeople who try to talk you into signing up for a slew of department store cards -- even if they come with a big discount.

"When you apply for multiple cards in a short amount of time, you're loading your credit report with a bunch of inquiries, which can also hurt your credit score," Ulzheimer says.

Incidentally, you're also loading your credit report with newly added accounts (if approved). "Since the average age of your accounts plays into your credit history, this can do some damage to your score," he says. "The older the age of the account, the better."

Mistake No. 6: You Don't Ask Credit Issuers to Report Your Limits

What you're risking: Now that you're committed to regularly reviewing your credit report, double-check that the limits listed match what's on your credit card statement. While companies always report your debt, they may not be consistently updating your maximum available credit limits.

"If you have a $20,000 limit that's been reported as $10,000, plus about $5,000 of debt, the credit bureaus will think you're using a much bigger amount of your overall limit," Francis says. "This is a mistake that's rarely talked about."

The credit-savvy move: If you notice your credit issuer isn't accurately reporting your limits, call a customer service rep and ask them to do so.

However, keep in mind that, unlike the credit bureaus' obligation to fix errors, creditors don't have to report your limits -- and you can't force them to, says Ulzheimer. "In fact, your credit card company has no obligation to report anything [to the credit bureaus]," he says. So if you find yourself in this situation, consider moving your business to a card that will.

You can also take this opportunity to ask the company to increase your credit limits. "The best time to do this is when you know you've got great credit, and when you have a good, solid income," Francis says. "These are the most important metrics credit card companies consider [when raising limits]."

Ulzheimer suggests asking for a modest increase -- just a couple hundred dollars. This way, provided you're in good standing, you're more likely to be approved. Repeat the exercise a few times a year, inching up your limits little by little.

Before you know it, you could be making big strides in the utilization-ratio department -- and have the healthy credit score to prove it.

 

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Charter Buying Time Warner Cable as TV Viewers Go Online

May 26, 2015, 12:54 am

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Filed under: Company News, Media, Mergers & Acquisitions, Internet, Telecommunications

By TALI ARBEL

NEW YORK -- As TV watchers increasingly look online for their fix, cable companies are bulking up. In the latest round, Charter Communications (CHTR) is buying Time Warner Cable (TWC) for $55.33 billion.

And executives say they're confident regulators will allow the creation of another U.S. TV and Internet giant.

The deal comes a month after Comcast (CMCSK), the country's largest cable provider and owner of NBCUniversal, walked away from a $45.2 billion bid for Time Warner Cable, the No. 2 cable company, after intense pressure from regulators. The government worried that the company would be able to undermine increasingly popular online video competitors such as Netflix (NFLX) because the bigger Comcast would have more than half the country's high-speed Internet customers.

There has been a wave in consolidation in the cable industry as providers are starting to lose TV subscribers, costs for TV, sports and movies rise and pressure from online video services such as Netflix and Hulu increases. The traditional cable ecosystem is breaking up -- for example, you can subscribe to HBO online without having to pay for cable, or pay for a smaller group of channels that you watch via a Sony PlayStation.

Getting bigger is one way to deal with those changes. It gives cable providers more lucrative Internet subscribers and more leverage against entertainment companies providing the channels.

Whether government regulators will approve the Charter deal after quashing Comcast's bid for Time Warner Cable remains to be seen. Charter also announced Tuesday that it is buying Bright House Networks, a smaller cable provider, for $10.4 billion.

In a statement Tuesday, Federal Communications Commission Chairman Tom Wheeler said that the FCC weighs every merger on its own to see if it will be in the public interest, and that "an absence of harm is not sufficient." He said the FCC "will look to see how American consumers would benefit" from the deal.

Charter notes that it will have less than 30 percent of the customers in the U.S. that the FCC defines as broadband: Those downloading at 25 megabit-per-second and faster. Comcast plus Time Warner Cable would have had more than half of those subscribers.

"We're a very different company from Comcast and this is a very different transaction," said Charter CEO Tom Rutledge on a conference call Tuesday. "We're confident it's going to get done," said Time Warner Cable CEO Rob Marcus.

Charter, combined with Time Warner Cable and Bright House, will have nearly 24 million customers, compared with Comcast's 27.2 million. It will also lag AT&T (T), whose pending deal with DirecTV (DTV) would give it 26.4 million U.S. TV customers and 16.1 million fixed Internet customers as well as tens of millions of wireless customers.

'Genuine Risks'

"One has to be sober about genuine risks that this deal could still be rejected," said MoffettNathanson's Craig Moffett in a research note Tuesday, given the number of Internet and TV subscribers involved.

But it doesn't raise the same immediate concerns as the Comcast-Time Warner Cable merger, said John Bergmayer of Public Knowledge, a public interest group that had opposed the Comcast deal. "The scale is totally different. It's not the No. 1 buying the No. 2," he said.

Another sign of confidence from the companies: The deal comes with a $2 billion breakup fee if it doesn't go through. If regulators don't approve it, Charter would pay Time Warner Cable; if Time Warner Cable kills the deal and goes with another buyer, it'll pay.

John Malone's Liberty Broadcast Corp., which owns more than a quarter of Charter's stock, is backing the acquisition. Liberty Broadband is expected to own about 20 percent of the new Charter.

Charter Communications Inc., based in Stamford, Connecticut, will provide $100 in cash and shares of a new public parent company equal to 0.5409 shares of Charter for each outstanding Time Warner Cable Inc. share. The transaction values each Time Warner Cable share at about $195.71.

The companies Tuesday valued New York-based Time Warner Cable at a total of $78.7 billion, including debt. They expect to complete the deal by the end of the year.

Time Warner Cable had chosen the Comcast deal and rejected a $38 billion hostile offer from Charter in early 2014.

-Michelle Chapman contributed to this report.

 

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Olive Garden: At Least 1 More Breadstick Creation On the Way

May 26, 2015, 1:35 am

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Filed under: Company News, Advertising & Marketing, Food & Beverage, Restaurants

By CANDICE CHOI

NEW YORK -- Olive Garden isn't finished dreaming up new ways to use its breadsticks.

The Italian restaurant chain said earlier this month it would introduce "breadstick sandwiches" as part of a broader menu revamp intended to play up its most popular offerings. The sandwiches don't arrive until June 1, but Olive Garden already has a follow-up act planned with "breadstick crostini" in August.

The "breadstick crostini" -- or toasted bread -- will be sliced and used as part of an appetizer, said Jose Duenas, Olive Garden's executive vice president of marketing.

"The flavor profile of the breadstick is powerful," Duenas said in an interview.

Olive Garden, which is owned by Darden Restaurants (DRI), has been fighting to hold onto customers as competition has intensified from rivals that are seen as quicker, more affordable and more in line with changing tastes.

Darden Restaurants Inc. (DRI) | FindTheCompany

To win back diners, the chain has tried to modernize its image by ditching its long-running TV ads evoking Old World charm and adding menu items to offer greater variety. Now under new management, Olive Garden says it wants to focus on the things it does best, rather than chase trends.

To enhance its unlimited salad, for instance, Duenas said Olive Garden will start offering grilled chicken as a topping. It will also bring back a variation of its "Tour of Italy" dish, which includes smaller portions of three entrees.

The breadstick creations are notable in part because of a public spat last year with an investor that was trying to take control of the company. Among other criticisms laid out in a nearly 300-page presentation, Starboard Value said Olive Garden wasn't being disciplined in distributing its unlimited breadsticks, which led to waste. It also said the quality of the breadsticks seemed to have declined and compared them to hot dog buns.

Soon after, Starboard ended up winning control of Darden's board of directors. Olive Garden hasn't said what changes it has made -- if any -- to address the criticisms detailed by Starboard. But during an appearance on "Wall Street Week" earlier this month, Starboard CEO Jeff Smith said "it might surprise people that I actually like the breadsticks."

Since the breadstick sandwiches were announced, Olive Garden executive chef Jim Nuetzi said he has been getting other suggestions for dishes that incorporate breadsticks.

 

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Solid Business Spending Plans Brighten Outlook for Factories

May 26, 2015, 1:48 am

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Filed under: Economic Indicators, GDP, Manufacturing, Economy

By Lucia Mutikani

A gauge of U.S. business investment spending plans increased solidly for a second straight month in April, a hopeful sign for manufacturing activity after a long spell of weakness.

The overall economy is gradually firming, with other reports Tuesday showing consumer confidence perking up this month and house prices extending gains in March, which should boost household equity and support consumer spending.

The Commerce Department said non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, rose 1 percent last month after an upwardly revised 1.5 percent increase in March.

The so-called core capital goods orders were previously reported to have increased 0.6 percent in March.

It provides some indication that business capital investment activity might be on the mend.

"It provides some indication that business capital investment activity might be on the mend," said Millan Mulraine, deputy chief economist at TD Securities in New York.

Business spending has slackened as a sharp decline in energy prices forced oilfield companies, including Schlumberger (SLM) and Halliburton (HAL), to slash their capital expenditure budgets. Investment has also been undermined by a strong dollar, which has squeezed profits of multinational corporations.

In a separate report, the Conference Board said its index of consumer attitudes rose to 95.4 this month from 94.3 in April.

Consumers' outlook for the labor market improved, with a rise in the share of households anticipating more jobs in the months ahead.

The rebound in business spending, together with a sturdy labor market, a strengthening housing market and firming underlying inflation, should keep the Federal Reserve on course to raise interest rates later this year.

The dollar rallied against a basket of currencies on the upbeat data, while prices for U.S. government debt prices rose. U.S. stocks were trading lower.

Business Spending Rise

The increase in core capital goods orders offers cautious optimism that business spending outside the energy sector will pick up in the coming months and support manufacturing, and the broader economy, after a dismal first quarter.

Although order books at manufacturers remain lean, the core capital goods data corroborates other surveys, including one on small businesses, that showed a jump in capital expenditure plans in April and May.

Economic growth slumped early in the year and data so far on retail sales and manufacturing point to tepid economic activity early in the second quarter. Economists polled by Reuters had forecast core capital goods orders gaining 0.4 percent.

Shipments of core capital goods, which are used to calculate equipment spending in the government's gross domestic product measurement, rose 0.8 percent last month after a 1.0 percent increase in March.

A 2.5 percent drop in transportation equipment, however, weighed down on overall orders for durable goods -- items ranging from toasters to aircraft that are meant to last three years or more -- which fell 0.5 percent last month.

Orders for machinery recorded their biggest gain in eight months in April and the increase in bookings for primary metals was the largest since September. While orders for computers and electronic products fell 3.6 percent, that followed a hefty 7.7 percent surge in March.

Orders for electrical equipment, appliances and components dropped 1.5 percent after gaining 0.9 percent the prior month.

Brightening Housing Picture

In another report the Commerce Department said new home sales increased 6.8 percent to a seasonally adjusted annual rate of 517,000 units. March's sales pace was revised up to 484,000 units from the previously reported 481,000 units.

The upbeat report added to housing starts data in indicating that housing was gaining momentum after treading water for much of last year.

A fourth report showed single-family home prices rose in March from a year earlier. The S&P/Case-Shiller composite index of 20 metropolitan areas increased 5 percent from a year ago, matching February's gain.

Economists believe housing will take the baton from a lethargic manufacturing sector and help to drive economic growth this year. Housing is being buoyed by a strengthening jobs market, which is encouraging young adults to set up their own households.

While higher home prices could reduce affordability, they could encourage more homeowners to put their houses on the market, which could ease supply constraints and boost sales. In addition, higher home values boost household net worth, which is positive for consumer spending.

 

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Taco Bell, Pizza Hut to Boot Artificial Ingredients

May 26, 2015, 2:24 am

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Filed under: Company News, Advertising & Marketing, Food & Beverage, Restaurants, Consumer Issues

By CANDICE CHOI

NEW YORK -- Taco Bell and Pizza Hut say they're getting rid of artificial colors and flavors, making them the latest big food companies scrambling to distance themselves from ingredients people might find unappetizing.

Instead of "black pepper flavor," for instance, Taco Bell will start using actual black pepper in its seasoned beef, says Liz Matthews, the chain's chief food innovation officer.

The Mexican-style chain also says the artificial dye Yellow No. 6 will be removed from its nacho cheese, Blue No. 1 will be removed from its avocado ranch dressing and carmine, a bright pigment, will be removed from its red tortilla strips.

Matthews said some of the new recipes are being tested in select markets and should be in stores nationally by the end of the year.

The country's biggest food makers are facing pressure from smaller rivals that position themselves as more wholesome alternatives. Chipotle Mexican Grill (CMG) in particular has found success in marketing itself as an antidote to traditional fast food. In April, Chipotle announced it had removed genetically modified organisms from its food, even though the Food and Drug Administration says GMOs are safe.

Critics say the purging of chemicals is a response to unfounded fears over ingredients, but companies are nevertheless rushing to ensure their recipes don't become disadvantages. In recent months, restaurant chains including Panera Bread (PNRA), McDonald's (MCD) and Subway have said they're switching recipes for one or more products to use ingredients people can more easily recognize.

John Coupland, a professor of food science at Penn State University, said companies are realizing some ingredients may not be worth the potential harm they might cause to their images, given changing attitudes about additives.

Additionally, he noted that the removal of artificial ingredients can be a way for companies to give their food a healthy glow without making meaningful changes to their nutritional profiles. For instance, Coupland said reducing salt, sugar or portion sizes would have a far bigger impact on public health.

Taco Bell and Pizza Hut are owned by Yum Brands (YUM), which had hinted the changes would be on the way. At a conference for investors late last year, Yum CEO Greg Creed referred to the shifting attitudes and the desire for "real food" as a revolution in the industry.

Yum Brands Inc. (YUM) | FindTheCompany

Representatives at KFC and Yum's corporate headquarters in Louisville, Kentucky weren't immediately available to comment on whether the fried chicken chain would also be removing artificial ingredients.

Pizza Hut says it will remove artificial flavors and colors by the end of July. It said it will start listing all it ingredients online once the changes are completed.

Taco Bell says it will take out artificial colors, artificial flavors, high-fructose corn syrup and unsustainable palm oil from its food by the end of 2015. It says artificial preservatives will be removed "where possible" by 2017. The moves don't affect fountain drinks or co-branded products, such as its Doritos-flavored taco shells.

Brian Niccol, the chain's CEO, said the company would work to keep its menu affordable.

"I do not want to lose any element of being accessible to the masses," Niccol said.

When asked whether the changes would affect taste, a representative for Taco Bell said in an email that "It will be the same great tasting Taco Bell that people love."

 

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Biggest Stock Movers: Shake Shack Sizzles; Roundy's Retreats

May 26, 2015, 2:58 am

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Filed under: Earnings, Retail, Biotechnology, Restaurants, Investing

Plenty of stocks go up and down in any given week. The gainers inspire us to keep investing. The decliners keep greed in check while reminding us about the risks of the equity markets.

Let's go over some of last week's best and worst performers.

Shake Shack (SHAK) -- Up 34 percent last week

The fast-growing burger chain soared on reports that a related entity has taken out a trademark for the Chicken Shack name. Shake Shack has plenty of room to grow as a burger chain, but if it's launching a sister concept specializing in poultry -- likely chicken sandwiches -- it can make things even more interesting for one of the hottest IPOs of the past year.

Red Robin Gourmet Burgers (RRGB) -- Up 18 percent last week

Shake Shack wasn't the only burger flipper slinging some serious lettuce last week. Red Robin also moved higher after the table-service restaurant chain posted better-than-expected quarterly results. Red Robin clocked in with a profit of $1.10 a share, well ahead of the 88 cents a share that analysts were forecasting.

It's a strong showing for a company that has fallen short of Wall Street profit targets in two of the three previous quarters.

MannKind (MNKD) -- Up 13 percent last week

An upbeat analyst report on MannKind helped send the biotech higher. MannKind recently began marketing Afrezza, an FDA-cleared inhaled insulin. It's naturally a potential breakthrough for diabetics tired of needle pricks, but it's been off to a slow start. Jefferies & Co. analyst Shaunak Deepak put out an encouraging report, arguing that a lack of education could be the problem. Deepak discovered that more than a third of the doctors treating patients with diabetes don't know about Afrezza, but those who are familiar with the inhaled insulin are actively prescribing it.

Roundy's (RNDY) -- Down 25 percent last week

The New York Stock Exchange's biggest sinker last week was Roundy's, shedding a quarter of its value after going through with a highly dilutive secondary offering. The struggling grocery store operator priced 3.5 million shares at $3.50. The problem with the pricing is that the operator of 150 supermarkets and 100 pharmacies had its stock kick off the week at $4.76. Things have to be desperate if underwriters have to offer such a big discount.

hhgregg (HGG) -- Down 15 percent last week

Consumer electronics retailer hhgregg took an 18 percent hit a week earlier after posting a big year-over-year decline in sales for its most recent quarter. Instead of bouncing back last week, the selling continued to the tune of an additional 15 percent drop. The new week got off to a bad start when UBS downgraded the retailer to "sell" as it slashed its price target to $4.

Southwest (LUV) -- Down 12 percent last week

Sometimes what's good news for consumers is bad news for the market. Shares of Southwest went on a sharp descent after its CFO announced that the air carrier will grow its capacity by as much as 8 percent this year. Its earlier guidance was calling for an uptick of just 7 percent in available seat miles.

Increasing capacity for the airline industry concerns the market because it can eat into pricing. If too many carriers are trying to fly more, it can result in cutthroat fares. That's great for consumers, but the air carriers won't like what that does to the bottom line.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. Check out our free report on one great stock to buy for 2015 and beyond.

 

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Media CEOs Dominate Ranks of Top-Paid Executives

May 26, 2015, 5:34 am

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Filed under: Company News, Media, Entertainment Industry, CEOs

By STEVE ROTHWELL and RYAN NAKASHIMA

NEW YORK -- They're not Hollywood stars, they're not TV personalities and they don't play in a rock band, but their pay packages are in the same league.

Six of the 10 highest-paid CEOs last year worked in the media industry, according to a study carried out by executive compensation data firm Equilar and The Associated Press.

The best-paid chief executive of a large American company was David Zaslav, head of Discovery Communications (DISCK), the pay-TV channel operator that is home to "Shark Week." His total compensation more than quadrupled to $156.1 million in 2014 after he extended his contract.

Les Moonves, of CBS (CBS), held on to second place in the rankings, despite a drop in pay from a year earlier. His pay package totaled $54.4 million.

In industries where the talent makes a lot of money, the CEO makes a lot of money as well.

The remaining four CEOs, from entertainment giants Viacom (VIAB), Walt Disney (DIS), Comcast (CMCSK) and Time Warner (TWX), have ranked among the nation's highest-paid executives for at least four years, according to the Equilar/AP pay study.

One reason for the high level of pay in the industry is that its CEOs are dealing with well-paid individuals.

"The talent, the actors and directors and writers, they're being paid a lot of money," said Steven Kaplan, a professor of finance at the University of Chicago Booth School of Business. "In industries where the talent makes a lot of money, the CEO makes a lot of money as well."

Pay packages for CEOs overall grew for the fifth straight year in 2014, driven by a rising stock market that pushed up the value of executive stock awards. Median compensation for the heads of Standard & Poor's 500 companies rose to a record $10.6 million, up from $10.5 million the year before, according to the Equilar/AP pay study.

Peer pressure is another factor driving up executive compensation. The board members responsible for setting CEO pay typically consider what the heads of similar companies are making. If pay for one goes up, it will likely go up for others.

Other Factors

For the chieftains of media, there are also other factors boosting pay.

Several work at companies where a few major shareholders control the vote.

The media magnate Sumner Redstone controls almost 80 percent of the voting stock at CBS and Viacom. Because of his large holdings, Redstone can easily override the concerns of other investors about the level of CEO pay. Discovery's voting stock is heavily influenced by the brothers Si and Donald Newhouse and John Malone, another influential investor in the media industry.

At Comcast, which owns NBC and Universal Studios, CEO and Chairman Brian Roberts controls a third of his company's voting stock. That means he has substantial influence on the pay that he is awarded.

Comcast had no comment when contacted by the AP for this story.

All of the media executives have tried, with varying degrees of success, to maximize the value of their company's entertainment brands online and on mobile devices.

For example, Moonves at CBS launched the series "Under the Dome" -- based on the Stephen King novel -- both on the network and on the Amazon Prime streaming service. Besides reaching online customers, the move helped offset production costs. The company, whose shows also include "NCIS" and "The Good Wife," has attracted 100,000 customers to "CBS All Access," an online subscription platform that costs $6 a month. Time Warner, under CEO Jeffrey Bewkes, launched HBO Now, which streams shows to computers, tablets and smartphones for $15 a month.

At Disney, CEO Bob Iger has bolstered revenues through canny acquisitions.

The purchase of Marvel in 2009 is reaping dividends with blockbuster superhero movies. "Avengers: Age of Ultron," pulled in almost $190 million in its opening weekend, making it the second-biggest U.S. movie opening ever. Disney's purchase of LucasFilms in 2012 means it also owns the highly lucrative "Star Wars" franchise, with the next installment scheduled for release in December.

Disney spokesman David Jefferson said in an email that Iger's pay award "reflected the company's outstanding financial performance," and cited its record earnings. He also said that during Iger's tenure Disney has returned more than $51 billion to stockholders through share buybacks and dividends.

Media stocks have climbed strongly the past five years. An index of media companies in the S&P 500 index (^GSPC) has risen 193 percent compared with a gain of 95 percent for the broader S&P 500.

Stock Price Rise

Discovery's stock price has climbed almost fivefold since it started trading as a public company in September 2008.

Zaslav, who has led Discovery since 2007, saw his compensation rise last year after he negotiated a new contract that will keep him at the company until 2019. Last year's pay package included $145 million in stock and options awards, $6 million in cash bonuses, $3 million in base salary, and $1.9 million in perks.

The company has pushed its channels overseas where pay TV penetration is growing faster than in the U.S. Last year, Discovery also grabbed a controlling stake in Eurosport International, making a bet on live sports. The move into European sports has set the stage for renewed growth overseas.

Zaslav has done a terrific job, said Chris Marangi, portfolio manager at Gamco Investors Inc., which holds more than $150 million in Discovery stock.

The CEO has returned cash to shareholders and increased viewership largely through company-owned reality TV shows like "Say Yes to the Dress" and "Deadliest Catch."

"He's a dynamic leader at the helm of a company in a very fast-changing industry," Marangi said.

Even though Discovery's stock has slumped over the last 18 months, it is still up 243 percent since Zaslav took the helm in 2007. That compares with a gain of 49 percent for the S&P 500 over the same time.

Discovery declined to comment for this story when contacted by the AP.

The pay package of Viacom CEO Philippe Dauman's reflects "solid financial results, execution on key operational goals and a return of $3.9 billion to stockholders through stock buybacks and dividends," company spokesman Jeremy Zweig said in an email.

Aligning Interests

Top executives are getting paid more because much of their compensation comes from bonuses linked to their company's financial and stock performance. Only a small part of their pay comes from their base salary.

Structuring pay this way is intended to align the executives' interests to that of the company and to encourage long-term strategies.

Because corporate earnings have grown consistently, with a near six-year expansion of the economy, executives have met or beaten their earnings targets generally.

Earnings-per-share for the average S&P 500 company rose 7.7 percent in 2014, according to data from S&P Capital IQ. Revenue-per-share climbed 4 percent.

"There should be a strong link between pay and performance. The markets were up in 2014 so it makes sense that [compensation] was going in the same direction," said Bess Joffe, managing director of corporate governance at TIAA-CREF, an asset management company. "We would also expect, in a downturn, for the compensation numbers to fall."

The gap between pay for CEOs and that of the average worker narrowed slightly last year, because average wages crept up more than CEO pay did.

A chief executive made about 205 times the average worker's wage, compared with 257 times the year before, according to AP calculations using earnings statistics from The Labor Department. That gap was still much wider than six years before, during the recession, when executives earned 181 times the average worker's pay.

Visionary Leaders?

The notion that every CEO is a visionary in the mold of Steve Jobs, who led Apple, or Bill Gates, who co-founded Microsoft, is challenged by some.

"There are superstar CEOs that definitely are the driving force of the company, but while they are out there, they are rare," said Charles Elson, a corporate governance expert at the University of Delaware.

Elson says that boards should look at overall levels of pay within their own company, rather than benchmarking pay against CEOs working in the same industry. He also says companies are paying too much to retain their chief executives when there is little evidence they'll move to competitors.

For the annual CEO pay study, Equilar assessed data from 338 companies that filed proxy statements with regulators between Jan. 1 and April 30, 2015. To calculate a CEO's pay package, Equilar and the AP looked at salary, stock and option awards, perks and bonuses.

The study only includes chief executives who have been at the helm of their company for at least two years. Because of these criteria, there are some notable omissions from the list.

Among other findings:

• The industry with the biggest pay increase was basic materials, which includes oil, mining and chemical companies. Median pay at these companies rose by 15 percent last year. Exxon Mobil CEO Rex Tillerson was the highest paid, making $28.4 million last year.
• Female CEOs again had a median pay package worth more than their male counterparts. Last year, women chief executives earned $15.9 million compared with the median salary for male CEOs of $10.4 million. The number of female CEOs included in the study rose to 17 from 12 in the previous year. Yahoo CEO Marissa Mayer was the highest paid, earning $42.1 million, which placed her fifth among CEOs in the survey.
• Richard Hayne, the CEO and co-founder of Urban Outfitters, received the biggest pay bump. His compensation soared 682 percent to $535,636. Most of the increase came from his performance cash bonus, which jumped to $500,000 from $35,000 a year earlier. Hayne returned to lead the company in 2012 after an absence of five years.

-Nakashima reported from Los Angeles.

 

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Never Pay Full Price for a Movie Again -- Savings Experiment

May 26, 2015, 6:22 am

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Filed under: Personal Finance, Savings Experiment

Everyone loves seeing a summer flick on the big screen, but no one loves to pay extra fees for buying tickets online. Before you overpay, let's look at some other ways to save on a trip to the movies.

First, if you have children or you're just young at heart, check out Regal Cinemas. Regal offers $1 tickets to kids' movies every Tuesday and Wednesday morning, all summer long. For that price, the whole family can join in on the fun.

If the latest children's release isn't for you, don't worry. Most theaters offer discounts for students and seniors, too. Just bring an ID for proof of age, and if you qualify, you can save up to 60 percent off your ticket.

Next, if you happen to have AAA, it can help you save at the movies. Flash your card at theaters like AMC Bowtie, Showcase and Regal Cinemas, and get up to 40 percent off the regular price of admission.

If these discounts aren't doing it for you, how does a free movie sound? At AdvanceScreenings.com, you can enter your zip code and view a list of potential theaters that offer free movie screenings. They're not always available, but it's definitely worth a look.

The next time you to head out to see the latest blockbuster, remember these money-saving tips. You'll realize that you don't need to spend big bucks, just to see a movie on the big screen.

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Gym Operator Planet Fitness Plans IPO

May 26, 2015, 8:35 am

≫ Next: Market Wrap: Stocks Drop on Interest Rate Concerns, Greece

≪ Previous: Never Pay Full Price for a Movie Again -- Savings Experiment

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Filed under: Company News, Retail, Healthcare Industry, IPOs

NEW YORK -- Planet Fitness, the company known for its low-cost purple-and-yellow gyms, plans to go public.

The company said Tuesday that it filed a "draft registration statement" to the Securities and Exchange Commission for an initial public offering. The filing is confidential and the paperwork is sealed from the public. Under the law, companies that have revenue under $1 billion are able to submit confidential IPO drafts to the SEC.

Planet Fitness didn't say how many shares it would offer, what the stock would be priced at or how much money it plans to raise. It also didn't say when it expects the IPO to happen.

Becky Brown, a spokeswoman at Planet Fitness, confirmed the filing to The Associated Press Tuesday.

According to its website, Planet Fitness Inc. has more than 900 locations around the country, with gym memberships starting at $10 a month.

The company is headquartered in Newington, New Hampshire.

 

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Market Wrap: Stocks Drop on Interest Rate Concerns, Greece

May 26, 2015, 9:46 am

≫ Next: From Flat Broke at 37 to Self-Made Millionaire

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Filed under: Market News, Mergers & Acquisitions, Economic Indicators, European Union, Interest Rates

By Caroline Valetkevitch

NEW YORK -- U.S. stocks fell Tuesday, pushing the S&P 500 to its biggest decline in three weeks, weighed down by concerns about Greece and some upbeat data that fueled expectations that a U.S. rate hike could come sooner rather than later.

All 10 major S&P 500 sectors were lower, with a drop in oil prices weighing on energy shares and transportation stocks. The S&P energy index was down 1.6 percent, while the Dow Jones transportation average fell 1.6 percent and touched its lowest level since Oct. 23.

The dollar was up 1.3 percent against a basket of major currencies as commodity prices fell.

"You're seeing a lack of leadership, and you're seeing weakness in the transports continue ... and it's really the rails that have gotten hit the hardest mainly because of oil transport," said Robert Pavlik, chief market strategist at Boston Private Wealth in New York.

Reports Tuesday showed U.S. business investment spending plans increased solidly in April, consumer confidence perked up this month and house prices extended gains in March.

The buoyant data comes after Federal Reserve Chair Janet Yellen said Friday that the central bank could raise interest rates this year if the economy keeps improving as expected. The comments kept the prospects of a September rate increase high.

Adding to concerns was Greece, which has warned it may miss a June 5 debt repayment to the International Monetary Fund.

The prospect of higher rates is one of the biggest issues that's been weighing on the market, said Larry Peruzzi, senior equity trader at Cabrera Capital Markets Inc in Boston, though the day's move may have been exaggerated because the market was closed Monday for Memorial Day.

The Dow Jones industrial average (^DJI) fell 190.48 points, or 1.04 percent, to 18,041.54, the Standard & Poor's 500 index (^GSPC) lost 21.86 points, or 1.03 percent, to 2,104.2 and the Nasdaq composite (^IXIC) dropped 56.61 points, or 1.11 percent, to 5,032.75.

Movers and Shakers

Apple (AAPL), down 2.2 percent at $129.62, was the biggest drag on all three major indexes.

The Dow transportation average flirted with a 10 percent drop that would put it in correction territory and closed 9.4 percent below its record high set late in December. On an intraday basis, the index fell more than 10 percent from a high hit in November.

Charter Communications' (CHTR) shares were up 2.5 percent at $179.78 after it agreed to buy Time Warner Cable for $56 billion. Time Warner Cable (TWC) rose 7.2 percent to $183.60, well below Charter's cash and stock offer of $195.71.

Declining issues outnumbered advancing ones on the NYSE by 2,417 to 662, for a 3.65-to-1 ratio; on the Nasdaq, 2,071 issues fell and 683 advanced for a 3.03-to-1 ratio.

The benchmark S&P 500 index posted five new 52-week highs and seven new lows; the Nasdaq composite recorded 52 new highs and 77 new lows.

About 6.3 billion shares changed hands on U.S. exchanges, slightly above the 6.2 billion daily average for the month to date, according to BATS Global Markets.

What to watch Wednesday:

Earnings Season
These selected companies are scheduled to release quarterly financial results

• Amerco (UHAL)
• Chico's FAS (CHS)
• Costco (COST)
• DSW Inc. (DSW)
• Michael Kors Holdings (KORS)
• Palo Alto Networks (PANW)
• Tiffany & Co. (TIF)
• Toll Brothers (TOL)
• Valspar Corp. (VAL)

 

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From Flat Broke at 37 to Self-Made Millionaire

May 26, 2015, 10:00 pm

≫ Next: 6 Ways to Make Extra Money Using Social Media

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Filed under: Small Business, Personal Finance, Entrepreneurs, Professional Development, People

Through saving and investing, a lot of hard work and, in his words, more than a little luck, motivational business speaker and author Barry Maher went from being broke at age 37 to being a self-made millionaire and semi-retiree who can afford to retire completely.

What Does 'Semi-Retired' Really Mean?

Now 67, Maher only works when he wants, how he wants and as often as he wants. That sounds like a pretty sweet deal to me. But who knew this would be in the cards for the boy who started out selling greeting cards door-to-door?

Maher was self-employed through college and built a successful business selling advertising products from scratch, but sold it so he could pursue a career writing fiction. Unfortunately, he financed the sale, the new owners ran the business into the ground and he lost any chance of being paid in full.

"I only got about 30 to 40 percent of the base price and a small pittance of what was supposed to be royalties. What was intended to be an annuity turned into nothing with breathtaking speed." Making matters worse, his novels weren't selling well and he found himself flat broke at the age of 37.

So how did Maher turn that situation around to become so successful?

The Journey from Broke to Millionaire

Maher credits his becoming a millionaire in large part to making good money in the corporate world and as a speaker. Armed with his experience of building a business from nothing, Maher got a job with GTE as a salesman. "I busted my butt because I was absolutely broke," he confesses. "I worked ridiculous hours from the time I woke up to the time I collapsed into bed." Maher quickly became the Fortune 500 company's top salesman, earning a promotion and financial security.

With money to invest, Maher dabbled in the stock market. He admits that he doesn't have the time or the expertise to pick individual stocks, but he has bought many index funds that have done well over the years.

Maher also credits his frugality for helping him to save the money he has. As he explained, "Whenever I buy something I think of how hard I had to work to make the money for it." For example, he imagines his Honda Accord, not just as a car, but as whatever he had to do to earn the $25,000 it cost him. "That mindset always makes my Honda seem more attractive when I start to think about buying a Mercedes," Maher quips. Barry's view on his Honda is the same I have on my 1998 Chevy Lumina that I inherited from my grandmother.

One day, Maher's literary agent suggested that instead of writing more fiction, he should try his hand at a business book. Although dubious at first, Maher wrote a specialty book on Yellow Pages advertising and was soon asked to speak at small business events on the topic. Maher took this opportunity to broaden his field of expertise and he began consulting on various sales and management issues.

The book that really helped to establish Maher as a sought-after motivational speaker was "Filling the Glass: The Skeptic's Guide to Positive Thinking in Business," which was translated into a number of languages and was cited by "Today's Librarian" as "one of the seven essential popular business books."

Common Misconceptions about Millionaires

Maher stressed that many millionaires today live normal lifestyles free of limousines and yachts. He drives an economy car and lives in a typical house. Because he doesn't have a mortgage and is frugal, he could afford to retire when he was 60. As he points out, a million dollars doesn't have the same spending power it once did. The writer estimates that, excluding travel and business expenses, it costs him significantly less than $100,000 a year to maintain his lifestyle.

It is easy to be intimidated by Maher's success and accomplishments, but everyone has hiccups to overcome on the road to success. Even though he might have changed some of his past decisions, Maher acknowledges that without his experiences, he wouldn't have anything to pass on to others.

For example, Maher gave many free presentations until he got himself established as a speaker. His first gig as a paid speaker was an excruciating 6-hour seminar on the Yellow Pages that he put together himself. "I bored the paint off the walls," he recalls. "It was terrible! But if I hadn't done that wrong, I never would have learned how to do it right."

What Financial Freedom Really Looks Like

Although he has been broke, Maher has never been seriously in debt. "I don't buy it until I have the cash to pay for it," he says. For Maher, the biggest advantage of avoiding debt was having the financial freedom to try a new career if he didn't enjoy his job.

He built an emergency fund to know that he wouldn't starve if nobody hired him for six months or a year. In the corporate world, this financial independence earned Maher a reputation for being brutally honest, "because I knew I could walk away from that job anytime I wanted. That is the kind of freedom that kept me working."

"The best investment you're ever going to make is the investment in yourself," says Maher. "You can't take charge of your life if you're paying money to other people. Then the bank's in charge of your life. You've got to get out from under the thumb of debt if you're actually going to succeed in the way that you would like to."

Advice to Give Your Younger Self

I asked Maher what he would tell young workers about how to succeed:

1. Do your homework. Maher's worst investment was buying a franchise for a sales business. "I thought I'd investigated it, but I really hadn't and it turned out to be a loss. I basically had to write it off."
2. Be open to trying something new. If you have too rigid an idea of what your career or your retirement will look like, then you will miss amazing opportunities that present themselves.
3. Recognize the real cost of your purchases. You might think of frugality as being a drag, but if you don't acknowledge that every dollar you spend costs you time at work, then you will never get out of the work-spend-work-spend treadmill.
4. Don't be in denial about your situation. It's hard to fess up when things are going the way you want, but you have to own your situation, drop the denial and work your crazy to get out of it.

Maher is among many retirees and semi-retirees whose journey to financial freedom is featured in the free eBook, "The Definitive Guide to Becoming the Retiree Next Door," published by MoneyTips.com. While most Americans worry that they won't have enough money to retire, this group of successful retirees shows that many fulfilling paths are possible despite the challenges.

 

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6 Ways to Make Extra Money Using Social Media

May 26, 2015, 10:00 pm

≫ Next: Which Retirement Account Should You Open First?

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Filed under: Fast Money, Mobile Technology, Computers

By Mikey Rox

It's safe to assume that if you're not making money on social media, you're probably just casually wasting time on it. Flip that script. Make your profiles pull in a profit with these seven tips to on how to squeeze the juice from your tweets, posts, pics, and more.

1. Join the Sharing Economy

My friends are probably tired of hearing about all the ways I add extra cash to my savings account by participating in the sharing economy -- a recently coined term that denotes a person sharing something he or she possesses with someone else who's willing to pay for it -- but I harp on it for a reason. In many cases, this is easy money -- and I want them to get in on the action. Examples of commodities in the sharing economy including housing, dog walking/sitting services, personal property (like bikes and tools), cars and more.

I rent my homes to travelers via Airbnb and other micro-subletting sites; I list my dog-sitting services on DogVacay; and people can rent my bicycles by visiting Spinlister. All of these side hustles earn cheddar on items I already have or low-level services I have to offer, and I think it's brilliant. There are many more ways to participate, so do some research of your own to find out how the sharing economy can fit into your life. There's a certain time commitment attached to some of these revenue avenues, but if you have some to spare, you should be turning a profit. Time is money, after all.

2. Pursue Blogging Opportunities at Outlets That Pay

Have something to say? There are blogs for just about every topic you can imagine -- and some of them pay. Take my success as a personal finance blogger, for example.

Just a few years ago I was a journalist primarily covering LGBT lifestyle topics and writing essays for mainstream publications like the Baltimore Sun and Examiner newspapers. I'm naturally someone who "lives my best life on a budget," and I had a money-saving topic about which I wanted to write. Wise Bread accepted my article pitch, which was initially a one-off engagement four years ago, but subsequently asked for more. After writing for Wise Bread for a year or so, other personal finance sites started to notice my work and offering me gigs. It just snowballed from there. Today, I have hundreds of published personal finance posts.

It's possible for you to fall into a great gig like this too, considering that you have fresh ideas written from a new perspective. Research the blogs in which you have the most interest and start making pitches. You've gotta start somewhere, and this is square one. Social media angle? Publishers love to work with writers who have big social media followings.

3. Follow and Use the Apps of Your Favorite Brands

Depending on how you look at "making money," you may want to download the apps and follow the social media pages of your favorite brands, some of which have opportunities to win prizes or earn swag when you become a brand ambassador. In that case, receiving free product from a brand on which you typically spend money is like keeping more of your own in your pocket. In addition, many popular businesses -- especially the "fun" brands -- offer cash for referrals, and that's as easy as sharing on social media the affiliate link generated for you by the company.

​4. Publish Sponsored Tweets or Posts

It's always paid to be popular -- you remember high school, don't you? But these days you can turn popularity into actual dollars if you're one of the cool kids on social media. "Even if you have a small audience, you can literally sign up for Sponsored Tweets right now, select the topics you'd normally talk about, and wait to be matched with advertisers for campaigns," adds Sakita Holley, founder of House of Success, a lifestyle brand-relation firm in New York. "Or, you can work with various social media influencer/advertiser agencies that have appeared over the last few years to help you sell your influence online. You could also pitch prospective advertisers directly by cold calling, emailing, or connecting over social media."

5. Create How-to Content on YouTube

I'm a big fan of how-to videos on YouTube, especially when they help me learn a skill for free that I would otherwise pay for. A friend of mine recently fixed his dishwasher using a YouTube how-to, and I was quite impressed. While these videos are free for users, however, you can make money based on the viewers it brings in, according to Jason Parks, owner of The Media Captain, a social marketing agency in Columbus, Ohio.

"Creating 'how-to' content on a niche topic can earn you money on social media," he says. "I worked with a tennis pro who created a simple YouTube video, 'How to Hit a Faster Tennis Serve.' We monetized the video (which now has over 150,000 views), and he gets money based on the overall view count. We have also created other videos after the success of the initial video. While the tennis pro can't quit his day job, the extra money into his bank account definitely doesn't hurt."

6. Post on Craigslist, Thumbtack, LinkedIn and More

OK, cards on the table: My media business was built on posting ads on Craigslist in New York City and other major metro areas, back when I couldn't afford other types of advertising. I know firsthand how social service-listing sites are bankable, and if you have a service or product to offer, you can make money, too. Find the network that suits your service or product best and work hard at building your profile and building a reputation.

 

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Which Retirement Account Should You Open First?

May 26, 2015, 10:00 pm

≫ Next: Ask Stacy: Should You Take Out a Reverse Mortgage?

≪ Previous: 6 Ways to Make Extra Money Using Social Media

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Filed under: Retirement, Retirement Plans, 401K, IRA, Roth IRA

By Sharon Epperson

Your first priority when it comes to saving for retirement should be to make sure you're putting away enough money. But once you've earmarked a percentage of pay for retirement savings, where do you put it?

Research shows that if you start saving 15 percent of your pay when you're 35, you should have enough money by age 65 to live comfortably in retirement. "The most important question is 'Are you saving 15 percent, including an employer match?' " said Stuart Ritter, senior financial planner at T. Rowe Price. "Then you have to decide which accounts to use in order to save that 15 percent."

Ritter suggests prioritizing retirement accounts in three steps: Match. Roth. Traditional. Direct your first retirement savings dollars to a traditional workplace plan like a 401(k) or 403(b) account, if you have access to one.

"First and foremost, take advantage of that company match," agrees certified financial planner Douglas Boneparth, vice president at Life and Wealth Planning in New York. For example, if your company matches the first 5 percent of pay you put into your 401(k) with an employer contribution, put at least 5 percent of your pay into that plan first. That match is free money.

Max Out Your Roth Options

Roth contributions are a popular choice for retirement savings, and many large companies now offer a Roth 401(k) option in addition to a traditional 401(k). With a traditional 401(k), your pretax contributions grow tax-deferred until you withdraw the money at age 59½. But you'll pay taxes when you take the money out in retirement.

With a Roth 401(k), like a Roth IRA, your after-tax contributions grow tax-deferred and then withdrawals after age 59½ are generally tax-free as long as you follow IRS guidelines. But unlike Roth IRAs, there are no income limits to contributing to a Roth 401(k). Once you leave your employer, you can generally roll over a Roth 401(k) into a Roth IRA with no income requirements and no required minimum distributions at age 70½.

In 2015, you can contribute a maximum of $18,000 to a traditional 401(k), Roth 401(k) or combination of the two. Workers who are 50 or older can put away an extra $6,000, or a total of $24,000 into these accounts. You can contribute up to $5,500 to a Roth IRA or $6,500 if you're 50 or older. However, Roth IRA contributions have income requirements. You have to make less than $131,000 if you're single to contribute. Married couples filing jointly have to make less than $193,000.

"Once you've contributed the maximum to a Roth 401(k), then if you're eligible, do a Roth IRA," Ritter said. "If your company doesn't offer a Roth 401(k), contribute enough to your traditional 401(k) to get the company match. Then use a Roth IRA."

Sock Away Extra Savings in Your 401(k)

If you don't have a Roth 401(k) option and have already maxed out or are ineligible to contribute to a Roth IRA, Ritter suggests putting any extra dollars you have to save into a traditional 401(k) until your reach the maximum contribution limit or your 15 percent goal.

Boneparth says most of his clients prefer contributing to a traditional 401(k) instead of the Roth 401(k), even if the option is available. "There's something about getting the tax savings now that people like. But for most retirement savers making contributions to a Roth account first makes sense," he said.

Fund a Taxable Account

If you still haven't reached your retirement savings goal, or need to save more, and you have maxed out all of your tax-advantaged options, earmark retirement savings in a taxable, brokerage account. In the end, Ritter notes, "the biggest driver of what you'll have to spend in retirement is how much you're saving."

Boneparth advises clients to "create a tax-triangle" with retirement accounts. "When you think of how you are going to utilize your assets in retirement think of the tax aspect," he says. "There's money in individual accounts that's taxable. There are tax-deferred accounts, including traditional 401(k)s. And there's money that grows and then comes out tax-free-that's the Roth account."

By prioritizing your accounts and separating them into different "tax buckets," you've done both retirement planning and tax planning for whatever tax bracket you may be in later in your life. "Regardless of what you're tax bracket will be in retirement, you're going to give yourself the most flexibility," Boneparth said.

 

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Ask Stacy: Should You Take Out a Reverse Mortgage?

May 26, 2015, 10:00 pm

≫ Next: Your Credit and Debit Cards Are About to Change -- Here's Why

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Filed under: Mortgages, Real Estate, Personal Finance, Estate Planning, Financial Education

By Stacy Johnson

Reverse mortgages are a popular topic these days, as evidenced by three questions I've received in just the last three weeks:

Is a reverse mortgage something to look at? We have a 30 year mortgage on our house for $70,000 and thought it might be easier to let the house make the payments for us. The house is worth somewhere around $225,000. -Roger

Can you give me a real, down-to-earth, honest-to-goodness explanation to the reverse mortgage currently being touted to seniors 62 and older. It almost seems like it's too good to be true, and you know what they say about those kinds of deals! -Larry

What is your thought on reverse mortgages. I own my home, recently widowed and owe approximately $25,000. -Mary

OK, Roger, Larry and Mary, let's look under the hood of this much publicized way to add some gold to your golden years.

What's a Reverse Mortgage?

Reverse mortgages are aptly named because they're loans that send you payments every month rather than the other way around. They allow you to convert your home equity into cash, without having to sell your home or make payments. So a reverse mortgage could be perfect for retirees with lots of home equity but little income. As with any mortgage, you apply through a lender. (You'll find a list of lenders by state here.)

Once your reverse mortgage is in place, you can choose to get payments in a lump sum, or monthly for a certain period of time, or for as long as you live in your home.

But to understand reverse mortgages, forget the "reverse" and focus on the "mortgage." Because at the end of the day, that's all they are -- a mortgage.

How They Work

In years past, pretty much any homeowner 62 or older who could fog a mirror and had home equity could qualify. Since the Great Recession, however, there are more hoops to jump through.

• You have to prove you have the resources to pay the taxes, insurance and other expenses required to maintain your home. If you can't, part of the loan proceeds may be carved out as a set-aside to take care of these expenses.
• You need to own your home outright, or have a low enough mortgage balance so it can be paid off with the proceeds from the reverse mortgage.
• If you have bad credit, you'll need to explain it. Then the lender will determine whether your explanation qualifies as an extenuating circumstance.

Once you get a reverse mortgage, you can repay it anytime, but it must be repaid when you die or when the home ceases to be your permanent residence. If you or your heirs can't repay the loan, your home goes to the lender.

While there are different types of reverse mortgages, the most common are home-equity conversion mortgages, or HECMs, backed by the U.S. Department of Housing and Urban Development.

As with any money you borrow, reverse mortgages are tax-free. You can get the money in several ways:

• Fixed monthly payments over a specific number of months.
• Fixed monthly payments for life, or as long as you live in the home.
• A line of credit you draw on as often as you want in whatever amounts you'd like.
• A combination of monthly payments and line of credit.

You won't give up the title to your home. You'll still own it.

The amount of the loan and payments will vary based on your equity, along with the size and length of the payments and your age. To see how much you could be eligible for, use this calculator.

What's the Catch?

Catch No. 1: Reverse mortgages come with big fees, and the rates aren't anything to write home about either.

When I did my first TV story on reverse mortgages about 12 years ago, the homeowner I interviewed insisted he paid nothing for his reverse mortgage. He was right in the sense that he didn't write a check to cover the fees, because they were rolled into the mortgage. But that doesn't mean the mortgage was fee-free. In fact, reverse mortgages typically have higher fees than regular mortgages. From the FTC's reverse mortgage page:

Lenders generally charge an origination fee, a mortgage insurance premium (for federally insured HECMs), and other closing costs for a reverse mortgage. Lenders also may charge servicing fees during the term of the mortgage.

Standard HECMs include a mortgage origination fee, based not on how much you borrow, but on the value of your home. If you home is worth less than $125,000, the lender can charge up to $2,500. If it's worth more than that, the fee is 2 percent of the first $200,000 of your home's value, plus 1 percent of the amount over $200,000, with a cap of $6,000. So if your home is worth $400,000 or more, you'll pay a $6,000 origination fee, no matter how much you borrow.

Let's look at an example to illustrate both rates and fees. Using the same reverse mortgage calculator mentioned above, we'll say we were born in 1943, own a home in Fort Lauderdale, Florida, with no mortgage and a $400,000 value. We want to borrow $100,000. Results:

• Interest rate: 6.31 percent. This is a combination of the 5.06 percent loan interest rate and the 1.25 percent mortgage insurance. Today's rate for a conventional 30-year mortgage loan? Four percent.
• Max available to borrow: $236,400. That's about 60 percent loan-to-value.
• Loan origination fee: $6,000. Ouch.
• Mortgage insurance: $2,000. Ouch.
• Other closing costs: $2,555.70. Ouch.

So that means we're paying more than $10,000 ($6,000 + $2,000 + $2,555) in fees to borrow $100,000: more than 10 percent. Plus, we're being charged more than 6 percent on the loan. Not exactly a sweetheart deal.

As with any mortgage, you should shop and compare reverse mortgages and ask about fees. While some may be set by law, others could vary by lender.

Catch No. 2: Although you may be receiving checks in the mail, don't lose sight of the fact that you're accruing interest, and that unpaid interest is increasing the size of the loan. The longer the loan remains outstanding, the more interest it will accrue.

Should you choose lifetime payments and stay in your home for decades, it's likely you'll have little, if any, equity to leave to your heirs, unless, of course, the home increases in value faster than the accumulated interest.

Catch No. 3: Because you still own the house, you remain responsible for property taxes, insurance and maintenance. As I've already mentioned, you'll have to prove you have the financial resources to pay them.

The Bottom Line

The benefits of tapping your home's equity without selling your home or making payments are obvious. Whether a reverse mortgage makes sense for you, however, will depend on your situation as well as other available options you may have. We hit on this topic last year with Looking at a Reverse Mortgage? Explore These 14 Alternatives First.

If it seems I'm critical of reverse mortgages, that's because I think the fees are high and I've personally witnessed people who didn't realize they were paying them. But a reverse mortgage can be the difference between living and merely surviving. If it's something that will enhance your life, do it. Just understand what you're doing and shop carefully.

Before you're allowed to take out a reverse mortgage, you'll be required to receive counseling from an FHA-approved reverse mortgage counselor. So if you're thinking of a reverse mortgage, call one in advance with questions. The vast majority are happy to help free of charge.

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Got a question you'd like answered?

You can ask a question simply by hitting "reply" to our email newsletter. If you're not subscribed, fix that right now by clicking here.

The questions I'm likeliest to answer are those that will interest other readers. In other words, don't ask for super-specific advice that applies only to you. And if I don't get to your question, promise not to hate me. I do my best, but I get way more questions than I have time to answer.

About me

I founded Money Talks News in 1991. I've earned a CPA (currently inactive), and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate. Got some time to kill? You can learn more about me here.

Like this article? Sign up for our newsletter and we'll send you a regular digest of our newest stories, full of money saving tips and advice, free! We'll also email you a PDF of Stacy Johnson's "205 Ways to Save Money" as soon as you've subscribed. It's full of great tips that'll help you save a ton of extra cash. It doesn't cost a dime, so why wait?

 

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Your Credit and Debit Cards Are About to Change -- Here's Why

May 26, 2015, 10:00 pm

≫ Next: Data Theft at ATMs Is Soaring: What You Need to Know

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Filed under: Identity Theft, Banking, Credit Cards, Consumer Protection, Debit Cards

The plastic we carry in our wallets will be quite different in the near future. The big change is seemingly innocuous -- a microchip embedded right above the first series of numbers on the card.

But that small metal stamp is the foundation of a system that promises more robust security for all parties involved in a transaction. Chip cards have been the norm for years in other countries, but they're only now starting to see full-scale rollout here in the U.S. And it's about time, too.

Old Technology in a New World

The traditional credit and debit card in this country packs its data onto the magnetic strip on the back of the plastic -- an innovation that dates from the 1970s.

This isn't particularly secure, since criminals need only possess the card and approximate the holder's signature when making a purchase. Also, with the right equipment, it isn't difficult to "skim," or copy, that data directly from the stripe.

As a result, America is a haven of card fraud. According to statistics compiled by The Economist, in 2012 total losses from the activity worldwide amounted to over $11 billion. The U.S. was responsible for nearly half of that figure.

In contrast, a card embedded with an EMV chip -- "EMV" stands for the members of the consortium that came up with the standard: EuroPay, MasterCard (MA) and Visa (V) -- encodes the card's information.

In most of the world, chip cards feature an important extra wall of security -- a PIN number. This must be input by the cardholder in order to complete the transaction.

This "chip-and-PIN" setup is clearly more secure ... at least for "card present" (face-to-face transactions where the customer presents the plastic) interactions. According to research by the Federal Reserve Bank of Atlanta, in the first year (2004) of large-scale chip-and-pin implementation in the U.K., total fraud losses stood at 505 million pounds ($767 million). By 2010, that number had dropped by nearly 30 percent to 365 million pounds ($556 million).

The difference would be more dramatic if it weren't for "card not present" transactions, such as the ones made by phone or online rather than face-to-face -- after all, without a PIN reader, it's not possible to use the PIN for verification (solutions are being developed, but none have yet found widespread adaptation). Fraud losses for CNP transactions actually rose over the same period, to 227 million ($352 million) in 2010 from 151 million pounds ($234 million) six years earlier.

Nevertheless, the big credit card companies -- Visa, MasterCard, Discover Financial Services (DFS) American Express (AXP) -- have set a date of Oct. 1 for merchants to implement the technology that can process chip card payments.

After that, according to the terms of their respective merchant agreements, the costs of compensating for fraudulent card-present transactions will be paid by the party least compliant with EMV transaction standards -- in other words, the merchant who hasn't properly upgraded its system to handle the new cards.

PINned to an Upgrade

Although certain nationwide retailers such as Wal-Mart (WMT) have upgraded their systems to take chip card payments in their stores, many smaller enterprises have yet to do so. This, of course, is a matter of resources. A smaller store or chain of stores might not have the capital to buy and install the necessary equipment..

Compounding this, some merchants have complained about delays in obtaining chip card readers due to backlogs from manufacturers. Apparently, the latter can't make a sufficient number of the machines quickly enough.

The credit card giants probably took this at least some of this into account; the full implementation is going to be slow and gradual. The chip cards the major issuers have been sending out still have that old-fashioned magnetic strip on the back of the card, in addition to the chip. So they'll still work in terminals not equipped to handle chip transactions.

Even at the points of sale that can crunch chip purchases, a PIN will not (yet) be required -- like chip technology to begin with, adding PIN verification requires extra technology in place to process the transaction. Instead, the cards being made and sent out these days are "chip-and-signature" products, requiring only an autograph from the cardholder for user authentication... exactly like those vulnerable strip-only cards.

Your Card Is in the Mail

Many card issuers are already well into the chip era. Bank of America (BAC), for one, has had the metal square on several of its card products for some time now. American Express began sending out its chip cards in 2013.

All told, around 575 million chip debit and credit cards are expected to be in the possession of cardholders by the end of this year. For cardholders, this transition will be automatic and largely painless: Issuers will replace expiring magnetic-strip-only cards with chip cards.

According to a recent article in The Wall Street Journal, by the end of this year around 75 percent of credit and 40 percent of debit cards should be chip cards.

Although these products will eventually be more secure than mag-stripe-only ones after full chip-and-PIN technology is implemented, as a card owner, you should always remain vigilant and continue to check your card activity on a regular basis. If any unauthorized charges have been made, contact the card's issuer right away.

It's early days yet, and there will certainly be hiccups on the way to America getting up-to-date on payment card technology. But it's the right direction to move in, and every key party involved in credit card commerce -- issuer, network operator, merchant and cardholder -- ultimately stands to benefit from a safer system.

Motley Fool contributor Eric Volkman has no position in any stocks mentioned. The Motley Fool recommends American Express, Bank of America, MasterCard and Visa. The Motley Fool owns shares of Bank of America, JPMorgan Chase, MasterCard and Visa. Try any of our Foolish newsletter services free for 30 days. Check out The Motley Fool's one great stock to buy for 2015 and beyond.

 

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