Keeping your cool can be hard to do when the markets go on their roller-coaster rides of late. But it is vital to have strategies in place that prepare you both financially and psychologically to handle this inevitable market volatility.

Have a Game Plan Against Panic
Having predetermined guidelines that anticipate turbulent times can help prevent emotion from dictating your decisions. If you're an active investor, a trading discipline can help you stick to a long-term strategy. For example, you might determine in advance that you will take profits when the market rises by a certain percentage, and buy when the market has fallen by a set percentage. Or you might take a core-and-satellite approach, combining the use of buy-and-hold principles for the bulk of your portfolio with tactical investing based on a shorter-term market outlook. You can use diversification to offset the risks of certain holdings with those of others. Diversification may not ensure a profit or guarantee against a loss, but it can help you understand and balance your risk in advance.

Consider Playing Defense
Many investors try to prepare for volatile periods by reexamining their allocation to such defensive sectors as consumer staples or utilities (though, like all stocks, those sectors involve their own risks). Dividends also can help cushion the impact of price swings.

Use Cash to Help Manage Your Mindset
Cash can be the financial equivalent of taking deep breaths to relax. It can enhance your ability to make thoughtful decisions instead of impulsive ones. If you've established an appropriate asset allocation, you should have enough resources on hand to prevent having to sell stocks to meet ordinary expenses or, if you've used leverage, a margin call.

A cash cushion coupled with a disciplined investing strategy can change your perspective on market downturns. Knowing that you're positioned to take advantage of a market swoon by picking up bargains may increase your willingness to be patient.

Know What You Own and Why You Own It
When the market sneezes, knowing why you originally made a specific investment can help you evaluate whether those reasons still hold, regardless of what the overall market is doing. If you don't understand why a security is in your portfolio, find out. A stock may still be a good long-term opportunity even when its price has dropped.

Remember That Tomorrow is Another Day
The market is nothing if not cyclical. Even if you wish you had sold at what turned out to be a market peak, or regret having sat out a buying opportunity, you may well get another chance at some point. Even if you're considering changes, a volatile market is probably the worst time to turn your portfolio inside out. A well-thought-out asset allocation is still the basis of good investment planning.

Learn From Your (and Others') Mistakes
Everyone looks good during bull markets, but smart investors emerge during the inevitable rough patches. Even the best aren't right all of the time. If an earlier choice now seems rash, sometimes the best strategy is to take a loss, learn from the experience, and apply the lesson to future decisions.

A qualified financial professional can help prepare you and your portfolio to both weather and take advantage of the market's ups and downs.

One of the reasons (Exchange Traded Funds) ETFs have gained ground with investors is because of their low annual expenses. Also, investing in an index means that trades are generally made only when the index itself changes. As a result, the trading costs required by frequent buying and selling of securities in the fund are minimized. We discussed some general characteristics of ETFs in part one of our discussion earlier this week, so let's further examine the mysterious ETF.

What Makes an ETF So Special?
ETFs are another example of passive index investing, which means an ETF--much like an index mutual fund--doesn't require a portfolio manager or a research staff to select securities; this greatly reduces the fund's overhead expenses. On the other hand, you will pay a commission each time you buy or sell ETF shares (just like stocks). For you, this means that a lump-sum investment into an ETF will likely be more cost-effective than dollar-cost averaging, which involves frequent, regular investments over time.

ETFs and Taxes
ETFs can be relatively tax efficient. Because it trades so infrequently, an ETF typically distributes few capital gains during the year. In the past, there have been times when some investors found themselves paying taxes on capital gains generated by a mutual fund, even though the value of their fund may actually have dropped. Although it is possible for an ETF to have capital gains, ETFs generally can minimize the ongoing capital gains taxes you'll pay.

Other Reasons to Invest in ETFs

• Exposure to a particular industry or sector of the market
• Because the minimum investment in an ETF is the cost of a single share, ETFs can be a low-cost way to make a diversified investment in alternative investments, a particular investing style, or geographic region.
• Loss Limits
  
• The ability to set a stop-loss limit on your ETF shares can help manage potential losses. A stop-loss order instructs your broker to sell your position if the shares fall to a certain price.
  

How to Evaluate an ETF

1) Look at the index it tracks. Understand what the index consists of and what rules it follows in selecting and weighting the securities in it.

2) Examine how long the fund and/or its underlying index have been in existence, and if possible, how both have performed in good times and bad.

3) Research the fund's expense ratios. The more straightforward its investing strategy, the lower expenses are likely to be. An index using futures contracts is likely to have higher expenses than one that simply replicates the S&P 500.

A qualified financial professional can help you decide if (and how) ETFs might fit your long-term investing strategy.

Exchange-traded funds (ETFs) have become increasingly popular since they were introduced in the United States in the mid-1990s. Their tax efficiencies and relatively low investing costs have attracted investors who like the idea of combining the diversification of mutual funds with the trading flexibility of stocks. ETFs can fill a unique role in your portfolio, but you need to understand just how they work and the differences among the dizzying variety of ETFs now available.

What is an ETF?
Like a mutual fund, an exchange-traded fund pools the money of many investors and purchases a group of securities. Like index mutual funds, most ETFs are passively managed. Instead of having a portfolio manager who uses his or her judgment to select specific stocks, bonds, or other securities to buy and sell, both index mutual funds and exchange-traded funds attempt to replicate the performance of a specific index.

However, a mutual fund is priced once a day, when the fund's net asset value is calculated after the market closes. If you buy after that, you will receive the next day's closing price. By contrast, an ETF is priced throughout the day and can be bought on margin or sold short--in other words, it's traded just as a stock is.

How ETFs Invest
Since their inception, most ETFs have invested in stocks or bonds, buying the shares represented in a particular index. For example, an ETF might track the Nasdaq 100, the S&P 500, or a bond index. Other ETFs invest in hard assets--for example, gold bullion. In such cases, a commodity or precious-metals ETF may buy futures contracts or quantities of bullion. With the rapid proliferation of ETFs in recent years, if there's an index, there's a good chance there's an ETF that invests in it.

The New Wave of ETFs
New and unique indexes are being developed every day. As a result, ETFs that might seem similar--for example, two funds that invest in large-cap stocks--can actually be quite different. Many indexes define which securities are included based on their market capitalization--the number of shares outstanding times the price per share. However, other indexes and the ETFs that mimic them may select or weight securities within the index based on fundamental factors, such as a stock's dividend yield.

Why is weighting important? Because it can affect the impact that individual securities have on the fund's result. For example, an index that is weighted by market cap will be more affected by underperformance at a large-cap company than it would be by an underperforming company with a smaller market cap. That's because the large-cap company would represent a larger share of the index. However, if the index weighted each security equally, each would have an equal impact on the index's performance.

Pros and Cons of Exchange-Traded Funds

Pros
ETFs can be traded throughout the day as price fluctuates
ETFs can be bought on margin, sold short, or traded using stop orders and limit orders, just as stocks can
ETFs do not have to hold cash or buy and sell securities to meet redemption demands by fund investors
Annual expenses are often lower, which can be especially important for long-term investors
Because ETFs typically trade securities infrequently, they have lower annual taxable distributions than a mutual fund
Cons
Dollar-cost averaging will require paying repeated commissions and will increase investing costs
If an ETF is organized as a unit investment trust, delays in reinvesting its dividends may hamper returns
An ETF doesn't necessarily trade at its net asset value, and bid-ask spreads may be wide for thinly traded issues or in volatile markets

More and more new indexes are being introduced, many of which cover narrow niches of the market, or use novel rules to choose securities. Many so-called rules-based ETFs are beginning to take on aspects of actively managed funds--for example, by limiting the percentage of the fund that can be devoted to a single security or industry.

But Wait...There's More.
As indicated above, one of the reasons ETFs have gained ground with investors is because of their low annual expenses. Later this week, we'll take a look at Part II of our ETF extravaganza and cover the advantages, trade offs, and special taxation associated with ETF investing.

Since the oldest baby boomers are now reaching retirement age, a lot of national attention has focused on this growing number of older Americans. We can all expect to live many years in retirement, but Social Security and Medicare will be strained. To make matters worse, most people are saving less than they should. Planning for a long, secure retirement has now become more important than ever.

Life Expectancy Trends
Gains in life expectancy over the last century have been dramatic. According to the National Center for Health Statistics (NCHS), from 1900 through 2004 (the most recent year for which statistics are available), life expectancy at birth for the total population increased from 47 to 78. Much of the gain in life expectancy at birth came in the first half of the 20th century, as public health projects and scientific discoveries helped control many of the infectious diseases and unsanitary conditions that led to a high number of childhood deaths.

Life expectancy for individuals who reach age 65 has also been steadily increasing. According to the NCHS, life expectancy for older individuals improved mainly in the latter half of the 20th century, due largely to advances in medicine, better access to health care, and healthier lifestyles. Someone reaching age 65 in 1950 could expect to live approximately 14 years longer (until about age 79), while someone reaching age 65 in 2004 could expect to live approximately 19 years longer (until about age 84).

Reduce the Odds of Outliving Your Money
Using life expectancy tables or calculators to estimate how long you'll live can help you plan for retirement. Once you understand how many years you might spend in retirement, it may be easier for you and your financial professional to put together a realistic plan to help ensure that your retirement funds will last for a lifetime.

Here are a few planning tips:

• Prepare for several financial scenarios. For example, how much money will you need if you live to age 75? Age 85? Age 95?
• Recalculate your life expectancy periodically. Statistically, life expectancy changes over time.
• Consider your spouse's life expectancy as well as your own when determining your retirement income needs. According to NCHS statistics, women live 5 years longer than men, on average, although the gap is slowly closing.
• Plan for the possibility of needing long-term care. The longer you live, the greater the chance that you'll need assistance with day-to-day tasks or even expensive nursing home care that could wipe out your retirement savings.

If you aren't already familiar with the alternative minimum tax (AMT), there's a good chance that your family soon will be. This is because its key figures aren't indexed for inflation. As a result, the AMT continues to snare more middle-income Americans every year. Additionally, because temporary legislative band-aids expired at the end of 2006, our nation's economic stage is set for a dramatic rise in the number of individuals who are affected.

What is the AMT?
The AMT is essentially a separate federal income tax system with its own tax rates and set of rules which governs the recognition and timing of income and expenses. If you're subject to the AMT, you have to calculate your taxes twice--once under the regular tax system and again under the AMT system. If your income tax liability under the AMT is greater than your liability under the regular tax system, the difference is reported as an additional tax on your federal income tax return.

Are You Subject to the AMT?
Part of the problem with the AMT is that, without doing some calculations, there's no easy way to determine whether you're subject to the tax. Key AMT "triggers" include the number of personal exemptions you claim, your miscellaneous itemized deductions, and your state and local tax deductions. So, for example, if you have a large family and live in a high-tax state, there's a good possibility you might have to contend with the AMT. IRS Form 1040 instructions include a worksheet that may help you determine whether you're subject to the AMT (an electronic version of this worksheet is also available on the IRS website), but you might need to complete IRS Form 6251 to know for sure.

AMT Adjustments
Differences between the regular and AMT calculations include:

• The standard deduction and deductions for personal exemptions are not allowed for purposes of calculating the AMT.
• Under the AMT calculation, no deduction is allowed for state and local taxes paid, or for certain miscellaneous itemized deductions.
• Under the AMT calculation, any deduction for medical expenses may also be reduced, and qualifying residence interest (e.g., mortgage or home equity loan interest) can only be deducted to the extent the loan proceeds are used to purchase, construct, or improve a principal residence.
• Special AMT treatment applies to the exercise of incentive stock options (ISOs) and to the treatment of certain depreciation deductions.

AMT Exemption Amounts
While the AMT takes away personal exemptions and a number of deductions, it substitutes a specific AMT exemption amount. The AMT exemption amount that you're entitled to depends on your filing status and income (AMT exemption amounts are phased out for individuals with higher incomes). A patchwork of legislation since 2001 has, along with other AMT provisions, pumped up AMT exemption amounts to stave off a spike in the number of taxpayers caught in the AMT "net." The bad news, though, is that the last legislative patch expired at the end of 2006. Unless Congress passes new legislation, 2007 AMT exemption amounts return to pre-2001 levels, and the number of taxpayers subject to AMT is expected to skyrocket.

Legislative Outlook
Several bills have been introduced in the current Congress relating to the AMT. Proposals range from another one-year patch to full repeal. The problem with repealing the AMT is that it would leave a significant revenue gap (the Joint Committee on Taxation projects that the AMT will account for almost $25 billion in revenue for the 2006 tax year). That means we're more likely to see another short-term fix than we are to see substantive reform.

Help is Available
Owing AMT can be an unpleasant surprise. It also turns a number of traditional tax planning strategies (e.g., accelerating deductions) on their heads , so it's a good idea to factor in the AMT before the end of the year, while there's still time to plan. If you think you might be subject to the AMT, it's worth sitting down to discuss your situation with a qualified tax professional. Until our federal government decides to substantially reform the current system, more American families will continue to carry this additional tax burden.

A record-keeping system is a planned, methodical approach to collecting, filing, and storing documents that are important to you and to other members of your family and household. While everyone saves at least some important documents and records, you may be uncertain of how to go about organizing your financial history, which records you should save, and how long to save each item.

Why Bother?
Creating a systematic approach to record keeping addresses these questions. It also offers several distinct advantages, while minimizing the risk of being unable to locate a critical document when it is urgently needed. Added emotional turmoil is never welcome at such times. The focus here is on records you must keep for financial planning and budgeting. However, a good record-keeping system requires retention of other important documents as well. Among these are items that may not be financial records per se, such as marriage and birth certificates, wills, deeds, trust documents, insurance policies, and medical proxy statements.

Save Valuable Time
Having an established record-keeping system means that when you sort and open the daily mail, you automatically know which items to save and where to put them. Without such a system, important bills and documents can be misplaced easily. Even a few items gone astray can be a source of major headaches later. Avoids lost records that can be costly

Documents of many types may be required for reference or verification long after you receive them. Tax auditors invariably demand documented support for tax return claims. Guarantees and warranties contain vital details usually soon forgotten. Proof of citizenship is required for employment and international travel. Other needs arise less frequently, but missing records usually bring plans to an abrupt halt while a desperate search is undertaken.

Example(s): Rob, an avid mountaineer, has a terrible accident that lands him in a hospital for surgery. He's pretty sure the name of his insurance company has a color in it, but his short-term memory is a little hazy from the fall. And unfortunately, his wife can't find the insurance policy or card. If only Rob had kept better records!

Avoid Added Emotional Turmoil in Stressful Times
Occasional periods of high stress are a given in our fast-paced world. Coping with the search for misplaced records is bearable, if unpleasant, in times of normal stress, but in crises and other urgent situations, you might ask, "Who needs this?"

Example(s): After 30 years, Ron's job is terminated by the ABC Company. Ron is fortunate in landing a comparable job with ABC's competitor, XYZ, Inc., but Human Resources at XYZ, Inc. requests proof of his citizenship before employing him. Ron recalls having his birth certificate years ago but has no idea where to look for it.

Others Can Better Manage Your Affairs If It Suddenly Becomes Necessary
Hopefully, you will never become incapacitated, but there is always a possibility. If it happens today, can someone easily take over your financial affairs? Or, as is too often the case, will they have no idea about your financial situation and the location of important records?

Example(s): You are on a business trip when your flight home on ABC Airlines crashes. Fortunately, you survive, but you spend several weeks in intensive care. Your significant other enters your hospital room to say, "Honey, the tax man called again requesting the paperwork for tax preparation. He said the extension you requested will run out soon." Will locating those records be a Herculean task?

Gathering the Data
A vital records log can be used to keep track of your records. The log is a worksheet that identifies where each of your important documents are located. It should be readily accessible so that in times of crisis, your important records can be easily found.

When you inherit a 401(k) plan account, the options available to you depend on a number of factors, including the terms of the 401(k) plan and your relationship to the deceased 401(k) plan participant. In general, you'll have four options: take an immediate distribution, disclaim all or part of the assets, leave the money in the 401(k) plan (if the plan permits), or roll the funds over to an IRA.

Should You Take the Cash?
Obviously, if you need the funds immediately, taking a lump-sum distribution from the 401(k) plan may be your only viable alternative. But you'll have to pay ordinary income tax on the distribution (certain exclusions apply; talk to your financial professional for details).

A lump sum might also be attractive if you're entitled to a distribution of employer stock. You may be able to pay ordinary income tax on just the participant's basis in the stock, and defer tax on the appreciation (also called "net unrealized appreciation") until you sell the stock in the future--at capital gain rates.

What's a Disclaimer?
When you disclaim (i.e., refuse to accept) 401(k) assets, they pass instead to the plan participant's contingent beneficiary, or estate if there is no contingent beneficiary. In general, you must give the plan written notice of your intent to disclaim the funds within nine months after the participant's death. But be careful not to exercise control over the funds in the meantime (for example, by choosing a distribution option or by exercising investment control), or you may lose your ability to disclaim the funds.

A disclaimer may be an attractive option if you're sure you won't need the funds, and the transfer to the contingent beneficiary makes good economic and estate planning sense.

The Problem With 401(k) Plans
If you're like most beneficiaries, your goal will be to stretch payments out as long as possible, taking full advantage of the tax deferral offered by retirement plans. This means either leaving the assets in the 401(k) plan, or rolling them over to an IRA.

For most, leaving the funds in the 401(k) plan isn't the best choice for two reasons. First, the investment alternatives available to you in a 401(k) plan are limited to the ones selected by the employer. Second, the distribution options offered by a 401(k) plan typically aren't as flexible as those available in an IRA. In fact, many 401(k) plans require beneficiaries to take distributions shortly after the participant's death.

Roll the Funds Over to an IRA
Unless the 401(k) plan offers a unique investment alternative, rolling the 401(k) assets over to an IRA will usually be your best choice. IRAs offer virtually limitless investment options. And when it comes time to take distributions from the plan, IRAs offer the most flexible payment provisions. But, before deciding on a rollover, make sure you understand any fees and expenses that may apply.

If you're a surviving spouse, you'll have to decide between rolling the funds over to your own IRA, or to an IRA that you establish in the participant's name, with you specified as the beneficiary (this is referred to as an "inherited IRA").

Which Should you Choose?
In most cases, spouses are better off rolling the funds over to their own IRA. A rollover is typically appropriate only if you're younger than 59½ and you think you'll need the funds before you reach that age. That's because distributions from an inherited IRA aren't subject to the 10% early distribution penalty tax. (In contrast, distributions from your own IRA before age 59½ are subject to the 10% penalty tax unless an exception applies.)

What About Non-Spouses?
If you're not the surviving spouse, you don't have the option of rolling the 401(k) assets over to your own IRA. But thanks to the Pension Protection Act of 2006, you may be able to make a direct rollover of the 401(k) funds to an inherited IRA. A 401(k) plan isn't required to offer this option, so check with your plan administrator. This new rule applies to distributions you receive after 2006.

The rules governing inherited 401(k) plan accounts are complex. A financial advisor can help you sort through the alternatives, and make the decision most appropriate for your individual circumstances.

Most lenders use an automated credit scoring system to help determine your creditworthiness. The higher your credit score, the more credit-worthy you appear. One of the factors built into the scoring is your debt-to-credit-limit ratio (the amount of debt you owe compared to your total credit limit for all cards). Lenders like to see ratios indicating you're indebted for balances less than 30% of your total overall limit. Generally, if your debt-to-credit-limit ratio is higher than that, then reducing your debt will improve your credit score. But how you reduce your debt can make a difference.

Act Carefully
You may believe that you should consolidate several credit card balances on one card with a low interest rate, and then close the paid-off accounts. Don't. While it makes sense to transfer high-interest balances to accounts with lower rates, you should keep the paid-off accounts open in order to maintain the highest possible total available credit.

Protect Yourself
Many consumers want to close unused cards in order to reduce their exposure to identity theft through the fraudulent use of inactive open lines of credit. This is a valid concern; however, it should be weighed carefully against the negative effects of the credit scoring system. This is a tough choice--and affects every consumer differently. If you have a specific question, you should seek advice from a financial professional.

The Credit Report is a Different Story
Even though your credit score may be affected, it's important to note that paying off a delinquent or collections account will not necessarily remove the negative information from your credit report. You still have to go through the necessary credit repair steps in order to correct your file.

So you've racked up thousands of dollars in student loans. Graduation is barely in your rear-view mirror, and the student loan companies are contacting you weekly about your soon-to-begin repayments. And if you didn't have enough on your mind already, we have to inform you that interest rates on variable student loan products just went up as well. Despite the increasing costs of higher education (and your burning desire to pursue graduate school) our federal government has a multi-trillion-dollar national deficit to repay...and apparently Uncle Sam's target is our nation's college students.

What's New
As of July 1, 2007, the interest rate on Stafford loans in repayment increased from 7.14% to 7.22%. The interest rate on in-school, grace, or deferment status Stafford loans went from 6.54% to 6.62%. And the rate for PLUS loans jumped from 7.94% to 8.02%. These rates will be in effect through June 30, 2008. The Department of Education sets the rates once each year based on the last three-month Treasury bill auction held in May.

These new rates apply only to loans issued on or after July 1, 1998 and before July 1, 2006. For all Stafford and PLUS loans issued on or after July 1, 2006, the loans will have a fixed interest rate--6.8% for Stafford loans and 8.5% for PLUS loans.

Keep Your Promise to Repay
Student loan repayment is a serious matter, especially since it directly affects your credit score. The main thing to remember is to communicate with your lender. If you are unable to make continuous monthly payments, just pick up the phone and let them know. They understand how most recent graduates are on the lower end of the economic scale and will usually work with you to arrange a favorable payback schedule.

With today's busy lifestyles, many people view a nice vacation every year as an entitlement, even if it means going into massive debt to pay for it. We understand the rationale...You work so hard all year and deserve a tropical break, especially after listening all winter about the fancy vacation plans of friends, co-workers, and neighbors. Of course everyone needs a break, and we all naturally want to have fond memories of endless summer days spent romping on the beach. But how can you keep those vacation costs from spiraling out of control?

Can You Really Afford It?
First, assess honestly whether you can afford the vacation you're thinking about. If you have to borrow most of the money to pay for it, then you probably can't afford it. If you do borrow to pay for your trip, you might find yourself financially strapped later on if the car dies or the roof starts leaking. At the very least, you'll inherit the stress that comes with trying to pay off that debt.

Think Outside the Vacation Box
Not being able to take a dream vacation doesn't mean you can't take a vacation at all. Everyone needs time away from their job and normal family responsibilities to recharge. If you just don't have the budget for the getaway of your dreams, then think of other creative ways to spend your time off. Here are some ideas:

• Try a few long weekends instead of one or two consecutive weeks. Perhaps you can afford a couple of nights at a hotel or bed and breakfast instead of all week. Or maybe you can camp for a few nights at a state or national park, where rates are very reasonable.
• Vacation from home. Take day trips into a nearby city and visit museums, restaurants, and other attractions. Or head out to the country for a hike, swim, and picnic. Doing things out of the ordinary, like eating breakfast three times a day or setting up a tent in the living room to play games and sleep in, can be a big hit if you have kids. (Most young kids usually just like being with their parents and are to tag along for whatever you have planned.)
• Let older kids pick an activity. It might not be Disney World, but what about a trip to an amusement or water park, a day or two at the beach, an afternoon canoeing or fishing, a movie and dinner outing, or a ballgame? Instead of lamenting the fact that you can't take an exotic vacation, focus on what you can do and enjoy the time with your family.
• Consider house swapping. If you're willing to trade houses with other like-minded families to save on room-and-board costs, there are several websites where you can find more information.

Plan Now for Next Year (or the Year After)
It's never too early to start thinking about next year, or the year after that. Start saving now for that future getaway by making a budget and seeing where you might be able to squeeze a few dollars. Consider opening a separate "Vacation Account" for those funds; otherwise, the money may get lost in your regular savings account and used for other purposes. Where you put your money will depend on your time horizon and other factors. A qualified financial professional can help you examine your options.

If you can contribute monthly to your vacation fund, great. If you can't, consider adding small windfalls like your tax refund, year-end bonus, or cash from birthdays and holidays. And when it comes time to actually plan your big vacation, keep cost-cutting travel tips in mind. For example, you might consider less convenient flights or a night or two at a less fancy hotel.

Forget About the Joneses
It's tempting to want to take grand vacations every year when everyone else seems to be doing so. But don't fall into the trap of thinking that you or your family will somehow be scarred if you can't. The important thing is to relax in a way that you can afford, and then enjoy that time with your family. You will have taught your children an important lesson--how to live a financially sound life, without worrying about what the Joneses are doing.

One of the most important steps in budgeting is reviewing income and expenses. Everyone knows that money tends to trickle out faster than it comes in, but often we lose track of how much goes where. An income and expense statement provides a snapshot that quickly shows your household's spending pattern in relation to its total income. With it, you can make informed budget-adjustment decisions more easily. The income and expense statement may be done weekly, monthly, quarterly, or yearly

What Is It For?
The income and expense statement reports income earned and spent during a specified period. That period can be whatever best meets your budgeting needs. A period of several months to a year is often used to obtain a broad overview.

Comparing two or more income and expense statements is more meaningful when each reflects an equal time period (e.g., comparing one month to another or one year to another).

Example(s): Last year Zora left her old employer to join ABC, Inc. Her former employer paid Zora weekly, but ABC pays her monthly. If Zora's income and expense statements were done weekly last year, they would need to be done weekly this year as well to do an apples-to-apples comparison.

Use the Income and Expense Statement to Estimate Future Income and Expenses
An income and expense statement can be used to forecast what you expect your income and expenses to be during some future period. It is a useful budgeting and financial planning tool. Although it is based on projected income and expenses, its accuracy is usually an adequate base for budgeting and planning purposes. Income and expense statements help identify problems and opportunities in budgeting.

As with cash flow analysis, you can compare income and expense statements for successive periods to learn several things. For example, you can learn which categories are increasing and decreasing, whether net income is shrinking or growing, and at what rate these changes are occurring. Net income--the amount of income you have left when all the bills are paid--increases your net worth.

Interpreting the Results: Are You Living Within Your Means?
If your expenses exceed your income, you have a negative bottom line or a "net loss." That is, you are depleting your net worth, a situation that sometimes requires prompt and serious attention. Hopefully, you have a substantial net gain, meaning that your net worth is indeed growing. You can divide total expenses by total income to learn what percent of income you are spending. Compare this to previous periods to learn if your ability to grow your net worth is improving. The percent of income you spend or save is meaningful only to you and your own budget objectives. Certainly, a higher net worth will enable you to do more and live more comfortably in coming years.

A retirement plan contribution is not truly an expense item. It is income being saved for future use. However, such contributions are often viewed as expenses in a cash flow analysis and budget because that cash is temporarily unavailable for other needs.

When you rent a car, you absolutely need insurance...but that doesn't necessarily mean you should purchase it from the rental car agency. You most likely already have adequate coverage through your regular auto insurance policy or even through your credit card company.

Purchasing insurance from the rental car agency may significantly increase the overall cost of renting a vehicle, so do your homework before you walk up to counter. Start by visiting the rental agency's website, where you can usually preview the types of coverage you'll be offered and read up on the terms and conditions.

Various Options
One popular type of coverage generally offered is the Collision Damage Waiver (CDW), sometimes called a Loss Damage Waiver (LDW). If you purchase this waiver, you may not be held responsible if your rental car is stolen or damaged. But you may want to decline the CDW if you own a vehicle and have comprehensive or collision coverage, because the coverages and deductibles that apply to your own vehicle generally extend to your rental vehicle. If you have any questions, call your insurance company to learn what is (and is not) covered. Also, different rules apply for business and international travel.

Next, call your credit card company. Coverage varies, but many cards offer protection (the coverage will be secondary to any insurance coverage you have). To receive protection, you generally have to decline the CDW and charge the entire rental car transaction to the credit card supplying the coverage. Make sure you understand all conditions that apply.

Evaluate Your Own Risk Tolerance and Comfort Level
The bottom line is that if you don't have coverage through your auto insurance policy or your credit card, or you simply want the highest possible guaranteed protection, you'll likely need to purchase it from the rental car agency. But never wait until you're standing at the counter in front of the rental agent to decide, because if you do, it's easy to waste a lot of money buying insurance you don't really need.

The Economic Growth and Tax Relief Act of 2001 gradually phases out the federal estate tax until its complete repeal in 2010. However, under the same law, the estate tax is scheduled to return in 2011.

Since 2001, there have been a number of failed attempts to make the estate tax repeal permanent. In fact, there are still several bills in Congress that include provisions to eliminate this tax. While it's clear President Bush would sign such legislation, the recent changes in Congress make it less likely he'll get the chance to do so. The question remains, though: Will permanent repeal become law, and if so, what are the potential ramifications?

Good-bye Estate Tax; Hello Capital Gains
Repeal does not mean that tax on wealth transfers from one generation to the next will disappear. While currently a tax is imposed on estates, after repeal, a tax will be imposed indirectly on inheritances in the form of capital gains tax. Here's a simplified explanation.

Under the current tax system, property that is transferred to heirs at the owner's death typically gets a "step-up" in tax basis to the current fair market value. Generally, tax basis refers to the cost the owner paid to acquire the property, and is used to compute capital gains tax when the property is sold.

On the other hand, when property is transferred by gift, the recipient receives a "carryover" basis; the tax basis in the hands of the person making the gift generally becomes the recipient's tax basis.

One of the consequences of estate tax repeal in 2010 will be that the step-up in tax basis will be lost. Heirs will receive a carryover basis on inherited property, and will recognize the capital gain (or loss) when the property is sold at some point in the future.

The Impact on You
According to the IRS, estate tax affects only 2% of Americans. Capital gains tax, though, can affect anyone who owns capital assets such as real estate, buildings, and industrial equipment. Therefore, unless the step-up in basis remains, estate tax repeal is likely to result in creating a higher tax bill for a greater percentage of less-wealthy Americans. Further, repeal will create a paperwork headache for heirs who will have to determine the decedent's tax basis in the property they've inherited.

Pros and Cons of Permanent Repeal
Proponents of permanent repeal regard the estate tax as morally unfair and an obstacle to family business continuity and growth. Critics call permanent repeal a boon to the mega-rich and fiscal suicide in a time of budget deficits, a Social Security and Medicare crisis, and war. The confusing reality is that there is statistical evidence can support both sides...and you do remember what Mark Twain said about statistics right?

One thing is certain: The uncertainty of our current estate tax is a burden on Americans and their financial planning which must re-evaluate estate planning options every year. For many on both sides of the issue, sensible reform is a preferable alternative to the success or failure of permanent repeal.

Outlook
In 2007, the Democrats regained power in Congress after 12 years of Republican control. The new Congress has been pursuing a fresh agenda and temporarily set estate tax relief on the back burner. When the issue does resurface, it's likely that Congress will support reform over full and permanent repeal. Reforms such as lowering the estate tax rates to match capital gains tax rates and/or increasing the exemption amount have been proposed. Other options that have been discussed include doubling the exemption amount for married taxpayers, phasing out the tax over a five- or ten-year period, and replacing the estate tax with an inheritance tax (which would essentially shift the tax burden to the heirs). It remains to be seen what will be done, if anything.