Travel insurance refers to specialized coverage you can buy to insure yourself against various risks that travelers face. Travel insurance policies may protect you against one type of hazard (e.g., getting sick or having a trip canceled) or against a group of hazards. You can purchase travel insurance from insurance companies, travel agents, tour operators, cruise lines, rental companies, or travel assistance companies. Coverage, cost, and terms vary widely.

Tip: Don't confuse travel insurance with travel assistance programs. Companies that offer travel assistance may also offer travel insurance, but the two are not the same. Travel assistance programs make the arrangements if you need help in an emergency situation while traveling. Travel insurance policies pay for the help you need.

Do You Need Travel Insurance?
You may want to purchase some form of travel insurance if the financial benefit outweighs the premium cost. For instance, if your trip was canceled or the tour operator or carrier went out of business, could you afford to lose the money you paid for the trip? If you got sick, would you be able to pay for your medical expenses yourself? Do you have other insurance that duplicates the coverage offered by the travel insurance policy? Do you think that the coverage offered by the travel insurance policy is worth the cost of the premium?

Trip Cancellation/Interruption Insurance
Trip cancellation/interruption insurance protects you in the event that your trip is canceled or interrupted due to some unforeseen event, such as bad weather; the financial failure of the cruise line, airline, or travel agency; illness; or death. Under the policy, you will be reimbursed for nonrefundable travel-related expenses. This type of insurance usually costs about 5 percent to 7 percent of the price of the trip.

Coverage offered varies from policy to policy. Before purchasing trip cancellation/interruption insurance, check the exclusion section of the policy carefully. Some policies cover more situations than others. Your definition of an unforeseen event may be different than the insurance policy's definition. For instance, some companies don't consider pre-existing medical conditions to be unforeseeable and often require you to purchase the insurance within 24 hours of booking your trip for pre-existing conditions to be covered. Whether you need trip cancellation/interruption insurance depends on what other protection you have and how much money you could afford to lose if your trip were canceled or interrupted.

Before purchasing this type of insurance, check the terms of your travel agreements and find out what guarantees the carrier, travel agent, or tour operator offers. Policies vary widely. Cruise lines, for instance, may allow you to receive most of your money back if you cancel several weeks before you travel, but they will give you less (or none) back if you cancel within a few days of travel. Airlines often sell nonrefundable tickets but usually allow you to rebook the trip for a fee (usually $25 to $75 per ticket) as long as you can travel within one year of your original departure date. If you rent a vacation house at the beach, you may be able to cancel your trip ahead of time, depending on the terms of the rental arrangement. But if your trip is interrupted by a hurricane, you may not get any money back unless you've purchased trip cancellation/interruption insurance.

Example(s): The Browns rented a Florida vacation home for $1,500 per week. The day they were to leave, a hurricane struck Miami, and they had to cancel their vacation. Their airline tickets weren't refundable, but the airline assured them that they could rebook the trip for a fee of $50 per ticket. However, they lost all the money they had spent on their vacation home because they had not purchased trip cancellation insurance and the vacation home rental did not provide for cancellation.

Caution: Trip cancellation/interruption insurance is different than cancellation waivers offered by cruise lines and tour operators. Cancellation waivers are not insurance--they are simply company guarantees that your money will be refunded under certain circumstances. However, they may not cover last-minute cancellations and will not protect you if the company goes out of business.

Temporary Health Policies
Most health insurance policies will cover you if you travel within the United States. However, some health insurance outlets (notably, Medicare and some HMOs) won't cover you overseas at all or may provide only limited coverage. If you find out that your health insurance coverage is inadequate, consider purchasing a short-term supplemental health insurance policy. This type of policy covers you against accidents and/or sickness and usually pays for medical treatment, all or part of the cost of medical evaluation, and other related expenses. Policies usually offer a choice of deductibles and may be tailored to suit your needs. You can purchase these policies separately or as part of a travel insurance package that includes other types of travel insurance.

Deciding whether to purchase a temporary health policy hinges on determining what medical coverage you already have. If you are traveling domestically and are adequately covered by an existing health insurance policy, you may not need extra protection. However, if you are traveling overseas, you should thoroughly investigate the terms of your health coverage and consider buying a supplemental policy.

Baggage Insurance
Baggage insurance (i.e., personal effects coverage) reimburses you if your personal belongings are permanently or temporarily lost, stolen, or damaged while you're traveling.

Before you purchase baggage insurance, find out what protection you already have. For instance, airlines may be liable for damage if it was caused by the airline's negligence, and they are liable for lost or stolen baggage after check-in. On a domestic trip, the airline's liability limit is generally $2,500 per passenger; on an international trip, the liability limit is $9.07 per pound. Some credit card companies and travel agents also provide supplemental baggage insurance at no charge to you. Your homeowners or renter's policy may also protect your personal belongings against theft when you travel.

Then, why purchase baggage insurance? Purchasing baggage insurance may make sense when you want 24-hour protection, not just protection after your bags are checked in with a scheduled airline. Baggage insurance may also offer higher liability limits than those offered by an airline. However, check the policy's fine print. If you are carrying expensive items, you may not be fully reimbursed if they are lost or stolen, and benefit limits may apply to certain items such as electronics and jewelry. You also may not be reimbursed for anything covered under another policy, so if your bags are lost or damaged by an airline, you may have to seek reimbursement from the airline first.

Accidental Death/Dismemberment Insurance
Accidental death/dismemberment insurance (AD & D) is inexpensive insurance that compensates you if you lose a limb or an eye or compensates your beneficiary if you die in an accident. You can purchase this coverage as a separate policy, as a rider to an existing policy, or as part of a travel insurance policy. You may also receive coverage as a "free" benefit when you purchase an airline, train, or bus ticket using your credit card. AD & D policies may also cover, up to certain limits, medical expenses associated with the accident.

Caution: Before you purchase AD & D coverage, make sure you don't have duplicate coverage elsewhere. If you have adequate life insurance, you may not need AD & D. In addition, you may already be covered for AD & D through a group insurance plan sponsored by your employer or your credit card company.

There's no doubt about it--home ownership is an exciting prospect. Face it, you've always dreamed of having a place that you could truly call your own. But buying a home can also be stressful, especially when you're buying one for the first time. The U.S. housing market is in the midst of a gripping recession as the real estate bubble continues to deflate. And today's buyers must know what to look for (and how to properly purchase) a home.

How Much Can You (Really) Afford?
According to a general rule of thumb, you can afford a house that costs two and a half times your annual salary. But determining how much you can afford to spend on a house is not quite so simple. Since most people finance their home purchases, buying a house usually means getting a mortgage. So, the amount you can afford to spend on a house is often tied to figuring out how large a mortgage you can afford. To figure this out, you'll need to take into account your gross monthly income, housing expenses, and any long-term debt. Try using one of the many real estate and personal finance websites to help you with the calculations.

Mortgage Prequalification vs. Preapproval
Once you have an idea of how much of a mortgage you can afford, you'll want to shop around and compare the mortgage rates and terms that various lenders offer. When you find the right lender, find out how you can prequalify or get preapproval for a loan. Prequalifying gives you the lender's estimate of how much you can borrow and in many cases can be done over the phone, usually at no cost. Prequalification does not guarantee that the lender will grant you a loan, but it can give you a rough idea of where you stand. If you're really serious about buying, however, you'll probably want to get preapproved for a loan. Preapproval is when the lender, after verifying your income and performing a credit check, lets you know exactly how much you can borrow. This involves completing an application, revealing your financial information, and paying a fee.

It's important to note that the mortgage you qualify for or are approved for is not always what you can actually afford. Before signing any loan paperwork, take an honest look at your lifestyle, standard of living, and spending habits to make sure that your mortgage payment won't be beyond your means.

Should You Use a Real Estate Agent or Broker?
A knowledgeable real estate agent or buyer's broker can guide you through the process of buying a home and make the process much easier. This assistance can be especially helpful to a first-time home buyer. In particular, an agent or broker can:

• Help you determine your housing needs
• Show you properties and neighborhoods in your price range
• Suggest sources and techniques for financing
• Prepare and present an offer to purchase
• Act as an intermediary in negotiations
• Recommend professionals whose services you may need (e.g., lawyers, mortgage brokers, title professionals, inspectors)
• Provide insight into neighborhoods and market activity
• Disclose positive and negative aspects of properties you're considering

Keep in mind that if you enlist the services of an agent or broker, you'll want to find out how he or she is being compensated (i.e., flat fee or commission based on a percentage of the sale price). Many states require the agent or broker to disclose this information to you up front and in writing.

Choosing the Right Home
Before you begin looking at houses, decide in advance the features that you want your home to have. Knowing what you want ahead of time will make the search for your dream home much easier. Here are some things to consider:

• Price of home and potential for appreciation
• Location or neighborhood
• Quality of construction, age, and condition of the property
• Style of home and lot size
• Number of bedrooms and bathrooms
• Quality of local schools
• Crime level of the area
• Property taxes
• Proximity to shopping, schools, and work

Making the Offer
Once you find a house, you'll want to make an offer. Most home sale offers and counteroffers are made through an intermediary, such as a real estate agent. All terms and conditions of the offer, no matter how minute, should be put in writing to avoid future problems. Typically, your attorney or real estate agent will prepare an offer to purchase for you to sign. You'll also include a nominal down payment, such as $500. If the seller accepts the offer to purchase, he or she will sign the contract, which will then become a binding agreement between you and the seller. For this reason, it's a good idea to have your attorney review any offer to purchase before you sign.
Other details

Once the seller has accepted your offer, you, your real estate agent, or the mortgage lender will get busy completing procedures and documents necessary to finalize the purchase. These include finalizing the mortgage loan, appraising the house, surveying the property, and getting homeowners insurance. Typically, you would have made your offer contingent upon the satisfactory completion of a home inspection, so now's the time to get this done as well.

The Closing
The closing meeting, also known as a title closing or settlement, can be a tedious process--but when it's over, the house is yours! To make sure the closing goes smoothly, some or all of the following people should be present: the seller and/or the seller's attorney, your attorney, the closing agent (a real estate attorney or the representative of a title company or mortgage lender), and both your real estate agent and the seller's.

At the closing, you'll be required to sign the following paperwork:

• Promissory note: This spells out the amount and repayment terms of your mortgage loan.
• Mortgage: This gives the lender a lien against the property.
• Truth-in-lending disclosure: This tells you exactly how much you will pay over the life of your mortgage, including the total amount of interest you'll pay.
• HUD-1 settlement statement: This details the cash flows among the buyer, seller, lender, and other parties to the transaction. It also lists the amounts of all closing costs and who is responsible for paying these.

In addition, you'll need to provide proof that you have insured the property. You'll also be required to pay certain costs and fees associated with obtaining the mortgage and closing the real estate transaction. On average, these total between 3 and 7 percent of your mortgage amount, so be sure to bring along your checkbook.

If your child is approaching college age, you may be wondering if an Ivy League education is really worth the steep price of admission. Will a diploma from an elite college guarantee your offspring a bright and prosperous future...or just a pile of debt?

Higher Dollars and Cents
The cost of tuition, fees, and room and board at Harvard University for the 2007/08 year is $45,620. (Source: Harvard Crimson, March 22, 2007) If your child entered the freshman class this September, that would translate into a total cost of $196,628 for four years (assuming a rather tame 5% annual rate of college inflation). And this doesn't include money for books, transportation, and personal expenses!

By comparison, the cost for the 2007/08 year at the University of North Carolina at Chapel Hill, a school widely regarded as a top-notch public college, is $28,684 for out-of-state students and $13,036 for in-state students. (Source: UNC Financial Aid Office) This equals a four-year cost of $123,632 for the out-of-state student and $56,187 for the in-state student (again, assuming a 5% rate of inflation). That's an out-of-pocket savings of $72,996 and $140,441, respectively, compared to the cost of Harvard.

The Debt Factor
The Ivies often note that, while their schools might be expensive, most students rarely pay the full sticker price. But even as Ivy League colleges dole out millions of dollars in need-based aid each year from their huge endowments, non-Ivy private schools and public colleges distribute more merit aid, which is aid awarded on the basis of good grades or some special talent. Up-to-date college guidebooks can tell you how generous each college is in helping its students meet annual costs, and the breakdown of student loans vs. grants.

Still, you won't actually know what your child will receive in the way of "free" grant and scholarship money until he or she actually applies to a particular college. So you won't know for sure how much you or your child might need to borrow. But if your child does require student loans, here's an idea of what he or she will owe each month:

Note: Results are based on a standard 10-year repayment term and a fixed interest rate of 6.8%--the current rate on all new federal Stafford loans.

As you weigh the cost factor, keep in mind that a high amount of debt might impact your child's future major life decisions on job opportunities, living arrangements, graduate school, getting married, and/or starting a family.

What About the Intangibles?
Putting aside cost, there are benefits to an Ivy education that can't be measured in nickels and dimes--the prestige of the name on your child's resume, strong mentoring that can lead to coveted jobs and graduate school spots after graduation, the opportunity to build friendships with future leaders, and an alumni network that can open doors throughout life.

But critics of the "Ivy-at-any-cost" group point to excessive competition at the Ivies. They claim that students are more likely to get individualized attention at other colleges, and note that as time goes on, achievement in the workplace will matter more than the name on your child's resume. Indeed, Warren Buffett, CEO of Berkshire Hathaway and graduate of the University of Nebraska-Lincoln, once stated: "I don't care where someone went to school, and that never caused me to hire anyone or buy a business." What counts most, some CEOs say, is a person's ability to seize opportunities. (Source: Wall Street Journal, Any College Will Do, September 18, 2006)

The Bottom Line
To decide if an Ivy League education is worth it, weigh the cost with the potential long-term economic and life experience benefits. But keep in mind that highly motivated students who are independent thinkers and hard workers will likely do well in life no matter where they attend college. The important thing is to make sure that the match between your child and the college is a good one.

You've recently graduated from high school or college, just finished a brief stint in the military, or perhaps you're launching a new career. Whatever your situation, for the first time in your life, you are really on your own. So now what?

True independence means you are no longer covered by your parents’ insurance. Many young adults feel invincible, go without insurance, and throw caution to the wind. But this is not a wise decision since a serious or prolonged illness, auto accident, or an apartment fire could wreak financial devastation. Listed below are several insurance coverages that we recommend all young adults consider.

Here's to Health
Most health coverage occurs through employment, but even that’s not a given. Among young adults, four in ten did not have jobs-based health insurance in 2003, according to a report from the Center for Studying Health System Change. This was due to a combination of low-wage jobs not offering plans and young adults declining coverage because they didn’t want to pay a portion of the premiums.

Certainly if you have health insurance available at work, take it. If it’s not available, or you’re unemployed, at a minimum consider a short-term medical plan. These typically run from 1 to 12 months. A 24-year-old male with a policy that has a $250 deductible and 20 percent coinsurance would pay roughly $100 a month in premiums.

If you’re between jobs, and you were covered under the previous employer’s plan, you probably can continue that group coverage for up to another 18 months through the federal program COBRA. But you’re responsible for 100 percent of the costs, so compare premiums against similar-quality individual coverage.

Another option for workers without employer coverage is the new health savings account, created by the federal government. This involves buying a qualifying medical policy with a high deductible ($1,650 to $2,500 for individuals, according to the law). The advantage is that you can stash away tax-deductible money in an IRA-like account to pay (also tax free) for deductibles and other out-of-pocket medical expenses. These policies are especially attractive to younger, healthier people who are more likely to face minimal medical expenses, yet still need protection in the event of a medical catastrophe.

The Disability Factor
Your working income is likely your most precious financial resource. Thus, a long-term illness or injury could prove financially devastating. And your odds of being disabled at least 90 days or longer before age 65 are significantly higher than the odds of dying, according to the Insurance Information Institute.

Disability insurance, sometimes called income-replacement insurance, pays a portion (around 60–80 percent) of lost wages if you’re unable to continue working due to an accident or illness. Employers typically provide some short-term disability coverage, but usually not long term, and what they provide may be insufficient for your wages. State-sponsored worker’s compensation programs may provide income, but normally only if you’re injured on the job (a few states provide for short-term nonwork-related disabilities). Social Security may provide benefits, but only if you’re unable to work at virtually any job.

If your employer’s coverage doesn’t pay at least 60 percent of wages and doesn’t last to age 65, you’ll likely want to supplement it with private coverage.

Renter’s Have Risk, Too
Your personal assets are probably modest at this point in your life, but nonetheless, it could cost you thousands or tens of thousands of dollars to replace clothes, electronic equipment, and other property if stolen or destroyed.

Many renters mistakenly believe that their landlord’s insurance would cover their lost or destroyed personal property. Not true. Fortunately, personal renter’s insurance is usually quite affordable—$150 to $300 a year will probably buy the coverage you need. You may need additional coverage for specific high-valued property or if you’re in a flood or earthquake zone. Be sure the policy includes liability coverage in the event you are sued for injuries suffered at your residence. You often can save premium dollars by buying renter’s insurance through the company that insures your auto.

Cars, Cars, Cars
You may still be able to continue under your parent’s policy if you’re under age 25, unmarried, and the car remains in their name.

Life and Death
Depending on many factors, you may or may not need life insurance. For example, assuming you are single and have no one financially dependent on you, you most likely do not need it. On the other hand, the longer you wait, the more expensive it becomes and the greater the risk of becoming uninsurable.

Volatility measurements can be used to evaluate the performance of mutual funds and investment portfolios as well as individual securities. An investment is considered 'volatile' when it experiences significant ups and downs in price...or when the prices and returns on that particular investment vary wildly from month to month (or year to year). A far cry from the market exuberance we experienced in the early spring, we are currently on the brink of a full-blown Wall Street panic, and television pundits love to use their fancy jargon to discuss this current volatility. Here's some insight into what the heck they're talking about.

Standard Deviation
This figure measures how much an investment's return varies from its mean return. The higher an investment's standard deviation is, the more dramatic its ups and downs. For example, let's say two stocks each return an average of 6 percent a year. However, one of those stocks might have a much higher return in some years, but lose a lot of value in others. That stock's standard deviation from its mean would be quite high. The second stock might achieve the same average without such dramatic price swings, and would therefore have a lower standard deviation.

Beta
Another way to evaluate an investment's volatility is to look at its beta, which compares an individual investment's volatility to that of the market. A stock or mutual fund with a beta of 1.0 would have exactly as much market risk as its benchmark--for example, the S&P 500 stock index. A stock or mutual fund with a beta of 1.5 would involve 50 percent more market risk than the benchmark; if the benchmark went up, the individual security would be expected to go 50 percent higher. If the benchmark's return dropped, the security's return should be 50 percent lower. Conversely, a stock or fund with a beta of less than 1.0 would involve less market-related volatility than the overall market. If the S&P rose by 50 percent, an investment with a beta of .5 should benefit by only 25 percent. If the benchmark fell by 50 percent, the individual security with a .5 beta should experience only a 25 percent drop.

R-Squared
Beta as a measurement of volatility is useful only if the investment is being compared to an appropriate benchmark. R-squared measures how much of an investment's volatility depends on the volatility of its benchmark. If an investment's performance is perfectly correlated with that of the overall market, it would have an R-squared of 1.00. The lower the R-squared, the less the investment's performance can be explained by the market's overall performance. For example, a stock with an R-squared of .80 would mirror the performance of the S&P 500 index much more closely than a stock with an R-squared of .40, which would be much more affected by factors specific to that stock.

Alpha
In addition to risk and reward that is linked to market movements, an investment involves risk and reward that is unique to the investment itself. A stock, for example, might benefit from superior management of the company, or suffer because of a substantial delay in launching an important product. Alpha indicates how well an investor is being compensated for the level of that specific (nonmarket-related) risk. It compares an investment's returns to the performance an investor might expect given the level of risk indicated by its beta. A positive alpha would mean that for the time period measured, the investment has done better than the return that investors could have predicted simply by multiplying its beta figure times the return of the benchmark index. A negative alpha means just the opposite: that the investment's returns have been worse than they should have been for the level of risk taken. At the portfolio level, alpha is a way to gauge whether you benefit from active management, compared to simply investing passively in an index.

Let's Get Technical: Measuring Overall Market Volatility
One way investors sometimes try to gauge short-term volatility in the market as a whole is to look at the Volatility Index (VIX) created by the Chicago Board Options Exchange. The VIX is calculated as a percentage figure by averaging the prices of options on the S&P 500 index. The figure, which is calculated minute-by-minute based on ongoing options trading, is used to gauge investor expectations for market volatility over the next 30 days. Though past performance is no guarantee of future results, options prices tend to rise when the markets are in turmoil and investor anxiety is high. That pushes the VIX up as well. When investors are feeling more certain about the future, options prices and the VIX tend to drop.

Chocolate cake. Pasta. Pancakes. They're all very different, but they generally involve flour, eggs, and perhaps a liquid. Depending on how much of each ingredient you use, you can get very different outcomes. The same is true of your investments. Balancing a portfolio means combining various types of investments using a recipe that's right for you.

Getting the Right Mix
The combination of investments you choose can be as important as your specific investments. The mix of various asset classes, such as stocks, bonds, and cash equivalents, accounts for most of the ups and downs of a portfolio's returns.

There's another reason to think about the mix of investments in your portfolio. Each type of investment has specific strengths and weaknesses that enable it to play a specific role in your overall investing strategy. Some investments may be chosen for their growth potential. Others may provide regular income. Still others may offer safety or simply serve as a temporary place to park your money. And some investments even try to fill more than one role. Because you probably have multiple needs and desires, you need some combination of investment types.

Balancing how much of each you should include is one of your most important tasks as an investor. That balance between growth, income, and safety is called your asset allocation. It doesn't guarantee a profit or insure against a loss, but it does help you manage the level and type of risks you face.

Balancing Risk and Return
Ideally, you should strive for a mixture of investments that minimizes the risk you take in trying to achieve a targeted rate of return. This often means balancing more conservative investments against others that are designed to provide a higher return but that also involve more risk. For example, let's say you want to get a 7.5% return on your money. You should keep in mind that market returns have historically averaged about 10% annually, and bonds roughly 5%. One way to try to achieve your 7.5% return would be by choosing a 50-50 mix of stocks and bonds. It might not work out perfectly that way, of course. This is only a hypothetical illustration, not a real portfolio, and there's no guarantee that either stocks or bonds will perform as they have in the past. But at least asset allocation gives you a place to start.

Someone living on a fixed income, whose priority is having a regular stream of money coming in, will probably need a very different asset allocation than a young, well-to-do working professional whose priority is saving for a retirement that's 30 years away. Many publications feature model investment portfolios that recommend generic asset allocations based on an investor's age. These can help jump-start your thinking about how to divide up your investments. However, because they're based on averages and hypothetical situations, they shouldn't be seen as definitive. Your asset allocation is--or should be--as unique as you are. Even if two people are the same age and have similar incomes, they may have very different needs and goals. You should make sure your asset allocation is tailored to your individual circumstances.

Many Ways to Diversify
When we refer to asset allocation, we're usually talking about overall classes: stocks, bonds, and cash or cash equivalents. However, there are others that also can be used to complement the major asset classes once you've got those basics covered. They include real estate and alternative investments such as hedge funds, private equity, metals, or collectibles. Because their returns don't necessarily correlate closely with returns from major asset classes, they can provide additional diversification and balance in a portfolio.

Even within an asset class, consider how your assets are allocated. For example, if you're investing in stocks, you could allocate a certain amount to large-cap stocks and a different percentage to stocks of smaller companies. Or you might allocate based on geography, putting some money in U.S. stocks and some in foreign companies. Bond investments might be allocated by various maturities, with some money in bonds that mature quickly and some in longer-term bonds. Or you might favor tax-free bonds over taxable ones, depending on your tax status and the type of account in which the bonds are held.

Asset Allocation Strategies
There are various approaches to calculating an asset allocation that makes the most sense for you.

The most popular approach is to look at what you're investing for and how long you have to reach each goal. Those goals get balanced against your need for money to live on. The more secure your immediate income and the longer you have to achieve your investing goals, the more aggressively you might be able to invest for them. Your asset allocation might have a greater percentage of stocks than either bonds or cash, for example. Or you might be in the opposite situation. If you're stretched financially and would have to tap your investments in an emergency, you'll need to balance that fact against your longer-term goals. In addition to establishing a (very important) emergency fund, you may need to invest more conservatively than you might otherwise want to.

Some investors believe in shifting their assets among asset classes based on which types of investments they expect will do well or poorly in the near term. However, this approach, called "market timing," is extremely difficult even for experienced investors. If you're determined to try this, you should probably get some expert advice--and recognize that no one really knows where markets are headed.

Some people try to match market returns with an overall "core" strategy for most of their portfolio. They then put a smaller portion in very targeted investments that may behave very differently from those in the core and provide greater overall diversification. These often are asset classes that an investor thinks could benefit from more active management.

Just as you allocate your assets in an overall portfolio, you can also allocate assets for a specific goal. For example, you might have one asset allocation for retirement savings and another for college tuition bills. A retired professional with a conservative overall portfolio might still be comfortable investing more aggressively with money intended to be a grandchild's inheritance. Someone who has taken the risk of starting a business might decide to be more conservative with his or her personal portfolio.

Things to Consider:

• Don't forget about the impact of inflation on your savings. As time goes by, your money will probably buy less and less unless your portfolio at least keeps pace with the inflation rate. Even if you think of yourself as a conservative investor, your asset allocation should take long-term inflation into account.
• Your asset allocation should balance your financial goals with your emotional needs. If the way your money is invested keeps you awake worrying at night, you may need to rethink your investing goals and whether the strategy you're pursuing is worth the lost sleep.
• Your tax status might affect your asset allocation, though your decisions shouldn't be based solely on tax concerns.

Even if your asset allocation was right for you when you chose it, it may not be right for you now. It should change as your circumstances do and as new ways to invest are introduced. A piece of clothing you wore 10 years ago may not fit now; you just might need to update your asset allocation, too.

In today's volatile economy, it is vital to maintain an adequate cash reserve. You need to have short-term money stashed away 'just in case'. Look at it this way...you never know when a pen will leak all over you new suit, or when that iPod will slip out of your hand and break on the sidewalk. But no matter what the situation, it is a wonderful feeling to know that you have money in the bank to cover that inevitable situation when you will need money in a pinch.

The term "cash equivalents" refers to financial instruments with a short-term maturity (typically less than a year). With most cash equivalents, the four major factors in deciding whether to purchase the instruments are (1) the financial strength of the issuer, (2) the maturity date of the instrument, (3) any early withdrawal penalties, and (4) the yield to maturity.

The financial strength of the issuer indicates the probability that you will be repaid when the instrument matures. The maturity date refers to how long you must wait before you will be repaid. An early withdrawal penalty is the amount of money you must forfeit if you surrender the instrument before the maturity date. Finally, the yield to maturity is the amount of interest (and possible gain in principal amount) you will receive for holding the instrument until it matures. The following discussion looks at how to analyze the various cash equivalents that are available to an individual investor in today's marketplace.

Checking and Savings Accounts
Probably the most widely used cash equivalents are checking and savings accounts at a bank, credit union, or other financial institution. Even though most checking accounts pay little or no interest, many online banks now offer (our favorite cash equivalent) high-yielding savings accounts with full FDIC insurance. These savings accounts offer upwards of 5% interest as well as fast, convenient access to your money at all times.

The analysis you should do before opening a savings account is similar to what you should do before buying a certificate of deposit. You should make certain that the institution is financially sound and has federal deposit insurance. This means that if the financial institution collapses, your deposits will be protected by the federally backed deposit insurer, up to a certain amount (usually $100,000; $250,000 for retirement accounts).


Treasury Bills
When you analyze Treasury Bills, the financial strength of the issuer and early withdrawal penalties are usually not considerations. Treasury bills (sometimes called T-bills) are backed by the full faith and credit of the U.S. Treasury--these are among the safest investments you can make. Early withdrawal penalties are also usually not a factor because T-bills can be sold in the secondary market at any time, and there is a very active market for them. You don't have to hold them until maturity. (Of course, you may have to pay a small commission if you want to sell T-bills on the secondary market before they mature.)

The only considerations, therefore, are the yield and the maturity date of the instruments. Because they are among the safest investments, T-bills almost always yield less (for a comparable maturity) than other more risky cash equivalents, such as commercial paper. Thus, the most important issue in analyzing T-bills is whether you want to accept a slightly lower yield (compared with other cash equivalents) in return for the assurance that there is almost no possibility that the issuer--the U.S. Treasury--will default on the repayment when the bills mature. The only other consideration is how long a maturity you want. T-bills are issued in 13- or 26-week maturities (although, as noted, you do not have to hold T-bills until maturity).

Certificates of Deposit
A short-term certificate of deposit (CD) issued by a bank is also considered a cash equivalent. Repayment of the CD is backed by both the issuing bank and the bank's deposit insurer (e.g., the FDIC). Therefore, when analyzing CDs, you should consider the financial strength of the issuing bank (or other financial institution) and make certain the institution has federal deposit insurance. This insurance will usually cover up to $100,000 of an individual's deposits in one financial institution (retirement accounts are generally insured up to $250,000). If the financial institution defaults on its obligation to repay the CD, the federally backed deposit insurer will cover the bank's obligation. Another consideration in analyzing CDs is whether there are early withdrawal penalties. Many financial institutions impose a penalty if you cash in the CD before its maturity date, so plan to hold the CD until maturity.
Repurchase agreements

A repurchase agreement (known as a "repo") is a type of cash equivalent created when a lender (usually a large financial institution) sells marketable securities to a buyer and agrees to buy back the securities a short time later for a higher price. The time period between the initial sale and the buyback may be as short as overnight or a few days. Usually, only large institutional investors (such as money market mutual funds) purchase repos. However, individuals may purchase repos if they have enough money to invest. Like commercial paper, repos are usually issued in denominations of $100,000.

The analysis for the purchase of repos is similar to the analysis you should do before you buy commercial paper. You want to research the financial strength of the issuer to make certain that the company can repay the repo amount to you when it becomes due. (When you buy a repo, you are essentially lending money to the issuer for a short period of time.) When you buy a repo, therefore, there is a slight risk of default if the buyer or seller has financial troubles. Another consideration when buying a repo is the maturity date of the instrument, whether it is a short- or a longer-term agreement. You should also compare the yield on the repo with the yield on similar instruments.

Other Cash Equivalents
In addition to the cash equivalents previously discussed, there are other money market instruments, such as Eurodollars and Banker's Acceptances. Like commercial paper and repurchase agreements, these instruments are purchased almost exclusively by large institutional investors because they are usually issued in large denominations. However, an individual with enough money could purchase them. The analysis you should do before purchasing these types of instruments is similar to what you should do before buying repurchase agreements or commercial paper. You need to research the financial strength of the issuer to make certain that the institution can repay the amount you invest. Be aware, too, of the maturity provisions, and compare the yields with those of similar instruments.
Money market mutual funds

One of the most popular cash equivalents is a money market mutual fund, a type of mutual fund that invests solely in cash equivalents and other money market instruments. A money market fund may purchase T-bills, commercial paper, repos, Eurodollars, and similar types of instruments. An individual can then buy shares in that fund. There are also subcategories of money market funds, such as those that invest only in T-bills or commercial paper. There are also funds that require very large minimum deposit amounts. These are just a few of the varieties of money market funds.

The two main considerations when analyzing a money market mutual fund are the safety of the fund and its yield. In general, all money market funds have been very safe. However, if your primary concern is the safety of your money, then you should invest in a money market mutual fund that invests only in government securities (such as T-bills).

The yield on a money market fund will depend, in part, on the type of securities in the fund--a money market fund with only T-bills will yield slightly less than a fund with more risky money market instruments. Furthermore, because the money market fund takes an annual management fee, the yield on a money market fund tends to be less than if you bought the money market instruments directly.

Money Market Deposit Accounts
Another type of cash equivalent is a money market deposit account. This is a type of federally insured savings account that banks, savings and loan associations, credit unions, and other financial institutions offer to their customers. The financial institution pools the money it receives from depositors and then invests the money in high-yielding, short-term debt instruments such as T-bills and commercial paper. The money market deposit account usually pays a higher rate of interest than that paid by other savings and checking accounts. Although technically a savings account, a money market deposit account usually allows the depositor to write a limited number of checks against the account each month.

Like homes themselves, mortgages come in many sizes and types, and one of the most important decisions you face as you consider your choices is whether to take out a fixed or an adjustable rate mortgage. The type of mortgage that's right for you depends on many factors, such as your tolerance for risk and how long you expect to stay in your home.

Fixed Rate Mortgages
As the name implies, the interest rate on a fixed rate mortgage remains the same throughout the life of the loan. Your monthly payment (consisting of principal and interest) generally remains the same as well. The entire mortgage is repaid in equal monthly installments over the term (length) of the loan.

The Good News Is You're Locked In. The Bad News Is...You're Locked In
Locking in a fixed interest rate on your mortgage has its good and bad points. If interest rates rise, yours won't; as a result, your monthly mortgage payment will always remain the same. This can be reassuring to homeowners on tight budgets or with fixed incomes. For this reason, fixed rate mortgages often appeal to individuals with a low tolerance for the risk associated with fluctuating monthly payments.

But if interest rates go down, yours won't, and your (now high) mortgage payment will remain the same. While you might be able to refinance your home, paying off the higher-rate mortgage with one that carries a lower interest rate, this isn't always possible. In addition, the interest rate might need to drop significantly to offset the expenses associated with refinancing, and you'd need to remain in your home long enough to allow the monthly savings associated with the lower rate to recoup those expenses.

Adjustable Rate Mortgages (ARMs)
With an ARM, also called a variable rate mortgage, your interest rate is adjusted periodically, rising or falling to keep pace with changes in market interest rate fluctuations. Since the term of your mortgage remains constant, the amount necessary to pay off your loan by the end of the term changes as your loan's interest rate changes. Thus, your monthly payment amount is recalculated with each rate adjustment.

Depending on what's specified in the mortgage contract, an ARM can be adjusted semi-annually, quarterly, or even monthly, but most are adjusted annually. The adjustments are made on the basis of a formula specified in the mortgage contract. To adjust the rate, the lender uses an index that reflects general interest rate trends, such as the one-year Treasury securities index, and adds to it a margin reflecting the lender's profit (or markup) on the money loaned to you. Thus, if the index is 5.75% and the markup is 2.25%, the ARM interest rate would be 8%.

What's to keep the interest rate from going through the roof--or, for that matter, from plunging through the floor? Most ARMs specify interest rate caps. The periodic adjustment cap may limit the amount of rate change, up or down, allowed at any single adjustment period. A lifetime cap may indicate that the interest rate may not go any higher--or lower--than a specified percentage over--or under--the initial interest rate.

Caution: Some ARMs cap the payment amount that you are required to make, but not the interest adjustment. With these loans, it's important to note that payment caps can result in negative amortization during periods of rising interest rates. If your monthly payment would be less than the interest accrued that month, the unpaid interest would be added to your principal, and your outstanding balance would actually increase, even though you continued to make your required monthly payments.

The initial interest rates (referred to as teaser rates) on ARMs are generally lower than the rates on fixed rate mortgages. If you can tolerate uncertainty in your mortgage interest rate and fluctuations in your monthly mortgage payment amount, believe that interest rates will stay low or go lower in the future, or plan to live in your home for only a short period of time, then you may want to consider an ARM.

Hybrid ARMs
Hybrid ARMs are mortgage loans that offer a fixed interest rate for a certain time period (3, 5, 7, or 10 years), and then convert to a 1-year ARM.

The initial fixed interest rate on a hybrid ARM is often considerably lower than the rate on either a 15-year or 30-year fixed rate mortgage. The longer the initial fixed-rate term, however, the higher the interest rate for that term will be. Generally speaking, even the lowest of these fixed rates is higher than the initial (teaser) rate of a conventional 1-year ARM.

Hybrid ARMs are ideal for individuals who plan to stay in their homes for a short period of time (3 to 10 years), since they can take advantage of the low initial fixed interest rate without worrying about how the loan will change when it converts to an ARM. If you think your plans may change or you are planning on staying put for a while, look for a hybrid ARM with a conversion option. This option will allow you to convert your loan to a fixed rate loan before it turns into an ARM.

Conventional fixed rate mortgage	Adjustable rate mortgage	Hybrid adjustable rate mortgage
Low risk 10- to 40-year term Interest rate doesn't change Payment remains the same	Higher risk Initial interest rate often lower than fixed rate mortgage Interest rate may go up or down Interest rate usually adjusted annually Rate adjustments may be limited by cap(s) Payment caps can result in negative amortization in periods of rising interest rates	Higher risk Initial rate often lower than fixed rate mortgage Fixed term for 1 to 10 years, then becomes a 1-year ARM May have option to convert to a fixed rate mortgage before becoming a 1-year ARM Interest rate may go up or down Rate adjustments may be limited by caps Payment caps can result in negative amortization in periods of rising interest rates

Do you vision home ownership, starting a business, or a comfortable retirement? These are just a few of the financial goals that may be important to you, and each comes with a specific price tag attached. This is where financial planning comes in.

Financial planning is a process that can help you reach your goals by evaluating the big financial picture, and then outlining strategies tailored to fit your individual needs and available resources.

Why is Financial Planning Important?
A comprehensive financial plan serves as a framework for organizing the pieces of your financial picture. With a financial plan in place, you'll be better able to focus on your goals and understand what it will take to reach them.

One of the main benefits of having a financial plan is how it helps you arrange financial priorities. A financial plan will clearly show you how each of your financial goals are related--for example, how saving for your children's college education might impact your ability to save for retirement.

You can then use the information to decide how to prioritize your goals, implement specific strategies, and choose suitable products or services. Best of all, you'll have the peace of mind that comes from knowing your financial life is on track.

The Financial Planning Process
Creating and implementing a comprehensive financial plan generally involves:

• Developing a clear picture of your current financial situation by reviewing your income, assets, and liabilities, and evaluating your insurance coverage, investment portfolio, tax exposure, and estate plan
• Establishing and prioritizing financial goals and time frames for achieving these goals
• Implementing strategies that address your current financial weaknesses and build upon your financial strengths
• Choosing specific products and services that are tailored to meet your financial objectives
• Monitoring your plan, making adjustments as your goals, time frames, or circumstances change

Key Members of Your Team
The financial planning process can involve any number of professionals.

• Financial planners typically play a central role in the process, focusing on your overall financial plan, and often coordinating the activities of other professionals who have expertise in specific areas.
• Accountants or tax attorneys provide advice on specific federal and state tax issues.
• Estate planning attorneys help you plan your estate and give advice on transferring and managing your assets before and after your death.
• Insurance professionals evaluate insurance needs and recommend appropriate products and strategies.
• Investment advisors provide advice about investment options and asset allocation, and can help you plan a strategy to manage your investment portfolio.

The most important member of the team, however, is you. Your needs and objectives drive the team, and once you've carefully considered any recommendations, all decisions rest in your hands.

Why Can't You do it by Yourself?
You can, if you have enough time and knowledge, but developing a comprehensive financial plan may require expertise in several areas. A financial professional can give you objective information and help you weigh your alternatives, saving you time and ensuring that all angles of your financial picture are covered.

Staying on Track
The financial planning process doesn't end once your initial plan has been created. Your plan should genera

lly be reviewed at least once a year to make sure that it's up-to-date. It's also possible that you'll need to modify your plan due to changes in your personal circumstances or the economy. Here are some of the events that might trigger a review of your financial plan:

• Your goals or time horizons change
• You experience a life-changing event such as marriage, the birth of a child, health problems, or a job loss
• You have a specific or immediate financial planning need (e.g., drafting a will, managing a distribution from a retirement account, paying long-term care expenses)
• Your income or expenses substantially increase or decrease
• Your portfolio hasn't performed as expected
• You're affected by changes to the economy or tax laws

We generally advise new investors relating to how often (and how much) money to invest in their retirement and educational savings accounts. At Lightship Mutual, we are staunch supporters of the "buy and hold" model of long-term investing, one of our favorite strategies is dollar-cost averaging. With this strategy, our clients are instructed to invest a small amount of money regularly, regardless of market conditions.

Quick and Easy Investing
With dollar cost averaging, you invest the same dollar amount at regular intervals (i.e. monthly, quarterly, semi-annually) over a long period time. By consistently following this strategy, you may be able to reduce the impact of market fluctuations on your investment portfolio.*

For example, let's say that you decide to invest $300 each month towards your child's college education. As the following illustration shows, you automatically buy more shares when prices are low and fewer shares when prices are high:

Average market price per share: $30 + $10 +$20 + $15 + $25 = $20 5 purchases Investor's average cost per share: $1,500 total investment = $17.24 87 shares purchased

Your regular monthly investment of $300 bought more shares when the price was low and fewer shares when the price was high. The result? The average cost of the shares you purchased is less than the average market price per share over the period.

It's [Not Always] About the Benjamins
Even though our example above uses a $300 monthly investment, dollar-cost averaging works with as little as $25 per month. The key is not necessarily how much you can afford to put away each month, but how consistently you do it. You are building positive financial habits, and dollar-cost averaging is the investing equivalent of brushing & flossing.

This hypothetical example is for illustrative purposes only and does not represent the performance of any particular investment. Actual results will vary.

*Dollar cost averaging does not guarantee a profit or protect against a loss in a declining market. Investors should consider their ability to continue investing regularly through all types of markets.

Risk is all around us. Some people consider driving a car risky. Others don't seem to mind driving but are terrified of flying in an airplane--even though statistics show you're far more likely to die in a car than in an airplane. Some people, like race car drivers, cliff divers, and bungee jumpers, actually thrive on risk; others go to great lengths to reduce or avoid it.

Risk is multidimensional with many factors interacting. For example, an athlete in top physical condition may suffer a fatal heart attack while exercising because he or she has a family history of heart disease. Some risks are more apparent than others. For instance, walking a high wire is quite obviously a risk. On the other hand, the danger of being struck by lightning is not so obvious.

Nobody can fully escape risk. The best you can do is to reduce (or "hedge") as much as possible. Stay clear of people with colds, maintain a healthy diet; wear a life jacket when boating. Most importantly, purchase adequate health, property, and liability insurance.

Risk in the Investment World
Some people view risk as a negative, others as a positive. Ask any group of people what risk means to them, and you are likely to get some of these answers:

• Danger
• Possible loss
• Uncertainty
• Challenge
• Opportunity
• Thrill

In the investment world, however, risk equals uncertainty. It refers to the possibility of losing an investment or that an investment will yield less than its anticipated return. Quite simply, investment risk refers to the probability that an investment will make or lose money. Every investment carries some degree of risk because its returns are unpredictable. The degree of risk associated with a particular investment is known as its volatility.

The Relationship Between Risk and Return
When you invest, you plan to make money on that investment or, more accurately, earn a return. Risk and return are directly related. The higher the risk, the higher the return potential. If you want a higher rate of return, you will have to accept a higher risk. Conversely, you may accept a lower risk, but the return potential is lower.

Technical Note: The term "risk-return trade-off" refers to the universal principle that investors should plan to be compensated for taking higher levels of risk of loss by earning higher rates of return.

The Relationship Between Risk and Time
The length of time that you plan to remain in a particular investment vehicle is known as your time horizon. Generally speaking, the longer your time horizon, the more you can afford to invest more aggressively, in higher-risk investments. This is because the longer you can remain invested, the more time you'll have to ride out fluctuations in the hope of getting a greater reward in the future. Of course, there is no assurance that any investment will not lose money.
Risk-taking propensity

Each of us is able to accept a certain amount of investment risk. This is known as our risk-taking propensity. Those of us who can accept a relatively great amount of risk are referred to as risk tolerant. On the other end of the spectrum, those who can accept very little risk are known as risk averse. Those who hold the middle ground are risk neutral or risk indifferent.

There are ways to measure your risk tolerance, using tests to assess how you react to different types of risk, such as monetary, physical, social, and ethical. These tests aren't foolproof, since we are essentially talking about psychological behaviors that may vary under different conditions. However, the results from these tests are generally considered reliable and valid.

Your risk-taking propensity is as important in determining which investments match your risk-return expectations as the risk of the investment itself.

Diversify Your Portfolio to Reduce Risk
One of the best ways to reduce risk is to develop a portfolio of investments that is balanced in terms of the types of assets in which you invest. In other words, don't put all your eggs in one basket. This is known as diversification or asset allocation. A portfolio that mixes a variety of asset classes (e.g., cash, bonds, domestic and foreign stocks, and real estate) has a lower risk for a given level of return than does a portfolio that consists of only one. Diversification works because it broadens your investment base. It can be achieved by company, industry, type of security, markets, or by investment objective.

How an investor diversifies depends upon his or her own situation. An investor can be aggressive (investing mostly in high-risk vehicles), conservative (investing mostly in low-risk vehicles), or somewhere in between.

Diversify with the Passage of Time
Historically, time has had a dampening effect on the riskiness of investments. Basically, the longer an investor remains invested--or the longer the investor's time horizon--the less risky the investment becomes. Of course, there is no guarantee this will continue in the future.

Do Your Homework
You may be able to reduce some risk simply by being diligent. For example, have real estate inspected and appraised before you buy it, or investigate a company's financial condition before you purchase stock in it.

Gauge the economy by identifying trends in overall business conditions. These trends are indicated regularly (weekly or monthly) by figures on inventories, prices, employment, and the GDP. Is the economy on an upswing or downswing? Knowing this will help you choose an investment more likely to appreciate under the given conditions.

Choose investments that make sense to you. For example, buy stock in a company with relatively stable earnings, or one whose sales are likely to keep up with inflation, or one whose products are in great demand, or one who sells a product for which the demand is constant, such as food

If your policy limits have not increased since you purchased your home, there's a good chance that you're now underinsured. However, it's not necessarily because the market value of your home has risen, but rather because construction costs have gone up.

For insurance purposes, the cost to rebuild your home is what counts, and that's probably very different than what you paid for your home, or how much you would pocket if you sold it today. For example, while the market value of your home includes the land it's built on, the rebuilding cost does not. On the other hand, if your home has features that would be expensive to replicate, is built of materials whose cost has skyrocketed, or is located in an area where labor costs are high, the market value of your home may actually be lower than the cost to rebuild it.

It's important to review your homeowners coverage with your insurer at least once a year. You should also call your insurance representative whenever you remodel your home or buy expensive items.

Although it's ultimately up to you to make sure you have adequate homeowners insurance, your insurance representative can help you estimate the cost of rebuilding your home, using information about construction costs in your area. Be prepared to answer questions about your home's features and square footage to help determine proper coverage limits.

And ask about adding an inflation guard clause to your policy (if available). An inflation guard automatically adjusts your policy limits over time to keep up with changing construction costs. Although you'll still want to review your homeowners coverage periodically, an inflation guard can help keep you from becoming significantly underinsured.

As the cost of a college education continues to climb, many grandparents are stepping in to help. This trend is expected to accelerate as baby boomers, most of whom went to college, become grandparents and start gifting what could be trillions of dollars over the next few decades. Helping to finance a grandchild's college education can bring great personal satisfaction and is a smart way for grandparents to pass on wealth without having to pay gift and estate taxes. So what are the best ways to accomplish this?

Outright Cash Gifts
A common way to help with college costs is to make an outright gift of cash or securities. But this method has drawbacks. If you gift the money directly to your grandchild, he or she might spend it on something other than college. Second, a gift of more than the annual federal gift tax exclusion amount ($12,000 for individual gifts, $24,000 for joint gifts) might have gift tax and generation-skipping transfer tax (GSTT) consequences (GSTT is the tax imposed on gifts made to someone who is more than one generation below you).

Another drawback to outright gifts is that the gifts become assets of the student, and the federal government treats student assets more harshly than parent assets for financial aid purposes. Students must contribute 20% of their assets each year toward college costs, compared to 5.6% for parent assets.

529 Plans
A 529 plan can be an excellent way for grandparents to contribute to a grandchild's college education while simultaneously paring down their own estate. There are two types of 529 plans: college savings plans, which are individual investment-type accounts whose funds can be used at any accredited college in the United States or abroad, and prepaid tuition plans, which allow prepayment of tuition at today's prices for the limited group of colleges (typically in-state public colleges) that participate in the plan. Grandparents can open a 529 account and name their grandchild as beneficiary (only one person can be listed as account owner, though), or they can contribute to an already established 529 account.

A big advantage of 529 plans is that under special rules, grandparents can make a joint lump-sum gift of up to $120,000 ($60,000 for individual gifts) to a 529 account and completely avoid federal gift tax, provided a special election is made to treat the gift as if it were made in equal installments over a five-year period and grandparents don't make any additional gifts to their grandchild during this time.

Significantly, this money is considered removed from the grandparents' estate, even though one grandparent can still retain control over the funds if he or she is the 529 account owner. But there are two things to keep in mind here: (1) if a grandparent contributes money, makes the special election, and then dies during the five-year period, a portion of the gift is recaptured into the estate for estate tax purposes; and (2) funds in a grandparent-owned 529 plan can still be factored in when determining Medicaid eligibility, unless these funds are specifically exempted by state law.

Of course, grandparents can contribute smaller, regular amounts to their grandchild's 529 account instead. Contributions grow tax deferred, and withdrawals used for college expenses are completely tax free at the federal level (and often at the state level).

Another interesting feature of 529 plans is that under current law, grandparent-owned 529 accounts are excluded by the federal government's financial aid formula--only parent-owned 529 plans count. So a grandparent-owned 529 plan won't impact a grandchild's chances of qualifying for aid (however, there's no guarantee this will be the rule in the future because Congress periodically tinkers with the financial aid rules).

Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about specific 529 plans is available in each issuer's official statement, which should be read carefully before investing.

Pay Directly to the College
Another excellent way for grandparents to help their grandchildren with college costs is to pay the college directly. Under federal law, tuition payments made directly to a college aren't considered taxable gifts, no matter how large the payment. But this is true only for tuition--room and board, books, fees, and the like don't qualify for this benefit. Aside from the obvious tax advantage, paying tuition directly to the college ensures that your money will be used for education. Plus, it removes the money from your estate.