Why do so many people never obtain the financial independence that they desire? Often it's because they just don't take that first step-- getting started. Besides procrastination, other excuses that people make are that investing is too risky, too complicated, too time consuming, and only for the rich.

The fact is, there's nothing complicated about common investing techniques, and it usually doesn't take much time to understand the basics. Investing is for everyone, not just the rich. And the biggest risk you face is not educating yourself.

Saving versus investing

Both saving and investing have a place in your finances. But don't confuse the two. With savings, your principal typically remains constant and earns interest or dividends. Savings are kept in certificates of deposit (CDs), checking accounts, money market accounts, and passbook savings accounts. By comparison, investments can go up or down in value and may or may not pay interest or dividends. Examples of investments include stocks, bonds, mutual funds, collectibles, precious metals, and real estate.

Why invest?

You invest for the future, and the future is expensive. For example, college expenses are increasing at double the rate of inflation, and people are retiring earlier and living longer. You have to take responsibility for your own finances--nobody else is going to. Government programs like Social Security will probably play a less significant role in your life than they did for previous generations. Corporations are switching from guaranteed pensions to plans that require you to make contributions and choose investments. The better you manage your dollars, the more likely it is that you'll have the money you want for your retirement.

Because everyone has different goals and expectations, everyone has different reasons for investing. However, it simply comes down to managing your money to provide a comfortable life and financial security for you and your family.

What is the best way to invest?

* Get in the habit of saving. You must set aside a portion of your income as often as possible.
* Invest in financial markets so your money can grow at a meaningful rate.
* Ignore short-term price fluctuations, and focus on long-term potential.
* Ask questions and become educated before making any investment.
* Invest with your head, not with your stomach or heart. Avoid the urge to invest based on how you feel about an investment.

Before you start

Organize your finances to help manage your money more efficiently. Remember, investing is just one component of your overall financial plan. Get a clear picture of where you are today. What's your net worth? Compare your assets with your liabilities. Look at your cash flow. Get a grasp on the amount of income that you're receiving, and where that income is going each month.

List your expenses. You can typically identify enough expenses to account for at least 95 percent of your income. If not, go back and look again. You could use those lost dollars for investing. Are you drowning in credit card debt? If so, pay it off as quickly as possible before you start investing. Every dollar that you save in interest charges is one more dollar that you can invest for your future.

Establish a solid financial base: Make sure you have an adequate emergency fund, sufficient insurance coverage, and a realistic budget. Also, take full advantage of benefits and retirement plans that your employer offers.

Understand the impact of time

Take advantage of the power of compounding. Compounding is the earning of interest on interest, or the reinvestment of income. For instance, if you invest $1,000 at 8 percent, you will earn $80.

By reinvesting the earnings and assuming the same rate of return, next year you will earn $86.40 on your $1,080 investment. The following year, $1,166.40 will earn $93.31.

Use the Rule of 72 to judge an investment's potential. Divide the projected return into 72. The answer is the number of years that it will take for the investment to double in value. For example, an investment that earns 8 percent per year will double in 9 years.

Consider working with a financial planner

Whether you need a financial planner depends on your own comfort level. If you have the time and energy to educate yourself, you may not need any assistance. However, don't underestimate the value of the experience and knowledge that a professional financial planner can offer. A financial planner can help you define your goals and objectives, make a net worth statement and a spending plan, decide the level of risk that's right for you, and work with you to create a comprehensive financial plan. For many, working with a professional advisor is the single most important investment that they make.

Review your progress

Financial management is an ongoing process. Keep good records and recalculate your net worth annually. This will help you for tax purposes and show you how your investments are doing over time. Once you take that first step of getting started, you will be better able to manage your money to help afford today's needs and pay for tomorrow's goals.

Few terms in personal finance are as important, or used as frequently, as "risk." Nevertheless, few terms are as imprecisely defined. Almost universally, when financial advisors or the media talk about investment risk, their focus is on the historical price volatility of the asset or investment under discussion.

Advisors label as aggressive or risky an investment that was prone to wild price gyrations in the past. The presumed uncertainty and unpredictability of this investment's future performance is perceived as risk. Assets characterized by prices that historically have moved within a narrower range of peaks and valleys are considered more conservative. Unfortunately, this explanation is seldom offered, so it is often not clear that the volatility yardstick is being used to measure risk.

Before exploring risk in more formal terms, a few observations are worthwhile. On a practical level, we can say that risk is the chance that your investment will provide lower returns than expected or even a loss of your entire investment. More to the point, you are concerned about the chance of not meeting your investment goals. After all, you are investing now so you can do something later (e.g., pay for college, retire comfortably). Since every investment carries some degree of risk, it makes sense to understand the kinds of risk as well as the extent of risk that you choose to take, and to learn to manage it.

What you probably already know about risk

Even though you might never have thought about the subject, you are already familiar with many kinds of risk from life experiences. For example, you know intuitively that a scandal or lawsuit that involves a particular company will likely cause a drop in the price of that company's stock, at least temporarily. You assume that if one car company hits a home run with a new model, that would be bad news for all competing automakers. In contrast, you'd expect an overall economic slowdown and stock market decline to hurt companies and their stock prices across the board, not just in one industry.

You must be mindful of these and other kinds of risks going forward. Volatility is a good place to begin, however, as we examine the elements of risk in more detail.

Volatility--why is it risky?

Suppose that you had invested $10,000 in each of two mutual funds 20 years ago, and that both funds produced average annual returns of 10 percent. Imagine further that one of the funds, Steady Freddy, returned exactly 10 percent every single year, unlike any real investment. The annual return of the second fund, Jekyll & Hyde, alternated--5 percent one year, 15 percent the next, 5 percent again in the third year, and so on. What would these two investments be worth at the end of the 20 years?

It seems obvious that if the average annual returns of two investments are identical, so will be their final values. But this is a case where intuition is wrong. If you plot the 20-year investment returns on a graph, you'll see that Steady Freddy's final value is over $2,000 more than what you'd get from the variable returns of Jekyll & Hyde. The shortfall gets much worse if you widen the annual variations (e.g., try plus-or-minus 15 percent, instead of plus-or-minus 5 percent).

This example illustrates one of the effects of investment price volatility: Short-term fluctuations in returns are a drag on long-term growth. (Note: This is a hypothetical example and does not reflect the performance of any specific investment. This example assumes the reinvestment of all earnings and does not consider taxes or transaction costs.)

Although past performance is no guarantee of future results, historically the negative effect of short-term price fluctuations has been reduced by holding investments over longer periods. But counting on a longer holding period means that some additional planning is called for. You should not invest funds that will soon be needed into a volatile investment. Otherwise, you might be forced to sell the investment to raise cash at a time when the investment is at a loss.

Different types of risk:
* Market risk: This refers to the possibility that an investment will lose value because of a general decline in financial markets, due to one or more economic, political, or other factors.
* Inflation risk: Sometimes known as purchasing power risk, this refers to the possibility that prices will rise in the economy as a whole, so your ability to purchase goods and services would decline. For instance, your investment might yield a 6 percent return, but if the inflation rate rises to double digits, the invested dollars that you got back would buy less than the same dollars today. Inflation risk is often overlooked by fixed income investors who shun the stock market completely, fearing the risks found there.
* Interest rate risk: This relates to increases or decreases in prevailing interest rates and the resulting price fluctuation of an investment, particularly bonds. There is an inverse relationship between bond prices and interest rates. As interest rates rise, the price of bonds falls, and vice versa. If you need to sell your bond before maturity, you run the risk of loss of principal if interest rates are higher than when you purchased the bond.
* Reinvestment rate risk: This refers to the possibility that you will have to reinvest funds at a lower rate of return than the original investment. Your five-year, 3.75 percent certificate of deposit might mature at a time when your only choice is to buy a new certificate of deposit at just 3 percent.
* Default risk (credit risk): This refers to the risk that a bond issuer will not be able to pay its bondholders.
* Liquidity risk: This refers to how easily your investments can be converted to cash. Occasionally (and more precisely), the foregoing definition is modified to mean how easily your investments can be converted to cash without significant loss of principal.
* Political risk (for those making international investments): This refers to the possibility that changes in foreign governments or politics will adversely affect the financial markets there or the companies you invested in.
* Exchange risk (for those making international investments): This refers to the possibility that the fluctuating rates of exchange between U.S. and foreign currencies will negatively affect the value of your foreign investment, as measured in U.S. dollars.

The relationship between risk and reward

In general, the more risk you're willing to take on (whatever type and however defined), the higher your potential returns, as well as potential losses. This proposition is probably familiar and makes sense to most of us. It is simply a fact of life--no sensible person would make a higher-risk, rather than lower-risk, investment without the prospect of a higher return. That is the tradeoff. Your goal is to maximize returns without taking on more risk than you can bear.

Understanding your own tolerance for risk

The concept of risk tolerance is twofold. It refers to both your personal desire to assume risk and your financial ability to endure risk. It also assumes that risk is relative to your own personality and feelings about taking chances. If you find that you can't sleep at night because you're worrying about your investments, you've assumed too much risk. Your financial ability to endure risk has more to do with your age, stage in life, how soon you'll need the money, and your financial goals. If you're investing for retirement and you're 35 years old, you can endure more risk than someone who is 10 years into retirement, because you have a longer time frame before you need the money. With 30 years to build your retirement fund, you have the ability to withstand short-term fluctuations in hopes of a greater long-term return.

Reducing risk through diversification

Don't put all your eggs in one basket. You can potentially help offset the risk in any one investment by spreading your money among several asset classes. Diversification strategies take advantage of the fact that forces in the markets do not normally influence all types or classes of investment assets at the same time or in the same way. Swings in overall portfolio return can be smoothed out by diversifying your investments among assets that tend not to experience price fluctuations that mirror each other. In a slowing economy, for example, stock prices might be going down or sideways, while falling interest rates cause the price of bonds to rise.

In addition to diversifying among asset classes, you should consider diversification within an asset class. There are different types of investments within an asset class. For example, when investing in stocks, you can choose to invest in large companies that tend to be less risky than small companies. When investing in bonds, you can choose between Treasury securities and the more risky corporate securities. Or, you could decide to allocate a portion of your investment funds among all four types of investments. Diversifying within an asset class helps reduce the risk to your portfolio due to the impact of any one particular type of stock, bond, or mutual fund.

Evaluating risk--where to find information about investments

You should become fully informed about a product before you invest. There are numerous sources of information about investment products. You can find information in third-party business and financial publications and websites, as well as annual and other periodic financial reports. Obtain a prospectus if the investment is a mutual fund or an initial public offering, or an offering circular if the investment is a limited partnership or hedge fund.

Third-party business and financial publications can provide credit ratings, news stories, and financial information about a company. For mutual funds, third-party sources provide information such as ratings, financial analysis, and comparative performance relative to peers.

The prospectus for a mutual fund provides a vast amount of information, including the fund's investment objectives, the types of securities it invests in and risks that go along with those securities, past performance, expense information, and financial reports. If you are considering investing in an initial public offering (IPO), it is extremely important that you read the prospectus.

The prospectus contains information about the company's products and/or services, operating history, future prospects, and management. The offering circular of a limited partnership or hedge fund should contain information similar to that of a prospectus for an IPO, as well as information regarding the general partner, special risks of investing in the product, and liquidity.

You can also check with the Securities and Exchange Commission (SEC). There, you can obtain reports disclosing significant events (e.g., the CEO plans to sell a large amount of shares; an investor plans to purchase a large amount of shares for a takeover) and financial reports. One of the easiest ways to get information is to go to the SEC's website.

A successful investor maximizes gain and minimizes loss. Here are six basic principles that may help you invest successfully.

Long-term compounding:
Your nest egg may get bigger, and bigger, and bigger ... It's the "rolling snowball" effect. Put simply, compounding pays you earnings on your reinvested earnings. The longer you leave your money at work for you, the more exciting the numbers get.

For example, imagine an investment of $10,000 at an annual rate of return of 8 percent. In 20 years, assuming no withdrawals, your $10,000 investment would grow to $46,610. In 25 years, it would grow to $68,485, a 47 percent gain over the 20-year figure. After 30 years, your account would total $100,627. (Of course, this is a hypothetical example that does not reflect the performance of any specific investment.)

This simple example also assumes that no taxes are paid along the way, so all money stays invested. That would be the case in a tax-deferred individual retirement account or qualified retirement plan, or even if you just bought and held shares of a stock that paid no dividends. The compounded earnings of deferred tax dollars are the main reason experts recommend fully funding all tax-advantaged retirement accounts and plans available to you.

While you should review your portfolio on a regular basis, the point is that money left alone in an investment offers the potential of a significant return over time. With time on your side, you don't have to go for investment "home runs" in order to be successful.

Endure short-term pain for long-term gain: ride out market volatility.

It sounds simple, doesn't it? But what if you've invested $10,000 in the stock market and the price of the stock drops like a stone one day? On paper, you've lost a bundle, offsetting the value of compounding you're trying to achieve. It's tough to stand pat.

There's no denying it--the financial marketplace can be volatile. Still, it's important to remember two things. First, the longer you stay with a diversified portfolio of investments, the more likely you are to reduce your risk and improve your opportunities for gain.

Second, during any given period of market or economic turmoil, some asset categories and some individual investments historically have been less volatile than others. Bond price swings, for example, have generally been less volatile than stock prices. Although past performance cannot predict future results, you can minimize your risk somewhat by diversifying your holdings among different classes of assets, as well as different individual assets within each class.

Asset allocation: spreading the wealth

Asset allocation is the process by which you spread your investment dollars over several categories of assets, usually referred to as asset classes. These classes include stocks, bonds, cash (and equivalents), real estate, precious metals, collectibles, and insurance products.

For many average investors, the focus is almost entirely on stocks, bonds (or mutual funds of stocks and bonds), and cash. You'll therefore also see the term asset classes used to refer to subcategories of these investments, such as aggressive growth stocks, long-term growth stocks, international stocks, government bonds (U.S., state, and local), high-quality corporate bonds, low-quality corporate bonds, and tax-free municipal bonds.

There are two main reasons why asset allocation is important. First, the mix of asset classes you own is a large factor--some say the biggest by far--in determining your overall investment portfolio performance. In other words, the basic decision to divide your money 80 percent in stocks and 20 percent in bonds is probably more important than your subsequent decisions over exactly which companies to invest in, for example.

Second, by dividing your investment dollars among asset classes that do not respond to the same market forces in the same way at the same time, you can minimize the effects of market volatility while maximizing your chances of return in the long term. Ideally, if your investments in one class are performing poorly, you will have assets in another class doing well. The gains in the latter will offset the losses in the former, minimizing the overall effect on your portfolio.

Consider liquidity in your investment choices

Liquidity refers to how quickly you can convert an investment into cash without loss of principal. Generally speaking, the sooner you'll need your money, the wiser it is to keep it in investments with comparatively less volatile price movements. You want to avoid a situation, for example, where you need to write a tuition check next Tuesday, but the money is tied up in a long-term mutual fund whose price is currently experiencing a loss.

Therefore, your liquidity needs should affect your investment choices. If you'll need the money within the next one to three years, you may want to invest in short-term bonds, certificates of deposit, a money market account, or a savings account. Your rate of return will likely be lower than that possible with more volatile investments such as stocks, but you'll breathe easier knowing that the principal you invested is relatively safe and quickly available, without concern over market conditions on a given day.

Dollar cost averaging: doing it consistently and often dollar cost averaging is a method of accumulating shares of stock or a mutual fund by purchasing a fixed dollar amount of these securities at regularly scheduled intervals over an extended time. When the price is high, your fixed-dollar investment buys less, but when the prices are low, the same dollar investment will buy more shares. A regular, fixed-dollar investment should result in a lower average price per share than you would get buying a fixed number of shares at each investment interval.

Remember that, just as with any investment strategy, dollar cost averaging can't guarantee you a profit or protect you against a loss if the market is declining. To maximize the potential effects of dollar cost averaging, you should also assess your ability to keep investing even when the market is down.

An alternative to dollar cost averaging would be trying to "time the market," in an effort to predict how the price of the shares will fluctuate in the months ahead so you can make your full investment at the absolute lowest point. However, market timing is generally unprofitable guesswork. The discipline of regular saving is a much more beneficial strategy, and it takes no mental effort or study.

Review your portfolio and game plan: buy and hold, don't buy and forget

Unless you plan to rely on luck, your portfolio's long-term success will depend on periodically reviewing it. Maybe your uncle's hot stock tip has frozen over. Maybe economic conditions have changed the prospects for a particular--or a whole class of--investment.

Even if nothing bad at all happens, your investments will appreciate at differing rates, so after a while, your asset allocation mix will change. For example, if you initially decided on an 80 percent to 20 percent mix of stocks to bonds, you might find that the total value of your portfolio has become divided 88 percent to 12 percent. When that's the case, you'll need to rebalance your portfolio.

Rebalancing involves restoring your original asset allocation decisions by shifting your funds among investment classes to restore the ratios you decided on in first designing your portfolio. Many investment advisors recommend using shifts of 5 percent or more as a trigger for rebalancing. Others recommend doing it every year.

Once you decide to take the plunge and begin investing, the next question you must anwer is: In what should I invest? There are so many investment options -- stocks, bonds, real estate, precious metals, commodities, antiques and collectibles, etc. -- that many people quickly become bewildered. It is possible to invest in any and all of these areas. And you may want to consider foreign investing as a entire new layer to your personal investing landscape.

One of the first investing decisions you will need to make is which broker and/or brokerage firm to use. A broker is a person who mediates between you (as the buyer or seller of a security) and the other party.

A brokerage firm is a company that specializes in this type of brokering. Financial planners also can be useful allies as you pursue your investment goals. Full-service brokerage firms offer personalized attention to you and the progress of your investment portfolio. Discount brokerage firms offer much less personal attention, but they are also much less expensive than full-service brokerages.

Don't hesitate to ask family members, friends, and colleagues about their experiences with brokers and brokerage firms. Not only will you hear the names of some good brokers (and probably some bad ones, too), but you'll also begin to better understand the nature of the broker/client relationship. There also are great online resources to help you select a broker, such as the bullet points on the SEC website (http://www.sec.gov/investor/pubs/inws.htm).

When selecting a broker, obtain and read all the information you can about that particular broker and, if appropriate, the brokerage firm for which he or she works. You may want to investigate several brokers before selecting one to work with. Schedule appointments and try to meet face-to-face. You will need to feel comfortable with and trust your broker. You will want to feel comfortable with her or his knowledge, experience, communication style, overall personality, suite of available services, and, of course, price structure. Also, be prepared to discuss your overall financial and investing goals with your broker. Your broker will want to learn as much about you. If your broker works for a brokerage firm, you will want to learn more about that firm, too. The FINRA website (http://www.finra.org/InvestorInformation/InvestorProtection/p005882) provides a free online tool to help you check the professional backgrounds of securities firms and individual brokers.

Many individual investors are opting to use online brokerage firms. When investigating online brokerage firms, you will want to note how much money you must deposit to open an account, the mix of securities (mutual funds, foreign stocks, bonds, penny stocks, IPOs (initial public offerings), etc.) each online brokerage firm offers, the available and costs of phone support, and other financial and research services offered by the online brokerage firm.

A stock is an indication that you possess partial ownership in a corporation. All of the stockholders as a group form the owners of a given corporation. Types of stocks include common and preferred stocks.

A common stock usually empowers the stockholder to vote at meetings of the shareholders and to receive dividends, whcih are distributions of a portion of a company's earnings to its shareholders. Holders of preferred stocks often have no voting rights, but they may have a higher or prior claim on the assets and earnings of the company, especially if the company goes bankrupt or is liquidated.

Stocks, of course, are bought, sold, and traded on stock markets, such as the New York Stock Exchange, Nasdaq, the London Stock Exchange, and other stock exchanges around the globe. Historically, stocks as a whole have outperformed other types of investments, such as bonds or savings accounts.

Most individual investors purchase and sell stocks through brokers and brokerage firms. However, sometimes it is possible to purchase stock directly from the company. Dividend Reinvestment Plans (DRIPs) and Direct Investment Plans (DIPs) are methods used by some companies to allow individuals to invest in the company's stock, often at regular intervals over a period of time.

A bond is a long-term promissory notes in which the issuer (a government, for example) agrees to pay you the amount of the face value of the bond on some future date, as well as pay a specified interest rate at regular intervals. Bonds basically are a form of debt undertaken by corporate and governmental entities to raise money for projects, new ventures, etc. Bonds generally involve lower risk than stocks, but they also generally pay a lower rate of return.

The primary issuers of bonds in the U.S. are corporations, municipalities, and the U.S. Treasury. Each issuing entity of bonds has a certain quality of its credit, which, along with the duration of the bond, helps to determine the bond's interest rate. The maturity periods for bonds range from 90 days to 30 years, depending on the type of the bond and the issuing entity.

Bonds often are graded by private independent rating services, such as Standard & Poor's and Moody's. The ratings, which range on the S&P scale from AAA as the highest to C for junk bonds, are based on an analysis of the financial strength of the issuing governmental or corporate entity.

Investing in the bond market may also have some positive tax implications for individual investors. Many "municipal bonds" sold by states, counties, and cities are tax-exempt at the federal level, and often at the state and local levels, too, if the individual investor lives in the state and/or city in which the municipal bonds were issued.

A mutual fund is a pool of money invested by an investment company in a number of investment areas, such as stocks, bonds, and government securities. Each mutual fund has its own mix of investments. Because most mutual funds invest in a wide range of areas, they can offer investors the benefits of a diversified portfolio, which may include reduced risk.

Mutual fund companies are classified by the Securities and Exchange Commission (SEC) as "open-end investment companies" which means that on a daily (or more frequent) basis, the company is issuing new shares to investors and buying back shares from investors who have decided to leave the mutual fund.

Mutual funds began in the 1920s, but they really grew in both numbers and combined assets in the Sixties, Seventies, and Eighties. Today there are over 8,000 mutual funds in the U.S., with combined assets of over $12 trillion.

There are many different types of mutual funds. Some invest primarily or exclusively in U.S. securities, some are a mix of U.S. and foreign securities, and some are primarily or exclusively comprised of foreign securities. Equity funds are the most common type of mutual fund, accounting for approximately 50 percent of the industry.

Exchange-traded funds (ETFs) are generally index funds that track stock market indexes. Mutual funds are managed by management companies, which hire (and fire) fund managers to develop, monitor, and modify the portofolio of investments in concert with the stated objectives of the mutual fund. The "net asset value" (NAV) of a mutual fund is the current market value of the securities within the fund, minus any liabilities the fund may be carrying. The "public offering price" (POP) of the mutual fund usually is the sum of the NAV and a sales charge.

Mutual funds often are grouped based on the size of their capitalization ("cap"): micro-cap, small-cap, mid-cap, and large-cap.

Individual Retirement Accounts (IRAs) are tax-deferred financial plans that individuals establish with one or more financial institutions, such as banks, mutual funds, or brokerage firms. Individual investors often make periodic (usually annual) contributions to their IRAs. The Internal Revenue Service has many rules and requirements for putting money into an IRA and taking money out. See, for example, IRS Publication 590 (http://www.irs.gov/pub/irs-pdf/p590.pdf). Generally, if you take money out of an IRA before you reach the retirement age of 59 1/2 years, you will be required to pay penalties.

Contributions to a traditional IRA are held by a designated institution, such as a bank or brokerage firm, and may be invested by that designated institution. The main advantage of a traditional IRA is that the contributions you make to it over the years usually are tax-deductible. However, when upon retiring you begin to withdraw funds from your IRA, those withdrawals probably will be taxed by the federal government at rates applicable at the time of withdrawal.

The Roth IRA investment vehicle, established in 1998, allows an individual investor to invest in a wide variety of securities and then manage the Roth IRA in various flexible ways. Compared to a traditional IRA, the Roth IRA's contributions are not tax-deductible, but usually withdrawals are tax-free. In most instances, it is possible to convert a traditional IRA to a Roth IRA, but there are exceptions, and there may or may not be strategic investment advantages in doing so.

The U.S. economy is large, but it still represents only a fraction of the total world economy. Investment advisors often argue that it makes little sense to limit one's personal investing only to companies that operate primarily or exclusively in the U.S. They argue that foreign investments not only allow you to select from a lareger pool of companies and sectors in the global economy, thus further diversifying your personal investment portfolio, but also because foreign investments can offer some opportunities for high returns on investments.

Many personal investors are actively pursuing foreign investments. In 2006, for example, over half of the new money flowing into U.S. mutual funds was earmarked for foreign investments. Investing globally carries some seemingly inherently hightened risks. When you invest abroad, you may lose the consistency of a single currency, standard accounting practices, securities trading laws and rules, reliable information, and watchdog organizations. Although not unknown in the U.S., political unrest and governmental instability abroad can lead to increased investment risks.

Many mutual funds are available that include some foreign investments. Global funds generally focus on promising investments anywhwere in the world, including the U.S. Foreign funds, on the other hand, invest almost all their assets outside the U.S. If you are trying to geographically diversify your portfolio and want to make sure you have invested in foreign companies, a foreign mutual fund may be the path to follow.

Regional funds and emerging market funds also are available. They focus their investments on specific countries, regions of the world, or small (usually volatile) markets. These funds tend to involve significant risk, often with breathtaking climbs and dips. Currency conversions add another wrinkle to foreign investments. As the U.S. dollar rises and falls against other world currencies, that may affect how well your foreign investments perform for U.S. citizens. The effects of continued globalization need to be considered too. Some financial analysts note that increasing globalization of many economies and investment markets has resulted in a world economy in which many of the components are more "in synch" with each other than they were, say, 25 years ago. For an individual investor trying to diversify his or her investment portfolio, this may mean that foreign investments now pack a softer diversification punch.

Real estate includes land and/or buildings. Of course, the home you reside in is an investment, but you also can build a portfolio of non-owner-occupied real estate, including other residential and commercial property, vacation homes, and undeveloped land. Investment real estate holdings usually generate income through a combination of rent and price appreciation in the real estate market.

As with most types of personal investing options, there are tax implications associated with investment real estate. Some of the tax advantages of the real estate you use as your primary residence may not pertain to investment real estate.

When considering real estate investments, two key concepts to consider are equity and liquidity. Home equity, for example, is the dollar value of the owner's share of the value of a property, after the balance on the mortgage and other outstanding debts have been subtracted. For example, if you own a home with a current fair-market value of $200,000, and the remaining balance on your mortgage for that home is $100,000, you have $100,000 in equity in that piece of real estate.

Real estate investments are notoriously low in liquidity. Liquity is the ability to convert one type of investment (e.g., real estate) into another type (e.g., cash) quickly with minimal loss of value in the initial investment. On a smaller scale, using a pawn broker provides a rough lesson in liquidity. That piece of jewelry you purchased last month for $1,000 may bring only $100 from a pawn broker. Real estate and collectables usually have low liquidity and may serve you better as long-term investment strategies, perhaps spilling over multiple generations.

The value of almost any piece of real estate is affected not only by the size, quality, and condition of the piece of real estate itself, but also about the surrounding pieces of real estate. A four-bedroom, three-bath home in a run-down neighborhood across the street from a fast food restaurant probably will have a lower market value than the same home situated in a well-maintained neighborhood.

Real estate investment trusts (REITs) are available for personal investors. A REIT is a type of security that is bought and sold like stocks on the major exchanges. A REIT invests in real estate either directly through properties (also known as an Equity REIT) or indirectly through real estate mortgages--Mortgage REITs. There also are Hybrid REITs that -- you guessed it -- invest in both properties and mortgages. REITs tend to focus on larger real estate holdings, such as shopping malls, business parks, apartment complexes, entertainment complexes, warehouses, motels, and resorts. Some REITs focus on a specific type of real estate, and others focus on a specific geographic area, such as a state, region of the nation, or country.

A commodity is something with a defined uniform value that is produced by many suppliers and traded on one or more commodity markets. Commodities include agricultural staples (corn, soybeans, coffee, cotton, sugar, etc.), livestock (feeder cattle, hogs, pork bellies, etc.), precious metals, industrial metals, energy sources (crude oil, natural gas, etc.), and other things.

Commodities generally are traded on exchanges, such as the Chicago Board of Trade, the New York Mercantile Exchange, and London Metal Exhange. Commodities often are traded as "futures" or futures contracts. Individual investors should note that they are entering into contracts, not purchasing equity in a corporation or piece of real estate. This means that investors are not actually purchasing specified amounts of a commodity, but rather futures contracts to buy specific quantities of a given commodity at a specified price with actual delivery set for a specified time and date. The investors do their work before the actual date the commodity is to be delivered, usually to some processing plant or manufacturer.

Commodity trading also can involve what are known as options. An option contract is an instrument that gives the owner the right to buy or sell a specified amount of a specified commodity within a specified period of time.

Grading and quality control are essential to any commodities market. Government agencies, such as the U.S. Dept. of Agricuture, play a role in defining and verifying the grade and quality of various commodities. In the U.S., the trading of commodity futures is regulated by the Commodity Futures Trading Commission, a federal agency.

Although commodities trading began with agricutural products (e.g., rice in Japan and hard spring wheat in Minneapolis), financial products also are traded now in a commodity fashion.

Precious metals include both well-known metals such as gold and silver as well as lesser known precious metals such as palladium. Some individual investors choose to diversity their investment portfolios by actualling purchasing and holding some previous metals, often in the form of coins or jewelry, in safety deposit boxes. Gold, for example, is considered a form of timeless, international currency. Nearly all societies and cultures across the ages have placed a high value on objects made of gold.

In a time of economic collapse and/or social/political upheaval, gold may be accepted and exchanged for needed goods and services when other securities such as stocks, bonds, and national currencies may have lost most or all of their market value. Investing in some precious metals to hold, therefore, can be understood as a coping strategy for catastrophic times.

Collecting collectibles can be a hobby, a form of personal investing, or both. As an individual investor interested in collectibles, you need to decide what role collectibles will play in your life as well as in your investment portfolio. Beware: Sometimes your affection for your collectibles as an avocational interest can cloud your judgement of those same collectibles as an investment.

Collectibles are basically anything that people collect. The range of collectibles is almost limitless -- baseball cards, toys, figurines, you name it. Antiques can be loosly defined as collectibles that are old and exhibit some sort of craftsmanship. The public television show "Antiques Roadshow" and the online trading venue eBay have done much to increase the awareness of and enthusiasm for collectibles.

To be good at collecting a certain type of thing, you need to develop a certain level of knowledge and expertise about that type of object. Most people take a long-term interest in collectibles Investing in collectibles contains its own set of risks. The seller of an object may misrepresent the nature or condition of an object for sale. The object may be lost, damaged, destroyed, or stolen. The tastes and wisdom of the crowd involved in a collectible area may evolve significantly over time.

Collectibles can be bought, sold, and traded at flea markets, antigue malls, conventions, auctions, garage sales, and online. Investing in collectibles generally offers low liquidity (that is, they cannot be quickly and easily turned into cash), and they do not provide many tax advantages.

Collectibles usually generate cash only at the time they are sold, with no periodic income via dividends. They appreciate in value over time based on the overall demand for those items, their rarity, and other factors. The value of some collectible items can be based on popular trends, and they peak in value as a collectible rather quickly. Other types of collectibles tend to appreciate in value rather steadily over a longer period of time, such as decades and even centuries. Collectibles often are held by the individual investors, which can create storage needs, insurance needs, and safe shipping needs.

Social Security has been providing benefits to millions of workers for 65 years.

Social Security, sometimes referred to by its full name, Old-Age, Survivors, and Disability Insurance (OASDI) is a social insurance system established in 1935 to provide benefits to workers and their family members upon retirement, disability, or death. It is an earned benefit insurance program, which means that only those who work and pay taxes are eligible for Social Security benefits.

At the end of December 2003, Social Security provided monthly benefits to 47 million beneficiaries (or one in every 6 Americans). Social Security paid a total of $471 billion to retired workers, disabled workers, and to the surviving family members of deceased workers in 2001 (SSA 2004 Trustees Report). In 2002, Social Security beneficiaries included about 3 million children under the age of 18.

Social Security benefits are guaranteed to beneficiaries. Because Social Security is not an investment scheme but rather a social insurance program, its benefits will continue to be paid as long as a beneficiary depends on them. Social Security's finances are not subject to the ups and downs of the stock market, or the luck of individual investors. The promise of Social Security benefits is instead backed by the good faith of the U.S. government, pretty much in the same way that the government backs the value of the dollar. Thus, there is no uncertainty for beneficiaries, once they start receiving benefits, they will continue to receive them in the future. Social Security offers mainly retirement benefits.

Workers can receive four different types of benefits under Social Security: retirement, early retirement, disability, and survivorship benefits.

Workers are entitled to retirement benefits if they have contributed to Social Security for at least 10 years, and if they have reached the normal retirement age, which is currently 65 (and is set to increase to 67 for workers born after 1959).

Early retirement benefits are available to workers if they have contributed to Social Security for at least 10 years, and if they have reached the earliest age at which benefits can be paid, currently 62. Benefits, however, are reduced by 20% compared to what the retiree would have received at age 65.

Both full and early retirement benefits were paid to 29.2 million retired workers in 2002. Of these, 71% or 20.8 million retirees received a reduced benefit payment because they chose the early retirement option. Average monthly retirement benefits for all workers receiving retirement benefits were $895 in 2002, or about $10,700 per year. In comparison, workers who had retired early received on average $830 per month.

Workers are also insured in case they become disabled.

Social Security provides insurance to workers in case they become disabled and can no longer work. The disability need not be related to an accident at the worker's job. The number of years that are required to receive disability benefits varies with the age of a worker. Younger workers need fewer years to qualify for disability benefits. In 2002, Social Security paid an average monthly disability benefit of $834 to 5.5 million beneficiaries.

Social Security offers life-insurance type benefits to workers.

If a worker dies, her family receives benefits from Social Security. Survivorship benefits are paid if the deceased worker has, on average, worked at least one quarter for each year after he or she attained the age of 21. In 2002, Social Security paid an average monthly survivorship benefit of $861.

Social Security is the most significant source of income for the majority of retirees over 65 years old.

Social Security benefits are the most important source of income for the majority of elderly households. Although these benefits are modest, they account for a large portion of income for many elderly households.

Social Security is a social insurance program.

Social Security replaces the source of income a worker has lost due to retirement or disability, or the income a family has lost due to the worker's death. To ensure that Social Security benefits are adequate for every worker who is insured, Social Security?like any other insurance?pays disproportionately more benefits to those who need them most. Workers with low lifetime earnings receive relatively higher benefits (in relation to their lifetime earnings) than workers with high lifetime earnings. The retirement benefit received by a low earner is smaller in absolute terms, but larger as share of earnings, than the benefits received by high earning workers. For example, typical low-wage workers will receive annual benefits that are more than half as large (57%) as their average yearly earnings. Benefits for high-wage workers are larger but on average just 38% of their annual earnings. This progressive benefit structure boosts the retirement incomes of low- and middle-wage workers.

Social Security also provides higher lifetime benefits to workers who live longer.

By the time a worker retires, benefits are granted on the basis of a workers age and earnings history. Because women have significantly higher life expectancies than men, they will receive the same monthly Social Security benefits than men.

Social Security is particularly important to women.

Women have fewer earnings to rely on in retirement. Less than half of all workers (46%) had a private pension through their employer in 2002, women are less likely than men: 44% of women have pensions compared to 47% of men. Women of color are even less likely to have a pension than are white women. Furthermore, a woman's pension is typically smaller than a man's because women earn less per hour, and often work part time or spend time out of the labor force.

Because they earn less, women have fewer savings than men to depend upon in retirement, thus they rely more heavily on Social Security.

Since women live in retirement an average of three and a half years more than men, they need more retirement income over the course of their lives, not less. They need a retirement program - like Social Security - that provides more income to people who live longer.

Given their longer life spans, it is especially important for women that Social Security benefits be adjusted each year for inflation. If inflation were 3% per year but benefits were not adjusted accordingly, benefits would buy 25% less after 10 years and 45% less after 20 years.

A woman who never worked but stayed home to care for family is still entitled to a Social Security benefit equal to half that of her working husband.

Widows and divorced women (after a marriage of at least 10 years) are entitled to Social Security benefits even if they never worked, so long as their husbands were eligible for benefits.

To pay for benefits, Social Security receives income from three sources.

Most of the money that is needed to pay for benefits comes from payroll taxes. Currently, employees and employer each pay 6.2% to Social Security, for a combined tax rate of 12.4% of wages and salaries. Self-employed workers pay the full 12.4% out of their earnings. Taxes, however, have to be paid only up to an earnings ceiling, which is $90,000 annually in 2005. Earnings above the ceiling are not subject to the payroll tax. In 2003, Social Security received a total of $535.2 billion in payroll taxes.

As a result of reforms to Social Security in 1983, a trust fund was specifically set up as a savings account to pay for baby boomers. Since then, Social Security has taken in more money than it has paid out in benefits. Consequently, it has built up a trust fund over the years. Social Security earns interest on this trust fund. In 2003, the Old Age and Survivor's Insurance trust fund received 6.0% interest on its assets, earning $75.2 billion in interest, and the Disability Insurance trust fund received 5.9% interest, earning $9.7 billion in interest.

Finally, some Social Security benefits are subject to taxes, which are then paid to Social Security. In 2003, taxes on Social Security benefits amounted to a total of $13.4 billion.

Social Security is building up a trust fund.

Because income is currently exceeding expenditures, Social Security is building up a trust fund. Total income to Social Security was $632 billion in 2003. Its expenditures came to $479 billion, $471 billion of which was benefit payments. Consequently, Social Security managed to increase its trust fund by $153 billion in 2003. As a result, Social Security held a total of $1,531 billion in assets at the end of 2003. If Social Security faces a shortfall in income, the trust fund assets can be used to pay for the additional benefits.

Trust fund assets are invested in government bonds.

Social Security trust fund assets, currently worth over $1.5 trillion, are invested in special, non-tradable government bonds. Each year the U.S. Treasury issues these government bonds, up to the amount of the Social Security trust fund surplus, to be added to the account. The bonds earn an interest rate comparable to the market interest rate for tradable government bonds. During 2003, the effective annual interest rate earned on all bonds held by the trust funds was roughly 6.0%.

Social Security is not going broke.

Each year, in early spring, the trustees of Social Security release their report. As required by law, the trustees present what can be described as their best guesses for three different scenarios for the future of Social Security. In their annual report for 2004, the trustees project that Social Security will take in more in income than it will pay out in expenditures until 2018. Between 2018 and 2028, interest income earned on the trust fund assets is forecasted to make up the difference between income and expenditures. After 2028, Social Security is expected to draw down its trust funds to pay for the expenditures that are not covered by income. Finally, in 2042, the trust fund assets are expected to be gone, and income is projected to be less than expenditures. However, the trustees project that Social Security will still be able to pay 74% of its promised benefits from 2042 to 2078, and those benefits would still be higher in real (inflation-adjusted) terms than retirees are being paid today.

Social Security is not going broke. The trustees instead project a financing shortfall that may happen almost 40 years from now. The nonpartisan Congressional Budget Office doesn't project a shortfall until 2052. The trustees' projections are based on pessimistic assumptions. Real growth is expected to fall to between 1.7% and 1.8% over the long-run, which has never been the case for an extended period of time during the post-war years. Similarly, the trustees assume that in the long-run the economy will settle on an average productivity growth rate of 1.6%, which is again too low by historical standards. Higher productivity and consequently faster real wage growth which have both historically been about 2.0% would be more realistic and improve Social Security's finances.

Myths and misstatements of fact frequently circulate on the Internet, in email and on websites, and are repeated in endless loops of misinformation. One common set of such misinformation involves the history of the Social Security system.

One Common Form of the Myths:

"Franklin Roosevelt introduced the Social Security (FICA) program. He promised:
1) That participation in the program would be completely voluntary;
2) That the participants would only have to pay 1% of the first $1,400 of their annual incomes into the program;
3) That the money the participants elected to put into the program would be deductible from their income for tax purposes each year;
4) That the money the participants paid in would be put into the independent "Trust Fund," rather than into the General operating fund, and therefore, would only be used to fund the Social Security Retirement program, and no other Government program.;
5) That the annuity payments to the retirees would never be taxed as income."

CORRECTING THE MYTHS AND MISSTATEMENTS

Myth 1: President Roosevelt promised that participation in the program would be completely voluntary.

Persons working in employment covered by Social Security are subject to the FICA payroll tax. Like all taxes, this has never been voluntary. From the first days of the program to the present, anyone working on a job covered by Social Security has been obligated to pay their payroll taxes.

In the early years of the program, however, only about half the jobs in the economy were covered by Social Security. Thus one could work in non-covered employment and not have to pay FICA taxes (and of course, one would not be eligible to collect a future Social Security benefit). In that indirect sense, participation in Social Security was voluntary. However, if a job was covered, or became covered by subsequent law, then if a person worked at that job, participation in Social Security was mandatory.

There have only been a handful of exceptions to this rule, generally involving persons working for state/local governments. Under certain conditions, employees of state/local governments have been able to voluntarily choose to have their employment covered or not covered.

Myth 2: President Roosevelt promised that the participants would only have to pay 1% of the first $1,400 of their annual incomes into the program.

The tax rate in the original 1935 law was 1% each on the employer and the employee, on the first $3,000 of earnings. This rate was increased on a regular schedule in four steps so that by 1949 the rate would be 3% each on the first $3,000. The figure was never $,1400, and the rate was never fixed for all time at 1%.

Myth 3: President Roosevelt promised that the money the participants elected to put into the program would be deductible from their income for tax purposes each year.

There was never any provision of law making the Social Security taxes paid by employees deductible for income tax purposes. In fact, the 1935 law expressly forbid this idea, in Section 803 of Title VIII.

Myth 4: President Roosevelt promised that the money the participants paid would be put into the independent "Trust Fund," rather than into the General operating fund, and therefore, would only be used to fund the Social Security Retirement program, and no other Government program.

The idea here is basically correct. However, this statement is usually joined to a second statement to the effect that this principle was violated by subsequent Administrations. However, there has never been any change in the way the Social Security program is financed or the way that Social Security payroll taxes are used by the federal government.

The Social Security Trust Fund was created in 1939 as part of the Amendments enacted in that year. From its inception, the Trust Fund has always worked the same way. The Social Security Trust Fund has never been "put into the general fund of the government."

Most likely this myth comes from a confusion between the financing of the Social Security program and the way the Social Security Trust Fund is treated in federal budget accounting.

Starting in 1969 (due to action by the Johnson Administration in 1968) the transactions to the Trust Fund were included in what is known as the "unified budget." This means that every function of the federal government is included in a single budget. This is sometimes described by saying that the Social Security Trust Funds are "on-budget." This budget treatment of the Social Security Trust Fund continued until 1990 when the Trust Funds were again taken "off-budget." This means only that they are shown as a separate account in the federal budget. But whether the Trust Funds are "on-budget" or "off-budget" is primarily a question of accounting practices--it has no affect on the actual operations of the Trust Fund itself.

Myth 5: President Roosevelt promised that the annuity payments to the retirees would never be taxed as income.

Originally, Social Security benefits were not taxable income. This was not, however, a provision of the law, nor anything that President Roosevelt did or could have "promised." It was the result of a series of administrative rulings issued by the Treasury Department in the early years of the program.

In 1983 Congress changed the law by specifically authorizing the taxation of Social Security benefits. This was part of the 1983 Amendments, and this law overrode the earlier administrative rulings from the Treasury Department.

Although Social Security is sometimes compared to private pensions, this is an improper comparison since Social Security is social insurance and not a retirement plan. The payment of disability benefits also distinguishes Social Security from most private pensions. In other ways the two systems are fundamentally different as well.

A private pension fund accumulates the money paid into it, eventually using those reserves to pay pensions to the workers who contributed to the fund; and a private system is not universal. Social Security cannot "prefund" by investing in marketable assets such as equities, because federal law prohibits it from investing in assets other than those backed by the U.S. government.

As a result, its investments to date have been limited to "special" non-negotiable securities issued by the U.S. Treasury, although some argue that debt issued by the Federal National Mortgage Association and other quasi-governmental organizations could meet legal standards. Social Security cannot by law invest in private equities, although some other countries (such as Canada) and some states permit their pension funds to invest in private equities.

As a universal system, Social Security operates as a pipeline, through which current tax receipts from workers are used to pay current benefits to retirees, survivors, and the disabled. There is an excess of taxes withheld over benefits paid, and by law this excess is invested in Treasury securities (not in private equities) as described above.

Two broad categories of private pension plans are "defined benefit pension plans" and "defined contribution pension plans." Of these two, Social Security is more similar to a defined benefit pension plan. In a defined benefit pension plan, the benefits ultimately received are based on some sort of pre-determined formula (such as one based on years worked and highest salary earned). Defined benefit pension plans generally do not include separate accounts for each participant.

By contrast, in a defined contribution pension plan each participant has a specific account with funds put into that account (by the employer or the participant, or both), and the ultimate benefit is based on the amount in that account at the time of retirement. Some have proposed that the Social Security system be modified to provide for the option of individual accounts (in effect, to make the system, at least in part, more like a defined contribution pension plan).

Specifically, on February 2, 2005, President George W. Bush made Social Security a prominent theme of his State of the Union Address. He described the Social Security system as "headed for bankruptcy", and outlined, in general terms, a proposal based on partial privatization. Critics responded that privatization would worsen the program's solvency outlook and would require huge new borrowing.

Private pensions are governed by the Employee Retirement Income Security Act (ERISA), which requires minimum levels of funding. The purpose is to protect the workers from corporate mismanagement and outright bankruptcy, although in practice many private pension funds have fallen short in recent years. In terms of financial structure, Social Security would be analogous to an underfunded pension ("underfunded" meaning not that it is in trouble, but that its "savings" are not enough to pay future benefits without collecting future tax revenues).

Sources:
Century Foundation. 1998. Social Security Reform: A Twentieth Century Fund Guide to the Issues, New York, N.Y.: Century Foundation.
Mishel, Lawrence et al. 2004. The State of Working America, 2004/2005, Washington, D.C.: Economic Policy Institute.
Social Security Administration. 2003. Annual Statistical Supplement to the Social Security Bulletin. Washington, D.C.: Social Security Administration.
Social Security Administration, 2004, The 2004 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds, Washington, D.C.: Social Security Administration.
Social Security Administration. 2002. Income of the Population 55 or Older. Washington, D.C.: Social Security Administration.

What type investor are you or should you be? The ABC’s of investment strategy are Aggressive, Balanced, and Conservative. How you want to invest depends on many things: how much money or percentage of savings you can invest; how much risk you can afford; how much time you have to invest before retirement; and what your goals are. Your financial situation and goals will change with time so it is always a good idea to reevaluate your investment strategy every year or so to be sure it is performing in a way that will help you meet your goals. If you need information about investing, please visit the Financial Industry Regulatory Authority (FINRA) at http://www.finra.org/InvestorInformation/index.htm for help with smart investing.

An aggressive investment strategy is most appropriate for investors with a lengthy period of time to invest or investors who are willing to assume more investment risk. An aggressive investor is willing to accept market swings, and seeks a higher potential return on his or her investments. An allocation model weighted heavily towards stocks is considered aggressive; and investing a high percentage of resources in high yield but risky equity securities and a low percentage in safer investments such as debt securities. This strategy incorporates portfolio management and asset allocation designed to achieve maximum return. It places a high percentage of investable assets into equities rather than safer debt securities.

The advantages of an aggressive investment strategy is greater potential for gain through long-term capital growth and a higher return over investment. The disadvantages include greater risk, high volatility in asset value, difficulty in estimating the return and the need of active money management. Aggressive investments are best as long-term returns and not advisable for the investment of monthly earnings.

Aggressive Investing Options:
* High Growth Companies
* Small and Mid Cap Equities (Stocks)

A conservative or defensive investment strategy is often appropriate for investors nearing retirement; investors who are uncomfortable with the stock market or higher risk investing; beginners, and those with little time to manage a portfolio. This strategy focuses on capital preservation and moderate growth. It places a high percentage of investable assets into lower risk securities such as cash, bonds, fixed-income, money market securities, and blue-chip or large-cap equities.

The advantages of a conservative investment strategy are minimized risk of losing capital, better planning of investments, generally predicitable and steady income, and use of risk-minimizing practices like close stop-losses. The disadvantage of this strategy is that the rate of return my not outpace inflation.

Conservative/Defensive Investing Options:
* Savings Accounts
* Certificates of Deposit
* Cash
* Bonds
* Money Market Funds
* Blue-chip Equities
* Large-cap Equities
* Treasury Notes
* Conservative Stocks (undervalued, less volatile, steadily growing and offer reasonable dividends)

A balanced investment strategy is most often chosen by investors who want to maintain their principal, but who also realize that in order to receive higher returns they must also assume some risk. A balanced may not be comfortable with market drops but understands that higher long-term gain will come from holding a steady course. A moderate allocation model for a balanced investment strategy combines both high-risk (equities) and low-risk (bonds) investments.

The key to a balanced investment strategy is in the diversification and management of the portfolio. The larger portion of portfolio allocated can be slightly aggressive or defensive, but the portfolio size must be fairly large to allow for enough diversification. A balanced investment strategy is best suited for investors with five or more years to invest and those with some tolerance for risk.

Balanced Investing Options:
Low-risk, low-return:
* Treasury Notes
* Bonds

High-risk, high Return:
* Equities
* Mutual Funds

Balanced portfolios may also include real-estate, money market, cash, precious metals, etc.

What is the purpose of health insurance?

Health insurance protects you from the high cost of medical care by providing coverage for specific health care services. Although you generally pay a monthly deductibles and either co-payments or co- insurance, the cost for insurance is far less than medical care would be if paid fully out-of-pocket.

What are the major types of health insurance policies?

There are three umbrella types of health insurance: consumer- directed, fee for service (often known as "traditional" or "indemnity" plans) and managed care. These types of plans cover medical, surgical and hospital expenses and depending on the plan, may cover prescription drugs, dental and behavioral/mental health coverage.

Fee for service plans mean the doctor or other health care professional will be paid a fee for each health care service provided to the patient. Patients can see the doctor of their choice and the claim is filed by either the health care professional or the patient.

Managed care plans provide coverage for comprehensive health services to their members and offer financial incentives in the form of lower out-of-pocket costs to patients who use doctors participating in a network. More than half of all Americans have some kind of managed care plan - the three types include health maintenance organizations (HMOs), preferred provider organizations (PPOs) and point-of-service (POS) plans.

What is an HMO?

An HMO is a type of managed care health insurance plan that allows you to receive care through a network of participating doctors and hospitals. Generally, you select a primary care physician who coordinates your care and refers you to specialists when needed. Out- of-network care is generally not covered under an HMO plan, unless the member requires care that is not available in the existing network.

What is a PPO?

A PPO is a type of managed care health insurance plan that combines features of a fee-for-service plan and an HMO. In a PPO, members who seek care within the network of participating doctors and hospitals pay lower out-of-pocket costs. Members can also seek care from nonparticipating doctors and hospitals, but pay a higher portion of the cost of care.

What is a consumer-directed health insurance plan?

Also referred to as "consumer-driven," or "consumer choice," this type of health plan gives members more choice and flexibility in making health benefits decisions and more control over their health benefits dollars. These plans often include a health fund or account for covered medical expenses. Depending on the type of fund or account, unused dollars may be rolled over annually to cover medical expenses in subsequent years for the duration of the members' enrollment in the plan. There are several types of consumer-directed plans, including Health Savings Accounts (HSAs), Health Reimbursement Arrangements (HRAs) and Flexible Spending Accounts (FSAs).

What is a health insurance premium?

A premium is the fee you and/or your employer pay to your insurance company to purchase a health insurance plan. This can be paid on a monthly, quarterly or annual basis.

How does a health insurance deductible work?

A deductible is the amount that you must pay for covered services in a specified time period in accordance with your plan before the plan will pay benefits. A member of a high-deductible health plan, for example, might be required to pay for the first $1,000 of medical care prior to receiving coverage under the terms of his/her benefits plan.

What is a co-payment?

A co-payment is the specified dollar amount or percentage required to be paid by you or on your behalf in connection with benefits. For example, most HMO plans have co-payments in place for certain services such as doctor's visits, prescription drugs, hospital stays, etc.

What are out-of-pocket costs?

Out-of-pocket costs include premiums co-payments, deductibles, co- insurance or other fees that you are required to pay outside of your health benefits plan.

How do I pick a health insurance plan?

If you have a choice of plans through your employer or you are purchasing your own coverage, it's important to understand your choices and pick the plan that is right for you and your family.

There are several questions to ask yourself when reviewing health insurance plan options:
* How affordable is the cost of care?
* How much are monthly premiums?
* How much are the deductibles?
* Are the co-payments or co-insurance flat fees or percentages of service fees?
* What out-of-pocket expenses have to be paid before the plan begins reimbursement?
* How does the reimbursement process work?
* What is the cost of out-of-network care?

Does the plan cover the services that I may use? For example:
* Doctors, hospitals, laboratories and other health care professionals in the network.
* Out-of-network care
* Treatments for pre-existing medical conditions or chronic conditions
* Prescription drugs

What is the quality of the health insurance plan? Research factors of the plan such as:
* Ratings of the plan by independent government and non-government organizations
* Accreditation from groups like the National Committee for Quality Assurance (NCQA) or the Joint Commission on Accreditation of Healthcare Organizations (JCAHO)
* Patient complaints
* Member drop-out rates for the plan
* Other patient experiences with the plan
* Doctor experiences with the plan

What if my employer doesn't offer health insurance?

Employer-subsidized group coverage is generally less expensive than anything you can get on your own. But, if your employer doesn't offer health insurance, or if you are unemployed, you should consider purchasing an individual health insurance policy.

Life insurance has long been a part of estate planning in the United States. Although life insurance does not need to be a part of every person's estate plan, it can be useful, especially for parents of young children and those who support a spouse or a disabled adult or child.

In addition to helping to support dependents, life insurance can help provide immediate cash at death. Insurance proceeds are a handy source of cash to pay the deceased's debts, funeral expenses, and income or estate taxes.

People who have no minor children or financially strapped dependents may not need life insurance. Below you'll find questions to ask yourself to help evaluate your life insurance needs. If you decide to purchase insurance, you should know exactly why you are buying it, and choose the best type of policy for your needs. And, of course, you should buy no more than you need.

Long-Term Needs

To determine whether it makes sense for you to buy insurance to provide financial help for family members over the long term, consider these questions:

How many people depend on your earning capacity? If the answer is "none," you probably don't need life insurance.

How much money would your dependents need for living expenses? One way to determine this amount is to look at the earned income that you bring to your dependents on a regular basis. From that amount, subtract the worth of property they would inherit from you and any amounts that will be available from public sources or private insurance plans that already provide coverage. Social Security survivors and dependents benefits will probably be available, and you may also be covered by union or management pensions or a group life insurance plan. Also subtract any other likely sources of income, such as the help reasonably affluent grandparents would provide for your children in case of disaster.

How long would it take for your dependents to be come self-sufficient? If your children are almost out of college, they may not need much additional income. If they're younger, remember that dependent spouses caring for young children can usually return to work at some point, and some kids may get at least partial scholarships.

Once you perform this exercise, you may find that your dependents may need little additional income from life insurance. But if you have young children, you may find that it makes sense to buy an affordable amount of life insurance.

Short-Term Needs

Now, assess whether you need life insurance for short-term needs:
What assets will be available to take care of your dependents' immediate financial needs? You might leave some money in joint or pay- on-death bank accounts, or place marketable stocks in joint tenancy or register them on beneficiary (transfer-on-death) forms.

After you die, how long will it be before your property is turned over to your inheritors? If most of your property will avoid probate, there's usually little need for insurance for short-term expenses, unless you have no bank accounts, securities, or other cash assets. By contrast, if the bulk of your property is transferred by will, and therefore will be tied up in probate for months, your family and other inheritors may need the ready cash insurance can provide. While a probate court will usually promptly authorize a family allowance or otherwise allow a spouse or other inheritor access to estate funds, it can still be nice to have insurance proceeds available.

Will your estate owe substantial debts and taxes after your death? Lawyers and financial advisors call cash and assets that can quickly be converted to cash "liquid." If your estate has almost all "non- liquid" assets (real estate, collectibles, a share in a small business, jewelry), there may be a significant financial loss if these assets must be sold quickly to raise cash to pay bills, as opposed to what they could be sold for later if there had been enough liquid money from insurance or other sources to meet all pressing bills. Obviously, if your estate has significant funds in bank accounts or marketable securities, you won't need insurance for this purpose. Fortunately, federal estate taxes aren't due until nine months after death, so cash to pay them doesn't have to be raised immediately.

Avoid Probate and Estate Taxes on Life Insurance

The proceeds of a life insurance policy are not subject to probate unless you name your estate as the beneficiary of the policy. If anyone else, including a trust, is the beneficiary of the policy, the proceeds are not included in the probate estate, and can be quickly transferred to survivors with little red tape, cost, or delay. Except when your estate will have no ready cash to pay anticipated debts and taxes, there is no sound reason for naming your estate, rather than a person, as the beneficiary of your life insurance policy.

Avoiding estate taxes. If you own your insurance policy at the time you die, the proceeds are included in your taxable estate. If your estate is large enough to face estate tax liability (at least over $2 million), your life insurance proceeds will be subject to estate tax. On the other hand, if you don't legally own your life insurance policy, the proceeds are excluded from your taxable estate. This can significantly reduce your death tax liability.

Business Needs

If you are the sole owner of a business, how much cash will it need when you die? Do you want, and expect, that some of your inheritors will continue the business? If so, do you think there will be enough cash flow for them to successfully maintain the business? You may need insurance proceeds to cover any cash flow shortage of the business. Will there be liquid funds to pay estate taxes?

If your inheritors won't continue the business, the questions are different: How much is your death likely to affect the value of the business? Will there be enough cash to keep the business alive until it is sold?

Living wills are not really wills at all. Instead, a living will (which also may be known as a healthcare directive or directive to physicians) is a document that expresses a person's desires and preferences about medical treatment in case he or she becomes unable to communicate these instructions during terminal illness or permanent unconsciousness. The first living wills helped people who wanted a natural death unattended by artificial life support and other advanced medical techniques. As these documents became more popular and widely available under local laws, they came to include other health care concerns such as tube feeding, resuscitation, and organ donation. While living wills are allowed in all states, they sometimes must follow certain formalities to be effective. If valid, a living will binds health care providers to its instructions.

What Can a Living Will Cover?

Many people believe that living wills only direct health care providers to withhold treatment. While many choose to issue that type of instruction, a living will also allows a person to ask for all available treatment options and medical techniques, or to choose some medical options and reject others. Because a living will involves complicated medical issues, consultation with a doctor may help clarify different treatment types and assist the patient in making living will decisions. Some people do not complete living wills because they worry doctors could let them die when there is still a chance for recovery. However, a living will cannot take effect legally unless the patient is medically determined to be in a permanent vegetative state or terminally ill, and therefore unable to communicate medical preferences.

Living Will vs. Durable Power of Attorney

A durable power of attorney can perform some of the functions of a living will. This document gives an attorney-in-fact legal power to make health care decisions for someone who cannot make those decisions him or herself. A durable power of attorney differs from a living will in that it may direct the attorney-in-fact to carry out the living will's instructions or it may allow the attorney-in-fact to use his or her own judgment. The living will itself also can specify a proxy to help enforce its terms. A durable power of attorney may be used whenever the individual granting the power cannot make his or her own health care decisions; it does not depend on terminal illness or permanent unconsciousness to become effective. Most estate planning attorneys recommend both documents to cover all situations.

Without a living will or durable power of attorney, family members may end up arguing over what treatments should or should not be provided. Doctors will only consult family members on health care decisions; if a person prefers that a friend or unmarried partner participate in his or her health care decisions, a living will and durable power of attorney enable that person to have a say.

Choosing an Attorney-In-Fact

The person chosen as the attorney-in-fact or proxy for health care decisions should be a trusted individual who is comfortable discussing health care issues. Because this person may need to argue the patient's case with doctors or family members, or even go to court, an assertive and diplomatic individual may be preferred. The representative should be well aware of the choices made in the relevant documents, and should support those instructions. It is also useful to enlist the cooperation of friends, relatives, and health care providers by giving them executed copies of the document for their reference, should the need arise.

Estate planning is one of the most important steps any person can take to make sure that their final property and health care wishes are honored, and that loved ones are provided for in their absence. Though often overlooked or put off in favor of more immediate concerns, a comprehensive estate plan can resolve a number of legal questions that arise whenever anyone dies: What is the state of their financial affairs? What real and personal property do they own? Who gets what? Does a personal guardian need to be appointed to care for minor children? How much tax will need to be paid in order to transfer property ownership? What funeral arrangements are appropriate?

What is an "estate"?

Your "estate" consists of all property owned by you at the time of your death, including:
* Real estate
* Bank accounts
* Stocks and other securities
* Life insurance policies
* Personal property such as automobiles, jewelry, and artwork

How can an estate plan help?

Regardless of your age, or the size and complexity of your estate, an estate plan can accomplish the following:
* Identify the family members and other loved ones that you wish to receive your property after your death.
* Ensure that your property will be transferred to those you have identified, as quickly and with as few legal hurdles as possible.
* Minimize the amount of taxes that will need to be paid in order for your property to pass to others after your death.
* Avoid the time and costs associated with the probate process by utilizing estate planning devices like living trusts and "payable on death" bank accounts.
* Dictate the kinds of life-prolonging medical care you wish to receive should you be unable to make your wishes known when the time comes.
* Set forth the kind of funeral arrangements you would like, and how related expenses are to be paid.

Understanding the estate plan options that are right for you can be a complex undertaking. The resources in FindLaw's Estate Planning Center can help you identify your estate planning needs, recognize potential solutions, and locate an experienced Estate Planning attorney to help you at every step of the estate planning process.

Getting legal help with your estate plan

An experienced estate planning attorney can explain all options available to you in meeting your estate planning goals and fulfilling the needs of your loved ones -- whether you need to revise an existing will or create a comprehensive estate plan from scratch. For skilled legal help with your estate plan, use the West Legal Directory to search for a law firm or attorney near you.

Wills are the most common way for people to state their preferences about how their estates should be handled after their deaths. Many people use their wills to express their deepest sentiments toward their loved ones. A well-written will eases the transition for survivors by transferring property quickly and avoiding many tax burdens. Despite these advantages, many estimates figure that at least seventy percent of Americans do not have valid wills. While it is difficult to contemplate mortality, many people find that great peace of mind results from putting their affairs in order.

Wills vary from extremely simple single-page documents to elaborate volumes, depending on the estate size and preferences of the person making the will (the "testator"). Wills describe the estate, the people who will receive specific property (the "devisees"), and even special instructions about care of minor children, gifts to charity, and formation of posthumous trusts. Many people choose to disinherit people who might usually be expected to receive property. For all these examples, the testator must follow the legal rules for wills in order to make the document effective.

Will requirements

Formal requirements for wills vary from state to state. Generally, the testator must be an adult of "sound mind," meaning that the testator must be able to understand the full meaning of the document. Wills must be written. Some states allow a will to be in the testator's own handwriting, but a better and more enforceable option is to use a typed or pre-printed document. A testator must sign his or her own will, unless he or she is unable to do so, in which case the testator must direct another person to sign the will in the presence of witnesses, and the signature must be witnessed and/or notarized. A valid will remains in force until revoked or superseded by a subsequent valid will. Some changes may be made by amendment (called a "codicil") without requiring a complete rewrite.

Will limitations

Some legal restrictions prevent a testator from giving full effect to his or her wishes. Some laws prohibit disinheritance of spouses or dependent children. A married person cannot completely disinherit a spouse without the spouse's consent, usually in a pre-nuptial agreement. In most jurisdictions, a surviving spouse has a right of election, which allows the spouse to take a legally-determined percentage (up to one-half) of the estate when he or she is dissatisfied with the will. Non-dependent children may be disinherited, but this preference should be clearly stated in the will in order to avoid confusion and possible legal challenges.

Some property may not descend by will. Property owned in joint tenancy may only go to the surviving joint tenant. Also, pensions, bank accounts, insurance policies and similar contracts that name a beneficiary must go to the named party.

Appointing a representative

A will usually appoints a personal representative (or "executor") to perform the specific wishes of the testator after he or she passes on. The personal representative need not be a relative, although testators typically choose a family member or close friend, as well as an alternate choice. The chosen representative should be advised of his or her responsibilities before the testator dies, in order to ensure that he or she is willing to undertake these duties. The personal representative consolidates and manages the testator's assets, collects any debts owed to the testator at death, sells property necessary to pay estate taxes or expenses, and files all necessary court and tax documents for the estate.

Choosing a guardian

Testators who have minor or dependent children may use a will to name a guardian to care for their children if there is no surviving parent to do so. If a will does not name a guardian, a court may appoint someone who is not necessarily the person whom the testator would have chosen. Again, a testator usually chooses a family member or friend to perform this function, and often names an alternate. Potential guardians should know they have been chosen, and should fully understand what may be required of them. The choice of guardian often affects other will provisions, because the testator may want to provide financial support to the guardian in raising surviving children.

When no valid will exists

If a person dies without a valid will and did not make alternative arrangements to distribute property, survivors may face a complicated, time-consuming, and expensive legal process. Dying without a will leaves an estate "intestate," and a probate court must step in to divide up the estate using legal defaults that give property to surviving relatives. The court pays any unpaid debts and death expenses first, then follows the legal guidelines. The rules vary depending on whether the deceased was married and had children, and whether the spouse and children are alive.

If the intestate individual has no surviving spouse, children, or grandchildren, the estate is divided between various other relatives. Therefore, intestacy may mean that people who would never have been chosen to receive property will in fact be entitled to a portion of the estate. Additionally, state intestacy laws only recognize relatives, so close friends or charities that the deceased favored do not receive anything. If no relatives are found, the estate typically goes to the state or local government. Intestacy also poses a heavy tax burden on estate assets. When made aware of the consequences of intestacy, most people prefer to leave instructions rather than subject their survivors and property to government-mandated division.

Trusts are estate-planning tools that can replace or supplement wills, as well as help manage property during life. A trust manages the distribution of a person's property by transferring its benefits and obligations to different people. There are many reasons to create a trust, making this property distribution technique a popular choice for many people when creating an estate plan.

Creation of a trust

The basics of trust creation are fairly simple. To create a trust, the property owner (called the "trustor," "grantor," or "settlor") transfers legal ownership to a person or institution (called the "trustee") to manage that property for the benefit of another person (called the "beneficiary"). The trustee often receives compensation for his or her management role.

Trusts create a "fiduciary" relationship running from the trustee to the beneficiary, meaning that the trustee must act solely in the best interests of the beneficiary when dealing with the trust property. If a trustee does not live up to this duty, then the trustee is legally accountable to the beneficiary for any damage to his or her interests.

The grantor may act as the trustee himself or herself, and retain ownership instead of transferring the property, but he or she still must act in a fiduciary capacity. A grantor may also name himself or herself as one of the beneficiaries of the trust. In any trust arrangement, however, the trust cannot become effective until the grantor transfers the property to the trustee.

Example: A grantor transfers money to a bank as trustee for the grantor's children, with the bank instructed to pay the children's college expenses as needed; the bank carefully manages the money to ensure there are funds available for this purpose. The children do not have control of the funds and cannot use the funds for any other purposes.

Testamentary and living trusts

Trusts fall into two broad categories, "testamentary trusts" and "living trusts." A testamentary trust transfers property into the trust only after the death of the grantor. Because a trust allows the grantor to specify conditions for receipt of benefits, as well as to spread payment of benefits over a period of time instead of making a single gift, many people prefer to include a trust in their wills to reinforce their preferences and goals after death. The testamentary trust is not automatically created at death but is commonly specified in a will and so as a will provision, the trust property must go through probate prior to commencement of the trust.

Example: A parent specifies in her will that upon her death her assets should be transferred to a trustee. The trustee manages the assets for the benefit of her children until they reach an age when the parent believes they will be ready to control the assets on their own.

A living trust, also sometimes called an "inter vivos" trust, starts during the life of the grantor, but may be designed to continue after his or her death. This type of trust may help avoid probate if all assets subject to probate are transferred into the trust prior to death. A living trust may be "revocable" or "irrevocable." The grantor of a revocable living trust can change or revoke the terms of the trust any time after the trust commences. The grantor of an irrevocable trust, on the other hand, permanently relinquishes the right to make changes after the trust is created. A revocable trust typically acts as a supplement to a will, or as a way to name a person to manage the grantor's affairs should he or she become incapacitated. Even a revocable living trust usually specifies that it is irrevocable at the death of the grantor.

Transferring assets

Irrevocable trusts transfer assets before death and thus avoid probate. However, revocable trusts are more popular as a means of avoiding the probate process. If a person transfers all of his assets to a revocable trust, he owns no assets at his death. Therefore, his assets do not have to be transferred through the probate process. Even though the grantor of the trust died, the trust did not die, so the trust assets do not have to be probated.

However, trusts avoid probate only if all or most of the deceased person's assets had been transferred to the trust while the person was alive. To allow for the possibility that some assets were not transferred, most revocable living trusts are accompanied by a "pour- over" will, which specifies that at death, all assets not owned by the trustee should be transferred to the trustee of the trust.

Example: Mark sets up a revocable trust, which states that on his death, his assets should be distributed to his children in equal shares. Mark transfers his house to the trust, but does not transfer some rental real estate he owns. At Mark's death, the trust can distribute the house outside of the probate process, but the rental real estate will have to be probated. Based on the will, the probate court will order the rental real estate be transferred to the trustee, who will then distribute it according to the terms of the trust.

Successor trustees

Although a grantor may name himself as trustee of a living trust during his lifetime, he should name a successor trustee to act when he is disabled or deceased. At the grantor's death, the successor trustee must distribute the assets of the trust in accordance with the directions in the trust document. In many states, certain people must be notified at the death of the grantor.

Getting help with a trust

Trusts have important tax, governmental assistance, probate, and personal ramifications, so an experienced estate planning attorney should be consulted at all stages of the process -- from preliminary discussions to execution of trust documents. Go here to find a knowledgeable estate planning attorney near you.

The legal process of transferring of property upon a person's death is known as "probate." Although probate customs and laws have changed over time, the purpose has remained much the same: people formalize their intentions as to the transfer of their property at the time of their death (typically in a will), their property is collected, certain debts are paid from the estate, and the property is distributed.

Probate administration

Today the probate process is a court-supervised process that is designed to sort out the transfer of a person's property at death. Property subject to the probate process is that owned by a person at death, which does not pass to others by designation or ownership (i.e. life insurance policies and "payable on death" bank accounts). A common expression you may have heard is "probating a will." This describes the process by which a person shows the court that the decedent (the person who died) followed all legal formalities in drafting his or her will.

What is often taught about the probate process is how to avoid it. The movement to avoid probate is primarily motivated by the desire to avoid probate fees. It is, in fact, quite possible to avoid the probate process completely. There are three primary ways to avoid probate and its protections: joint ownership with the right of survivorship, gifts, and revocable trusts. The probate system, however, exists for the protection of all the parties involved and the focus of this article is what occurs in probate.

What happens in probate?

The probate process may be contested or uncontested. Most contested issues generally arise in the probate process because a disgruntled heir is seeking a larger share of the decedent's property than that he or she actually received. Arguments often raised include: the decedent may have been improperly influenced in making gifts, the decedent did not know what they were doing (insufficient mental capacity) at the time the will was executed, and the decedent did not follow the necessary legal formalities in drafting his or her will. The majority of probated estates, however, are uncontested.

The basic process of probating an estate includes:
* Collecting all probate property of the decedent
* Paying all debts, claims and taxes owed by the estate
* Collecting all rights to income, dividends, etc.
* Settling any disputes
* Distributing or transferring the remaining property to the heirs.

Usually, the decedent names a person (executor) to take over the management of his or her affairs upon death. If the decedent fails to name an executor, the court will appoint a personal representative, or administrator, to settle the estate. The administrator will fulfill many of the same duties listed above.

Typically, people may leave property to any person they wish, and may make such designations in their will. However, in certain situations, depending on the relationship to the decedent and the laws of the state, the decedent's wishes may have to be overridden by the court. For example, in most states, a spouse is entitled to a certain amount of property. Furthermore, creditors may have a claim on the property of the estate.

Each jurisdiction usually prescribes how long an estate must be open to give creditors an adequate time frame in which to present claims to the estate. The more complex and sizable the estate, the longer and more time-consuming this process can be.

The probate process itself also carries with it a number of costs that are usually paid out of estate assets. These costs include:
* Fees of the personal representative * Attorneys' fees
* Court costs

Why Do I Need a Will?

A will is simply a formal way of setting forth your wishes regarding how you would like your property distributed upon your death. You should consider a will whether you are single, married, have minor children, or own even a small amount of personal assets or property. In fact, every adult should have a will or other means to control the disposition of their assets. If you have not formalized your intentions, your estate may meet with unnecessary and costly litigation, adding to the grief experienced by your survivors. Avoiding the financial and emotional turmoil of will contests and other legal wrangling starts with choosing an experienced estate planning attorney.

According to most sources, the cost of a funeral is one of the three or four most expensive consumer purchases. Traditional Funerals can cost upwards of $15000. They definitely don't have to be so expensive, and there's no reason (other than stubborn sentimentalism) to believe that paying so much for a funeral is somehow a sign of love for the departed.

Many morticians or funeral homes will shy away from telling you that you can have a perfectly legitimate funeral, complete with a fine casket, for under $2500. A number of places advertise 'low cost funerals' for under $2000, and these funerals provide the same sense of memorial as the more expensive ones. They may even be seen as a more appropriate way to honor sensible or more frugal minded decedents.

Cost facts

In accordance with The Funeral Rule set out by the FTC, funeral providers must give you a statement of all costs of the funeral goods and services that you select. This is called a General Price List (GPL). If the funeral director doesn't know the costs, you must be given a written 'good faith estimate'. This statement doesn't have to be in a specific format, though providing the list up front is a sign of good business practices. The Funeral Rule covers American funerals only, but many Canadian provinces also make it mandatory to disclose all costs ahead of time.

Cost breakdown

Funeral costs can be divided into three basic categories: - The basic service fee: Funeral providers are allowed to charge this, and it can't be declined by consumers. This fee covers services common to all funerals including the use of the home, the services of the funeral director and funeral home attendants, burial arrangement coordination (with a cemetery or other), securing permits, etc.
- Optional service charges: Some optional services include transporting the body, embalming, times for viewing (or wakes), use of a hearse or limousine, burial container, cremation and interment.
- Cash disbursements: This covers goods and services that the funeral home buys on your behalf, with your consent. It may include the purchase of flowers, clergy services, obituary notices, pallbearers and other service providers such as soloists or musicians.

Your expenditures

When it comes to funeral expenses you should definitely shop around and find the best prices. You might want to find a trusted funeral home to help you with your decisions, but you have to remember that they'll have their own interests in your purchases and might not lead you to the best values. The most important thing to remember is that the cost of the funeral isn't related to how much you cared for or respected the deceased. You shouldn't deal with anyone who tries to guilt you into overspending in this way.

Funeral pre-planning (personal funeral planning) is a wise practice that's becoming increasingly accepted and appreciated. People are sometimes hesitant to pre-plan a funeral because they think they're not going to die anytime soon, or they may not like the idea of thinking about their own death and funeral. There may even be some superstition that planning your own funeral will somehow bring on a hasty death. However, many people who get over their initial resistance to the idea actually find funeral planning to be a freeing experience. You're able to make sure things are done in the way you'd like them, and you'll know that you're relieving your loved ones of some very burdensome future responsibilities.

You can begin the funeral planning process long before you are even close to death. If you're ill or in the process of dying, funeral planning can be a proactive way of dealing with the inevitable.

There's a growing organization of information concerning less-than- scrupulous business practices and over-selling in the funeral industry. If you pre-plan your funeral before the stress and chaos of death occurs, you can avoid exposing your family the funeral home sales tactic of equating the money spent on a funeral with their amount of love for the deceased.

Pre-planning your funeral lets everyone know what you want and you leave no room for up-selling or over-selling. More benefits of funeral planning include:
- Being forthright about your desires for your funeral will relieve your family of the burden of having to make decisions in their time of grief.
- Prepaying for your funeral will also offer some relief to your loved ones. You have to be aware of some of the pitfalls of this process though.
- A lot of people buy into the idea that the amount of money spent on a funeral is a reflection of the amount of love for the deceased. Prepaying decreases the stress of this aspect of funeral planning.
- Making a will is a fundamental benefit to your family. You can add funeral arrangement preferences into your will.

Finding enlightenment through pre-planning

When you really get into it, planning your own funeral can be a great experience. Many people who've done so have found it to be a helpful process, as they know they're lightening the load of their own passing for their loved ones.

There are a number of factors you can take care of when you're pre- planning your funeral. Just to name a few, you can decide on your own non-traditional memorial, you can personalize your funeral or write your own epitaph. You can also even pre-purchase a custom casket or make your own.

Your first steps

If you're considering funeral planning, here are some of the first steps you'll have to take:
- Write a will
- Consider all aspects of a pre-need funeral
- Research financial options like funeral insurance

Like learning to read, financial literacy is a long-term process that best starts in early childhood. This means taking the time to educate our children in the fundamentals of money management, just as we prepare our children for other skills in adulthood. We cannot assume our children will learn good money attitudes and skills unless we take the time to teach them.

A key to raising responsible children in affluence is finding or creating 'teachable moments' in everyday life when money lessons can be learned. Most people think wealth brings more of these moments than in middle-class life. Unfortunately, the opposite is true.

The modern conveniences of wealth actually make these moments more elusive, stealing opportunities for children to gain money skills. Young children must first learn about money as a tangible thing -- holding, counting, giving away, and receiving money as part of life. This includes experience making choices about purchases and encountering limits when one has spent all the cash on hand. Mastering these basic skills with cash lays the groundwork for later being able to make the transition safely to more abstract money transactions using credit cards, ATMs and check-writing.

Children in this pre-adolescent stage are very interested in learning about money and may be more teachable than they will be during adolescence. Making it a game, they will enjoy being shown how to calculate tips in a restaurant, how quickly they can estimate 25% off in a sale, or how to compare the value of two sizes of snack foods.

A powerful teaching tool can be an allowance. Why? It is invaluable as "a tool for teaching children how to manage money," according to Joline Godfrey, author of Raising Financially Fit Kids. An allowance is a constant source of teachable moments, giving you as a parent a way to foster your child's financial training. Approaching an allowance this way shifts the focus from what the child has done to "get" the money towards what the child plans to "do" with the money.

Many wealth counselors1 advocate the "Three Bucket Model":
- one-third paid in cash, to be spent as the child sees fit (weekly for young children, biweekly or monthly by the teenage years)
- one-third deposited in a bank account or entered in a money- management program like Quicken, to be built up in savings.
- one-third deposited or set aside for charitable uses, to teach philanthropy.

This system teaches many lessons at once. It underscores that the family's values include not only spending but also saving and philanthropy. By devoting a portion toward savings, it teaches delay of gratification and long-term planning. And it provides a vehicle for children to practice making their own decisions about money safely, learning from both successes and setbacks.

The teenage years (ages 13-18) pose special challenges for financial parenting, particularly if you've let those earlier opportunities slide by. The calmer waters of childhood give way to the fast-moving currents of adolescence. Your kids may turn into people you barely recognize, making increasingly risky decisions even they may regret later. Teachable moments evaporate as peers and the media take over as major influences.

How to foster your teenager's training in financial literacy

Information: Use TV and print ads as teachable moments about interest rates, both as fees in credit cards and loans and as income from bank CDs and bonds. Talk about compound interest. Demonstrate online investment tracking. Explain how to read monthly statements, starting with a smaller account that may already be in the child's name. Teach your child how to write checks and balance a checkbook, even if these responsibilities can be delegated later in life.

Values: In retelling the family history of howthe wealth was created, emphasize the work and risk that were undertaken, not to instill guilt but to teach that work and risk are fundamentals of success. As purchases get more expensive (cars, travel, parties), make your teen subsidize more of their cost. This demonstrates that the family hands over greater responsibility as the next generation matures.

Decision-making: Teenagers can be naturalborn debaters, not always to their benefit. Foster healthy decision-making by prompting your teenagers to "make their case" responsibly when they want something new, whether a BMW or a trip to Italy. This should not be an exercise in glib argument. Have them truly explain the reasoning behind requests, showing they've looked at costs, benefits, and alternatives. Stay open but firm. They will gradually learn how to think carefully about choices. You will be rewarded when they are able to drop an extravagant request after they've truly explored things. Of course, sometimes a purchase goes against deeply-held family values. Then it's time to say, "No," with an explanation. This way, you teach the crucial lesson that life doesn't fulfill every wish, even for wealthy children.

Teaching your children about how finances work is a lifelong endevour and cannot be encapsulated in a small article. Below is a list of some further resources which you may find useful in passing on critical skills to your children and other family members:

Gallo, Eileen and Jon Gallo. Silver Spoon Kids: How Successful Parents Raise Responsible Children. New York: Contemporary Books, 2002.

Gallo, Eileen and Jon Gallo. The Financially Intelligent Parent: 8 Steps to Raising Successful, Generous, Responsible Children. New York: New American Library, 2005.

Godfrey, Joline. Raising Financially Fit Kids. Berkeley CA: Ten Speed Press, 2003.

Hausner, Lee. Children of Paradise: Successful Parenting for Prosperous Families, Second edition. Irvine, CA: Plaza Press. 2005.

Salzer, Myra. The Inheritors' Sherpa: A Life- Summiting Guide for Inheritors. The Wealth Conservancy, 2005.

Willis, Thayer Cheatham. Navigating the Dark Side of Wealth: A Life Guide for Inheritors. Portland, Oregon: New Concord Press, 2003.