“Last year I was investing in bond funds and now I’ve lost money. What happened? I thought bonds were supposed to be safe investments!”

Recently several people have asked me this same question. Given the turbulent economic times we’re (hopefully!) coming out of, it’s understandable that folks want to find a “safe investment” to hunker down in.

Alas, the phrase “safe investment” is an oxymoron. The whole point of investing is taking on some risk with the hope, but not the guarantee, of earning a higher return than you’d get from doing something risk free.

So how did bonds get the reputation of being “safe?” Well, at their core, bonds are loans. You lend money for a pre-determined period of time. In return you receive interest at specified intervals. When your loan (a.k.a. bond) matures you get back the money you originally loaned – if the entity hasn’t gone bankrupt.

It is the return of that original investment that has caused people to view bonds as “safe” investments. Alas, there are always risks with any investments. The two classic ones for individual bonds are:

1.      Credit Risk: This is the risk that the entity you lend to goes belly up and can’t pay you back.

2.      Interest Rate Risk: Bonds are like seesaws. When interest rates go up, the price of bonds go down. If you hold your bond until it matures, the impact is all on paper. But if you are forced to sell your bond before its maturity date and interest rates are higher than when you bought that bond, the price you’ll receive will be less than you originally invested.

Another problem with individual bonds is you often need a pretty hefty chunk of change to buy them. This is where bond mutual funds come in. For example, if you had $10,000 to invest you might be able to buy one bond. But by pooling your money with other people’s money, bond mutual funds enable you to take that $10,000 and spread it out over many different bonds. That helps you spread out your risk.

However, when individual investors decide to take their money out of a bond fund, the portfolio manager may be forced to sell bonds at less than desirable prices to give them back their money. You could call this liquidity risk. Over the past year, as interest rates have inched up and there have been concerns about credit quality, the price of some bond funds has declined as these risks all reared their heads.

What does this mean for you? It means that like stock funds, bond funds also have some risk associated with them. They should not be thought of as “100% safe” substitutes for FDIC insured savings accounts. Rather, they are intended to be part of a well-balanced portfolio. Another way to keep your risk low is to invest in bond funds that have average maturities of 5 years or less because they seesaw around less violently as interest rates move.

What additional questions do you have about bonds or bond funds?

© 2011 SingleMindedWomen.com All rights reserved. Permission to reprint this article must be obtained from SingleMindedWomen.com.

Want more financial love? You can follow Women’s Financial Literacy Initiative founder, Manisha Thakor, on Twitter at @ManishaThakor, sign up to get her email updates delivered right to your inbox here, and enroll in her innovative new online personal finance course called “Money Rules.”

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Do you ever worry about ending up old and poor?

For many women, becoming the proverbial “bag lady under the bridge” is one of their worst nightmares. Myself included. I literally sit down with my husband and our financial planner twice a year to re-confirm that we are doing everything we can to make sure we do not outlive our retirement savings!

Unfortunately, this fear of ending up old and poor is actually a very rational one for a high percentage of women.

Recently, I had the chance to hear Karen Wimbish, Head of Wells Fargo Retail Retirement Group, and personal finance guru Jean Chatzky present powerful data collected in a Harris Interactive poll in conjunction with the launch of a new website to help women prepare for retirement, Beyond Today. I’m always looking for useful resources to direct women to, and I think this site can help a lot of folks.

First up, the data: (Put your seatbelts on. The numbers are stark.)

• Nearly 1/3 of women between the ages of 40 and 69 are “can’t estimate” how much money they can withdraw annually from their retirement accounts and about 32% of women in their 40s and 50s estimate they will withdraw between 11% – 30% of their savings annually. These are unrealistically high annual withdrawal rates – leaving them vulnerable to outliving their savings.
• While both men and women are under saved for their retirements, the women polled had saved less than men – with a median retirement savings accumulated to date of $20,000 for women surveyed versus $25,000 for men.
• Worse still, despite longer expected life spans, when asked how much they were aiming for in retirement savings women aimed lower with a median goal of $200,000 versus $400,000 for men.

A savvy, 30-year industry veteran, Karen was kind enough to speak with me about some of the factors driving this dreary data – and what women can do to improve the odds that their golden years really will be golden.

A couple of key themes kept coming up during out chat. First, while many women are absolutely at the table on a day-to-day basis for bill payment and major household expenditures, when it comes to financial planning or investing – women are more likely to report ourselves as a “joint decision maker” than are married men who are asked this question. Men are more likely to see themselves as “the primary“ decision maker in financial matters – so there is a disconnect between men and women in terms of the role they see themselves playing. The survey data also showed women to have less confidence in the stock market as a long-term tool for retirement planning.

What does all this potentially mind-numbing data mean for your life?

• If you are in your 20s and 30s: The best action step is to max out your tax advantaged retirement plans (401k type plans and IRAs). Karen points out a great way to do this is to commit to saving a set percentage of your income, rather than a fixed dollar amount, so as your income rises, so too do your contributions.
• If you are in your 40s: The data shows that this group, which I’m a part of, are the most stressed-out set, sandwiched between entering our peak earnings years while trying to juggle family and elder care responsibilities. In this life stage, the key action step is not to put our heads in the financial sands.
• If you are in your 50s, and 60s: You are heading into the “red zone” the critical years leading up to retirement where small shifts in how much you save and what you invest in can make the difference. Understanding the gravity of this period is key.

The key takeaway: At all three stages making sure you are actively engaged with your finances and seeking to self-educate yourself is key. Reading blogs, visiting websites like Beyond Today, and engaging the services of a trusted financial advisor to meet with you on an annual or semi-annual basis can go a VERY long way towards increasing your financial confidence, sense of optimism for the future, and even household harmony. Just as with your health, no one will ever care about your financial fitness as much as you do.

What steps are you taking right now to plan for your retirement?

© 2011 SingleMindedWomen.com All rights reserved. Permission to reprint this article must be obtained from SingleMindedWomen.com.

Want more financial love? You can follow Women’s Financial Literacy Initiative founder, Manisha Thakor, on Twitter at @ManishaThakor, sign up to get her email updates delivered right to your inbox here, and enroll in her innovative new online personal finance course called “Money Rules.”

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If you could reduce your taxes in three ways with one simple tactic, would you pass it up?

Believe it or not, that’s exactly what many hard-working Americans are unknowingly doing. Only 12% of Americans who reported an annual household income of less than $50,000 and may be eligible for the “Saver’s Credit”, know about it according to recent research by Transamerica’s Center for Retirement Studies. This tax credit, intended to encourage retirement savings amongst everyday Americans, may be applied up to the first $2,000 of contributions made by eligible workers to employer-sponsored retirement plans (like 401ks and 403bs) or IRAs.

Whenever tax season rolls around I get lots of questions from people asking, “Is XYZ deductible?” That’s a smart question because these days it’s the rare person who couldn’t benefit from some extra dollars in our pockets. But the real magic tax bullet isn’t a tax deduction… it’s a tax credit. That’s because a tax credit results in a dollar for dollar reduction of your tax bill. In other words, a $1,000 credit means $1,000 is shaved off your tax bill. By contrast, if you had a $1,000 deduction and your marginal tax rate were 25%, your tax bill would only be reduced by the deductible amount multiplied by your marginal tax rate for a $250 savings.

If that math just made your head spin, you are not alone. Every single year when tax time comes around I have to pull out my notes (which have grown longer and more detailed as I’ve moved from a “W2″ worker paid by a corporation to being a self-employed small business owner). When the complexity of our tax code makes me want to pull my hair out in frustration (which is often), I remind myself – by looking closely at charts like this one – how lucky we are to live in America.

As for the triple-header, depending upon your income and tax filing status, if your employer offers a 401k with a match and you contribute… you benefit from the match, from the reduction of your taxable income (a.k.a. a deduction), AND from the tax credit. That’s a sweet deal. And even if your employer doesn’t match or you are making the contribution through your IRA you still get the double benefit of a reduction in your taxable income plus the credit against any tax liability.

As someone who focuses her financial literacy advocacy work on women, I was particularly struck by data in the Transamerica’s 11th annual Women & Retirement study showing that women are less likely to contribute to 401k plans, when we do we contribute a smaller percentage of our income than men, and that we are less aware of this valuable Saver’s Credit than men. Given that we women (grumble, grumble) earn less than men yet live longer, it’s extra important for us to share the word about this credit with each other.

Here are the details on income limits for the credit. If you work with a tax preparation firm like H&R Block, Jackson Hewitt, or an individual CPA be sure to ask them if you eligible for this valuable savers credit:

For single filers, the adjusted income limit is $27,750 in 2010. For the head of a household, the adjusted income limit is $41,625 in 2010. For those who are married and file a joint return, the adjusted income limit is $55,500 in 2010. Additionally, the filer cannot be a full-time student or be claimed as a dependent on another person’s tax return.

Do you know a woman who can benefit from this information? If so, please pass it along.

© 2011 SingleMindedWomen.com All rights reserved. Permission to reprint this article must be obtained from SingleMindedWomen.com.

Want more financial love? You can follow Women’s Financial Literacy Initiative founder, Manisha Thakor, on Twitter at @ManishaThakor, sign up to get her email updates delivered right to your inbox here, and enroll in her innovative new online personal finance course called “Money Rules.”

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Do your children think you are a walking ATM?

If you are tired of “must-have-that-toy-right-now” tantrums as you walk down the aisles of Target or Toys “R” Us, go straight to your nearest bookstore and buy Alisa T. Weinstein’s new book, EARN IT, LEARN IT. Alisa tosses the old allowance-based system of teaching your kids about money and replaces it with: J.O.B.S. But not in the way you might think…

Innovative learning lessons can transform a child’s life. When I was growing up one of my pivotal memories was sitting down with my dad who showed me how to calculate how much money I’d have in my IRA down the road if I contributed my babysitting and lawn mowing money to it and it grew at 6%, 8%, 10%, etc.  Yeesh. Once I saw that if I saved $2,000 a year (the annual max contribution back then) for 50 years and earned 8% average annual returns I’d have over $1,000,000 – I was hooked. It changed my attitude about money forever. Learning to be responsible with money became fun. Now most kids aren’t as wonky as I was so punching the keys of an HP12C financial calculator might not do it for them, but I have a strong hunch Alisa’s unique approach will.

How did you come up with this concept of using jobs to teach kids about money?

I credit my daughter completely. She wanted “one more lip balm Mommy!” and I thought 13 lip balms were plenty for a four-year-old (a four-year-old!). In my exasperation I told her to “get a job.” As soon as I said it, I just knew that was how she was going to earn her allowance: by test-driving real jobs.

How does EARN IT, LEARN IT work?

For the book, I interviewed 49 people with 49 different careers. I then translated their day-to-day responsibilities into kid-friendly tasks, many of which take 15 minutes. So when Mia was a Toy Designer, she cut out a paper version of her favorite stuffed toy and we talked about things like hard costs (which she apparently doesn’t have because “Mom, I don’t pay for [that stuff]. You do!”)

What is the most surprising reaction you’ve had so far from a child?

I say this with a big smile: the most surprising reactions don’t come from kids. The real surprise reactions are from parents, who didn’t realize it could be so easy, and take so little time, to get their kids engaged in something totally worthwhile.

What is the most common challenge parents have today when teaching their children about money?

It has to be just getting started. Talking about money makes people uncomfortable. On top of this, the traditional methods (paying for chores, odd jobs, or no strings attached) aren’t much fun. Since we’re all so busy, it would seem easier to avoid the subject altogether. But then you end up with a kid who thinks the world exists to provide her with another lip balm.

What have you personally learned about money while writing this book?

I was lucky. My parents taught me early on that what we do to earn money can be even more valuable than the money itself. Which means being more open to finding a career that simply makes us feel good. And this not only makes life richer, it makes living with (and learning about) money a lot more fun. [You can follow Alisa on Twitter at @EarnMyKeep]

What experiences have you had teaching your kids about money?

© 2011 SingleMindedWomen.com All rights reserved. Permission to reprint this article must be obtained from SingleMindedWomen.com.

Want more financial love? You can follow Women’s Financial Literacy Initiative founder, Manisha Thakor, on Twitter at @ManishaThakor, sign up to get her email updates delivered right to your inbox here, and enroll in her innovative new online personal finance course called “Money Rules.”

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Do you ever tell yourself, “Some day I will…”?

After going 16 straight months in my new entrepreneurial life without taking a single day off, I slammed head first into a mental wall.

So I sought help from business strategist Alexis Martin Neely. I figured we’d dive right into my business model, but one of the first things Alexis asked was what I did for fun. Silence. Terrified that if I slowed down for a nanosecond in this economy I would plunge into the deep dark abyss of permanent career mal-function, the only word that I could manage to utter was a feeble…“Work?”

So Alexis asked me what long-term dream I’d fulfill after all this work was done and I’d finally “arrived.” No hesitation. “Take a luxury cruise,” I immediately blurted out. That was something I’d fantasized about for over 15 years but never felt I could afford to take the time off to actually do. With the encouragement of my wonderful husband and Alexis, I finally went on a Caribbean cruise.

On the enjoyment scale I’d give the cruise a 5, but on the life lesson scale it was an absolute 10. Here’s what I learned and how it can help YOU spend your hard earned money & time more mindfully.

1. Experiences give you the ultimate bang for the buck. The average age of my fellow travelers was roughly 75 (by comparison, I’m 40 years old). Many had climbed to the top of their respective industries. When I chatted with them about the most memorable moments during their working years – time and again they spoke of simple experiences: a good meal, a memorable outing, a daily ritual that brought them joy. Not one mentioned the acquisition of THINGS.

2. Few female breadwinners = no men in the laundry room. Given the age of the average traveler, it probably comes as no surprise that virtually none of the women I talked to had careers outside the home. But what really struck me was that not once during the cruise did I see a man in the on-board launderette. Instead I saw female guests of every nationality washing and ironing their husbands’ clothes. That really got me observing the dynamic between the couples. Time and again I saw the connection between earning money and having choices in a relationship. And as politically incorrect as it is to say… it was very clear to me the first often drove the later. For more on this – I highly recommend reading Leslie Bennett’s wonderful book, The Feminine Mistake.

3. Test driving your dreams can save you money and time. Because I booked the cruise at the last minute and deliberately sought out ships that were close to sail date and had extra rooms, I was able to find an Italian liner with a nearly 50% off special. It was lovely to save that money.  But what was really wonderful was realizing this “dream” that I’d had for so long really didn’t make me that happy. Cruising is for many people – I’m just not one of them. So now I know. And I’ll waste no more time day dreaming about the month-long cruise I’d once thought I’d wanted at 5x the price I had paid this go around!

What about you – what dreams are you waiting for, and what can you do today to take them for a spin?

© 2011 SingleMindedWomen.com All rights reserved. Permission to reprint this article must be obtained from SingleMindedWomen.com.

Want more financial love? You can follow Manisha on Twitter at @ManishaThakor and sign up for her weekly email updates here. Manisha also teaches an innovative online personal finance course called “Money Rules.” Founder of the Women’s Financial Literacy Initiative, Manisha can be reached via her website: www.ManishaThakor.com.

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