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Show DAILY C6 HERALD Sunday, July 27, 2008 THE WALL STREET JOURNAL HEALTH COSTS LOVE & MONEY By MP. McQueen As a Pay Cut Looms, Let's Revisit the Budget Smile Benefits Improve I'm Moreover, we'll likely combine his soccer camp with the family's summer vacation, saving us a substantial amount on travel and lodging costs. Also on the chopping block: the monthly sum we save for A new water emergencies. heater. Patching the roof. A computer breaks. Through the years, this account has helped us several times manage such small financial crises that inevitably arise, keeping us from relying on credit cards or depleting our savings. We'll still save a little because we've seen great benefit from this strategy, but we just don't have the capacity to save as we once did. a few weeks away from a substantial pay cut. When I finally wrap up the Love & Money column next month, I will be losing a nice chunk of my current income. Although leaving the column is my choice mainly because I want to devote all my attention to my next assignment I can't deny that this is going to hurt, emotionally as well as financially. This week, though, I'll focus on the finanBy JeffD. cial aspect. My Opdyke wife, Amy, and I are only now beheads around to our get ginning the magnitude of the change. And in doing so, we're facing many of the real and psychological challenges that all families confront when they're hit by a significant pay cut. In the first column I wrote, back in 2002, 1 noted that one of the reasons I agreed to open my family's personal financial life to public scrutiny was because the gig came with a nice bit of extra cash. Now, in what effectively completes that circle, I am offering a look at how my family has to adjust to losing that cash. important to me, no doubt because I grew up with grandparents who always felt financially constrained. They never had enough to do the things they wanted to do for themselves, or their family. Our challenge now comes in restructuring our finances to live within our new means, a task far easier to write about than to implement. As most readers will no doubt recognize, people have a great capacity to spend up to their earnings, regardless of need. We manage to build our lives around whatever sustained income we earn even if that income is temporary. Indeed, Amy and I have spent the past six years relying on the money this column has generated for everything from taking our kids to Disney World to helping pay for a new car. Now comes 'withdrawal The biggest cut is the easiest, though to me the most painful: We're sharply slicing the amount of money earmarked for savings. Though we'H certainly continue to save a piece of every paycheck, the cash from this column helped us fund amass an emergency roughly equal to a year of my salary, while at the same time serving as what I call an over I have to think that a pay cut is on the minds of many people these days, courtesy of a struggling U.S. economy and the nation's increasing number of unemployed workers. I'm certainly not lumping myself in with families who have lost a job. I'm voluntarily forsaking this income, and the adjustment will be far less traumatic for me. Nevertheless, the result the loss of spending power is no less real. And it comes with plenty of stress. For the past six years, my extra income has bolstered my sense of financial security. That security has always been we happened to overrun our budget during a given month for whatever reason, we didn't fret much because we had this cash that was otherwise headed toward a savings account. We could just divert some of that flow. No more. That, in turn, means more meals in and fewer out. It means sticking to a more rigid grocery budget, instead of grabbing what strikes our fancy at the market. Combined, these reduced food costs should save us more than $300 a month. I've canceled subscriptions to a few magazines and newspapers, saving about $45 a month, and I'm looking for a cheaper cellphone plan, given that I rarely use all the minutes I pay for now. In anticipation of the salary drop, I recently replaced my Jeep with a far more car. That should save between $50 and $100 a month in gasoline. I'm also shopping for a new policy that, I hope, will trim our insurance costs by several hundred dollars a year. We've, drastically cut the amount of money I squirrel away each year for our son's soccer camps. He'll still be able to attend cne or two, but they won't be the pricier camps that he has attended in the past. By Andrew Bary BARRON'S INSIGHT Some Signs Beaten-Dow- n run account. If It's 35 investors had feared that the bank would eliminate or severely cut the payout. Many other banks offer dividends of 4 or more. Banks also have valuable deposit franchises that give them access to a stable and a source of funds. Investors can take two approaches to the financials: buying quality stocks or issues whose outlooks are more troubled. The quality stocks include Wells Fargo, U.S. Bancorp, J.P. Morgan and even American Express, whose shares fell last week after the "WV n company reported disappointresults. ing second-quartWells Fargo, U.S. Bancorp and American Express are big holdings of Berkshire Hathaway, whose chief executive, Warren Buffett, is a fan of all three. Regional banks like Wachovia, SunTrust, Zions Bancorp and Fifth Third Bancorp are contending with asset problems stemming from mortgage and lending. David Konrad, a banking analyst at Keefe Bruyette & Woods in New York, is partial to Fifth Third, Sovereign Bancorp and National City. Contrary to market speculation, he argues that real-estat- real-esta- 8. Q, By Tom Herman Here is a question about the y "wash sale" rule. I and buys the same thing, or something substantially identical, within 30 days. (Note: That means 30 days before or after the sale-- not just 30 days after.) If you run afoul of this rule, you can't deduct the loss. Instead, add the disallowed loss to the cost of the new securi- have never been sure if it can be gotten around by selling stock from a taxable account (and taking a loss) and simultaneously buying the same stock in an IRA to cover market risk you may otherwise face by waiting '30 days. What is your take on this? ties. L.P.S., Yorba Linda, Calif. If you try that idea, youcan't deduct your loss. The Internal Revenue Service issued A, a ruling on that very subject late last year. Here's some background: A "wash sale" typically occurs when an investor sells a stock or some other security at a loss 1 l - 1 33 ' i i i i 2007, i 0b j i i - After I wrote about this subject several years ago, many readers raised the same question you did: What if you sell a stock at a loss in a taxable account and then, one day later, buy the same stock for your IRA? Does that violate the wash-sal- e rule? At the time, the Treasury and IRS declined comment. I repeated my question each year housing legislation is close to becoming may help as many as home- 500,000 owners avoid foreclosure, by assisting them in refinancing into i Source: WSJ Market Data Group these banks, whose stocks have been battered, won't need to raise additional capital. Mark Boyar, the head of the New York investment firm bearing his name, likes J.P. Morgan, Travelers, Bank of New York Mellon and Lehman Brothers. Lehman, whose shares have rallied to $17 from a recent low of $12, trades at a sizable discount from its book value of $33 a share. In fact, it's the only major securities firm whose stock languishes below book. Travelers and most other insurers, including Allstate and Chubb, offer a lower-risway to play financials than banks because they don't have significant exposure to the troubled mortgage market. These stocks trade below 10 times estimated 2008 profits and at little or no premiums above their book values. property-and-casualt- y k For more stories, see barrons.com for several years after that but didn't get a reply. Then came new IRS leadershipand at the end of last year, the IRS finally answered the question in what's known as revenue ruling. ' That ruling said the loss on the sale would be disallowed and the basis of the IRA isn't increased by the amount of the a disallowed loss. "This is a real trap for the unwary," says Steven Rosenthal, a tax partner at the law firm Ropes & A Way health-insuran- to Fight Disease Experts say the enhanced preventive care is aimed at reducing overall employer health costs by reducing the prevalence of serious disease. A growing number of studies have linked gum disease to such conditions as births, diabetes and heart disease, although the relationship is not always well understood by science. (All dental plans aren't available in all areas, however, and some of the new features are included only if an employer chooses to offer them.) Delta Dental of California, New York and Pennsylvania and Affiliates, one of the largest dental plans in the U.S., recently introduced a plan that doesn't count diagnostic and preventive care toward the annual maximum. That enables patients to conserve more of their annual benefits allowance, usually capped at $1,500 to $2,500, for such big expenses as bridges and crowns. Life Guardian Insurance plans are allowing patients to roll over a share of the unused pre-ter- Expanded Coverage More insurers also are 50-- for dental were which formerly implants, excluded. Others are paying part of the cost of tooth whitening or providing a discount for it. Evelyn Ireland, executive director of the National Association of Dental Plans, says insurers are doing this to entice consumers into visiting the dentist for necessary routine care. Many insurers also are adding interactive online tools to make it easier to shop for providers and compare fees. That's useful because insured patients usually must share about 20 of the cost of basic services such as fillings and extractions, and 50 of major restorative work like bridges. MetLife, Principal Financial, Delta Dental and Guardian all have introduced cost estimators to calculate the average costs of services in a given Zip Code. Email: forum.sunday03wsj.com By Emily Green cash-strapp- low-co- 500-stoc- ASK DOW JONES The Vu 25. 20- Jeff Opdyke covers personal finance for The Wall Street Journal. Email: lovemoneywsj.com At portion of their annual limit for future years provided they file at least one paid claim a year. The changes are intended to reward patients for getting regular, routine care, insurers say. When it comes to patients with chronic diseases, Principal Financial Group just started offering extra cleanings for patients undergoing treatment for cancer of the head and neck, saying research indicates they are at greater risk of complications from dental procedures. Delta Dental last year added a third paid exam and a free extra cleaning per year for pregnant women, and an additional deep cleaning for those with signs of periodontal disease. Guardian is covering up to four routine or periodontal maintenance cleanings at the recommendations of the dentist, without additional verification, says Richard Goren, DDS, second vice president. Two Alternatives to Foreclosure $40 30 a pullback late last Despite bank and financial stocks held on to much of their recent gains, suggesting that the worst could be over for that battered group. Before Thursday's selloff, financial issues in the benchmark Standard & Poor's k index had gained .nan 25 since bottomh. ing on July K, and some bciton-dowcompanies, like fJuik ol America, Lehman Lathers a..d V.achovia, were 50 or mo:e above their lows. The sector, however, is still off nearly 30 for the year, the worst showing among the major industry groups within the S&P 500. A slew of second-quartearnings reports from banks showed sizable mortgage and e losses, but Wall Street reacted favorably because many institutions, including giants like Wells Fargo and J.P. Morgan Chase, probably have sufficient earnings power to absorb setbacks without seeking additional capital. Bank of America has risen to $29 a share from a recent low of $20 after reaffirming its dividend, which now offers a Previously, yield of about (xlf) share price Financial Stocb that. FAMILY FINANCES S&P500 Financials ETF Time to Buy Those aren't all the cuts, but they provide a flavor for how we're going to restructure our finances for a smaller paycheck. Looking over my list, I realize that a) many of the cuts seem relatively small; and b) we're still saving money, meaning we could maintain a lifestyle closer to what we currently have if we just get rid of more of our savings. Two points. First, even small cuts can add up to meaningful savings. A hundred dollars here, a hundred dollars there, and you're quickly talking about a lot of money. Moreover, if I can cut more than necessary, I can see which expenditures offered real value, and which ones I don't miss at all. My guess: I may want to reinstate a few more family dinners at restaurants, but I probably won't miss the magazines. Second, to the degree possible, I will always prefer to save first and forsake various discretionary expenses. It's something that has been instilled in me since I was a child. And no pay cut will change a time when workers shouldering an share of costs, some insurers surprisingly are increasing benefits in dental plans. A growing number of plans are rewarding patients who get regular preventive care by allowing them a higher maximum yearly allowance. More plans are paying for services that were formerly excluded, including tooth bleaching and dental implants to replace missing teeth. And more plans also are covering additional cleanings or gum treatments for patients who are pregnant or have chronic health conditions. The new features are showing up in employer-provide- d group plans and some are finding their way even into individual plans. Gray in Washington, D.C. Send your questions to us at askdowjones.sunday03wsj.com and include your name, address and telephone number. Questions may be edited; we regret that we cannot answer every letter. government-backe- Counseling Resources for Struggling Homeowners Neighborhood Assistance of America Corp. naca.com d mortgages. But since many struggling borrowers may not qualify, people facing foreclosure should themselves also familiarize with two other options: "short sales" and "deed in lieu of foreclosure" transactions. Neither option will keep you from losing your house or avoid severe damage to your credit score. Still, they may be less painful in some ways than foreclosure, the legal process in which the bank repossesses a homeowner's property because of failure to meet the terms of the mortgage. In a short sale, the borrower sells the house at a fair market value that is less than the amount owed on the mortgage, and the lender usually agrees to forgive the remainder of the debt. ACORN acorn.org Homeownership Preservation Foundation 995hope.org HomeFree-US- A homefreeusa.org generally face a shorter waiting period before they can obtain another mortgage. Many lenders, primarily make loans that they can sell to big mortgage players Fannie Mae and Freddie Mac. Starting Aug. 1, Fannie Mae generally will not buy loans made to borrowers involved in a short sale in the past two years. That's r wait shorter than the time if you have a deed in lieu of foreclosure on your record, wait time if and the five-yeyou have a foreclosure on record. (The current wait time is four years for a foreclosure or a deed in lieu of foreclosure; there is no existing policy for borrowers with a short sale.) Freddie Mac generally won't guarantee loans made to borrowers who have had a foreclosure in the past four years, says Freddie Mac spokesman Brad German. (If the foreclosure was due to circumstances beyond the borrower's control, such as a medical emergency, then Freddie Mac will guarantee the loan in two years' time). The company considers short sales and deeds in lieu of foreclosure a significant negative but not an "automatic no," says Mr. German. four-yea- In the other option, the bor- rower hands over the property to the lender with the lender's consent "in lieu of" waiting for foreclosure. The obligation falls on the lender to sell the house; as in a short sale, the lender typically agrees to forgive the amount by which the mortgage balance exceeds the house's current value. Put Debt Behind You A key advantage of both strategies is that most individu- als walk away from their house freed of their mortgage debt, a psychological and legal relief, says Vicki Vidal, ah associate vice president at the Mortgage Bankers Association. In contrast,- in foreclosure proceedings, lenders can theoretically pursue the differential owed to them, depending on state law. The great majority of lenders don't pursue this debt, but it has occurred, particularly in cases where the borrower vandalized the property upon departure. A second benefit of short sales and deeds in lieu of foreclosure is that borrowers will - A Blow to Credit Scores What short sales and deeds in lieu of foreclosure don't do is minimize the impact on a borrower's credit score. All three proceedings have roughly the same negative impact on an individual's credit score, says Craig Watts, spokesman for Fair Isaac Corp., which created the widely used FICO score. Mr. Watts says that to date little analysis has been done distinguishing, for instance, the credit risk of individuals who completed a short sale versus those involved in a foreclosure. For that reason, "the model ends up treating them a short sale, a deed in lieu of foreclosure, and a foreclosure all the same." If homeowners are interested in pursuing a short sale, they should open discussions with their lender or loan servicer before attempting to sell their house. For both short sales and deeds in lieu of foreclosure, borrowers will have to present a "hardship letter" to the lender or servicer detailing why they are unable to make their mortgage payments. . Lenders have shown increasing willingness to negotiate short sales and deeds in lieu of foreclosure because of the losses they frequently incur in foreclosures. Short sales are considered preferable because they save lenders the hassle of selling the house. But a deed in lieu of foreclosure also has its advantages to lenders versus foreclosure: "The earlier they get the home, the better the condition the property is in," says Ms. Vidal of the Mortgage Bankers Association. Still, for both short sales and deeds in lieu of foreclosure, the process of negotiating with lenders can quickly become complicated. If a borrower took out second and third mortgages, he or she may need to negotiate with multiple firms. Whether attempting a short sale or a deed in lieu of foreclosure, borrowers should take a "proactive approach," says John Snyder, homeowner specialist with the nonprofit America. He recommends that borrowers who foresee problems making their mortgage payments contact a nonprofit organization to help them negotiate with their lending institution. Neigh-borWor- Email: emily.greenwsj.com i |