Money Management 101 for Single Parents Going it Alone

1. Determine What You Owe

As the head of the household, it’s up to you to make sure that your entire family’s needs are being met. In order to do that, you need to be extremely diligent when it comes to money management basics. This is not something that will happen by accident. Instead, you must plan for it and work toward it.

The first step is to set up your “office.” Gather all of your bills, a calculator, a pencil, and your checkbook.

I would also recommend that you grab an old binder that you can use to keep track of your financial data and a shoebox for storing paid bills.

Now you’re ready to begin:

  • Go through all of your bills, and pay anything that is due within the next week.
  • If you have bills coming due that you cannot pay, notify the company and ask them to set up a payment plan with you.
  • Print a copy of the chart “Paying Down My Debts” or make your own.
  • On the chart, list all of your debts, including any car loans, student loans, and credit card debt.
  • In addition, list the total balance left to be paid on all of these debts, and the percentage rate you are paying.
  • For now, leave the fourth column of the chart blank, and store it in your “Financial Data” binder.

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2. Eliminate Joint Debt

Before we create a plan for paying down your debt, it’s important to consider some special circumstances that may apply to you as a single parent. I asked LaToya Irby, Credit/Debt Management Expert, to share her expertise on handling joint debt:

Wolf: Let’s say a single mom still shares a credit card with her ex. What should she do?

Irby: Ideally, she would want her ex to transfer his portion of any joint balances onto his own credit card. That way, everyone is paying for their own debt.

Wolf: What about leaving both names on the account, and agreeing to pay part of the amount due? Is that ever advisable?

Irby: No. If you’ve made an agreement with your ex to split the debt payments on accounts that include your name, and your ex-misses a payment, it’s going to hurt your credit. If the ex-fails to pay altogether, the creditors and collectors will come after you. Not even a divorce decree can change the terms of a joint credit card agreement. In the credit card issuer’s eyes, you’re just as much responsible for post-divorce accounts as before.

Wolf: What about situations when a couple’s divorce decree mandates that one individual must pay off the joint credit card debt, but that person fails to do it?

Irby: You can always file contempt of court papers against him/her, but in the meantime, your credit score suffers. So I suggest paying off the debt to save your credit. If you can’t afford to pay the debt, at least make minimum payments to keep a positive payment history on your credit report.

Wolf: What about other accounts, such as utilities and cell phones?

Irby: The safest thing to do, if you have a service in your ex’s name, is to turn off the account and reestablish service in your name.

 

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3. Find Money to Pay Down Debt

Another thing we have to do before creating a plan to pay down your existing debt is to find money in your budget each month. To assist in this step, I contacted Erin Huffstetler, Frugal Living Expert.

Wolf: How much money do you think the average person can uncover just by being more intentional about spending and budgeting?

Huffstetler: The average person could easily uncover an extra $250 a month—and probably much more.

Wolf: What are the top 5 areas that you think people should look to first when they’re trying to cut their expenses?

Huffstetler:

  • Food spending (both groceries and eating out)
  • TV-related expenses (cable/satellite services, certainly; but also movie subscriptions and rentals)
  • Phone services (particularly extras like call waiting, caller id, long distance, and cell phones)
  • Insurance premiums
  • Miscellaneous spending (all those small amounts spent on coffee, vending machine snacks, and other indulgences)

Wolf: How can single parents, specifically, stretch their child support dollars and reduce child-related expenses?

Huffstetler: For single parents looking to stretch their child support dollars, creativity is the key. Look to children’s consignment shops and thrift stores to buy your kids’ clothes instead of department stores; sign them up for Parks and Rec-run activities instead of privately-run activities (which will always cost more); and don’t feel like you have to make up for being a single parent by buying them extra things—it’s you they need, not stuff.

 

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4. Pay Off Your Debt

The next step is creating a schedule for paying down your debt:

  1. Pay off the debts that charge you the highest interest first.Bob Hammond, author of Life Without Debt, recommends that you pay off the debts that are charging you the highest interest first since borrowing from those creditors is costing you the most money. “Concentrate on paying off the high-cost debts as soon as possible,” Hammond advises. LaToya Irby, Credit/Debt Management Expert, agrees. “Highest interest rate debts cost the most money, especially when those debts have high balances. So you’ll save money on interest charges when you pay off those high-interest rate debts first.”However, there are exceptions to this general rule. Irby notes, “If you’re likely to get discouraged because it’s taking a long time to pay off that high-interest rate debt, you can start with the lowest balance debt. Getting some small debts paid off will motivate you to keep going.”
  2. Pay more than the minimum payment. Aim for paying more than the suggested minimum payment, in order to pay off your debts as quickly as possible.Miriam Caldwell, Money in Your 20’s Expert, shares this advice:
    • Choose one debt to focus on.
    • Increase your payment on that debt by as much as you can.
    • Once you have paid off that debt, move all that you are paying on it to the next debt you want to pay off.
    • You’ll be surprised at how quickly you can get out of debt with this plan!
  3. Meanwhile, continue to pay the minimum balance due on all of your other debts.Record what you intend to pay toward each debt on the debt chart you made in Step 1.

 

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5. Budget Your Monthly Expenses

Now that you know where you stand financially, and you’ve created a plan for paying down your debts, it’s time to make sure that you’re making any other necessary adjustments so that you can keep up with your plan. And this means creating a budget.

I know this can be intimidating, but I’m going to make a suggestion for you: Sign up for Mint.com. It’s a free financial software program available on the Internet, and it will basically do your budgeting for you. It will create a visual pie chart showing how much you’re spending each month on housing, gas, food, entertainment, and more. This way, if it turns out that you’re spending a lot more on food than you really should, you can begin to make the necessary adjustments to get your spending under control.

If you would prefer to create your budget the traditional way, allotting a certain amount of money to each spending category, I’ve created an online budget calculator you can use, which includes categories for child support and other details specific to your life as a single parent.

Finally, in taking a look at where your money really goes each month, it’s important to know approximately how much money you “should” be spending in each category. Generally speaking, your net spendable income (after taxes) should be allocated as follows*:

  • Housing: 30%
  • Food: 12%
  • Auto: 14%
  • Insurance: 5%
  • Debt: 5%
  • Entertainment: 7%
  • Clothing: 6%
  • Savings: 5%
  • Medical/Dental: 4%
  • Miscellaneous: 7%
  • Child Care: 5%
  • Investments: 5%

 

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6. Set Financial Goals

Now that you’ve worked out a plan to pay down your debt, and you’ve created a budget, it’s time to determine your needs moving forward.

Specifically, as a single parent, you need to ask yourself some questions, such as:

  • Do you need to file for child support?
  • Do you need to get a higher-paying job?
  • Is it time to think about going back to school?
  • Do you need to consider moving into a home/rental that would reduce your overall monthly payments?
  • Are there alternatives, such as taking on another job or splitting expenses with another single parent family, that you need to consider at this point?

One of the things that I want you to know is that the ball is in your court. You determine where this goes from here on out. But unfortunately, you can’t do that if you’re ignoring your financial health, right?

So the fact that you’ve come this far in the process of getting a handle on your finances tells me that you’re determined to make the changes you need to make in order to provide for your family’s future.

So go ahead and ask yourself these questions. So much of single parenting is learning to roll with the punches and be creative in the face of adversity. If, indeed, you need to make some pretty major changes, now is the time to do it. Don’t incur any more debt where you are. Be resourceful, follow through, and do what you need to do to turn your financial situation around.

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7. Increase Your Net Worth

The next step is to determine your net worth and begin adding to it.

Determine Your Net Worth:

Your net worth is what you own minus what you owe. Programs such as Mint.com, Quicken, and Microsoft Money will calculate your net worth for you, automatically.

You can also determine your net worth simply by adding up all that you own, including all of your investments, the equity you may have paid into your home, the value of your car, and any other assets you possess; and subtracting what you owe in remaining debts.

Set Up a Savings Account:

Once you know where you stand, you’ll be ready to set up a savings account. You can do this through your regular bank, or begin investing in a mutual fund that pays interest.

Even if you can only afford to set aside $25 or $50 per month, it will begin to add up.

Before you know it, you’ll have an emergency savings plan in place, to protect you in the event that your car breaks down, or your home needs a major repair.

In addition, this regular savings will help you increase your net worth over time.

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8. Become Even More Frugal

Unfortunately, all of the work you’ve already done in steps 1-7 will have little lasting value if you don’t change your attitude toward money. Now is the time to become even more frugal and learn to live within your means.

Practice Discipline:

Stop imagining that more money is going to pour in tomorrow—through finally collecting on unpaid child support, winning the lottery, or getting a promotion. If those things happen, great! You’ll be even better off. But living as if they’re going to happen is causing you to spend money you don’t have.

Instead, force yourself to make purchases with cash only. Do not continue to pay outrageous interest payments toward credit cards for purchases you don’t absolutely need. You can get by without that new furniture, right? What else could you skip, in the interest of spending only what you have right now in the bank?

Try These Ideas:

  • Check Freecycle before you make another major purchase. Someone else may be giving away the very thing you’d like to buy!
  • When you’re getting ready to buy something specific, look for it on eBay first. I buy a lot of my clothes, new-with-tags, through online auctions!
  • Forget trying to keep up with “The Jones’s.” You already know your value; don’t get caught up trying to “prove” your worth to others by having “just the right” house, car, or appearance.
  • Do not use shopping, ever, to appease your emotions.
  • Finally, when you do go to make a big purchase, step back and give yourself a few days–or even a week–to think about it. There’s no reason to suffer through buyer’s remorse and try to justify to yourself purchases that you really can’t afford. Think it over carefully and make those purchases, when necessary, with cash.

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9. Schedule Your Own Weekly Financial Check-In

Grab your calendar and schedule a weekly financial update meeting with yourself. This is an extremely important step in managing your personal finances, and it’s one that you need to continue each and every week. During your “meeting” time:

  • Pay any bills that are due.
  • If your bank statement has arrived, take the time to balance your checkbook.
  • Check the balances of your checking and savings accounts.
  • Update your debt list to incorporate any recent payments.
  • This is also a good time to write out your grocery shopping list and check what’s on sale at your local grocery store this week (either using the store’s Web site or the sales circular that comes in the newspaper).
  • Finally, also make note of any upcoming expenses you need to anticipate and plan for.

An attitude of gratitude and finances.

 

 

References:
Irby, LaToya. Email interview. 24 Oct. 2008, 
Huffstetler, Erin. Email interview. 24 Oct. 2008. 
Sources:
Caldwell, Miriam. Email interview. 27 Oct. 2008, Hammond, Bob. “Debt Free Key: 10 Steps for Coping With Credit Problems.” Life Without Debt. Franklin Lakes, NJ: Career Press, 1995. 31-32, Irby, LaToya. Email interview. 24 Oct. 2008. 
“Spending Plan Online Calculator.” Crown Financial Ministries. 11 Oct. 2008.

Written By: Jennifer Wolf

Source: thebalance

 

 

 

How To Avoid A 401(k) Meltdown If The Trump Rally Fizzles

Millions of Americans are asking the wrong questions when it comes to their retirement plans. It’s not “how much should I invest now?” or “is the market safe?” You should invest as much as you can in every kind of market.

So forget about the question of whether the “Trump rally” is over, or taking a pause. If that’s your concern, you’re focused on the wrong thing.

Despite this reality, far too many investors are trying to find the right fund manager who can somehow predict and navigate the rocky seas the market will toss up. In rare cases, some managers get lucky and get in and out at the right time. But most don’t have this ability.

Most of us want to believe that professional money managers know just when to get in and out of stocks. We put a lot of faith in them — and mis-spend some $2 trillion in fees hoping that they’ll be right and protect our money.

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The numbers don’t lie, however. Most managers can’t do better than passive market averages and rarely outperform after you subtract their fees. So if you’re placing your trust in active management, you’re headed for a meltdown sooner or later.

A recent study by Jeff Ptak at Morningstar shows the folly of active management for most investors.

Ptak looked a the relationship between what actively managed funds return to the fees they charge for management. In most cases, expenses will cancel out most significant gains.

“Fees haven’t fallen that steeply, and, as a result more than two-thirds of U.S. stock funds levy annual expenses that would wipe out their estimated future pre-fee excess returns.”

What this means is that active managers who time the market aren’t likely to outperform passive baskets of stocks. When you subtract their fees, you’re not coming out ahead.

Fees take an even bigger bite when overall market returns are lower. If stocks return less than double digits, you’re going to feel the pain even more.

Ptak is blunt in his conclusion: “Many active stock funds are too expensive to succeed. The exceptions are small-cap funds, where it appears fees are still below estimated pre-fee excess returns.”

What can you do to avoid the meltdown of overpriced, actively managed funds? It’s a pretty simple process.

1) Find the lowest-cost index funds to cover U.S. and global stocks and bonds. Expense ratios shouldn’t be more than 0.20% annually (as opposed to 1% or more for active funds).

2) If you still want active funds in your portfolio, they should be highly-rated managers who invest in smaller companies.

3) Make sure that the “active” part of your portfolio is no more than 30% of your total holdings. While this is an arbitrary percentage, it will provide some buffer against market timing decisions.

You should also avoid the error of picking funds based on their past performance, which can never be guaranteed. So, instead of asking how they performed, you should ask “how many securities can they hold for the lowest-possible cost.”

 

Money Continues to Leave Equities for Bonds in 2016

– Money continues to leave domestic equity mutual funds and exchange-traded funds (ETFs) and move into bond funds and ETFs. This shows a potential continued lack of trust when it comes to equities.

– This year the difference between the two has been very pronounced. Year-to-date $89.1 billion has left domestic equity funds and ETFs, while $199.9 billion has moved into bond funds and ETFs.

 

 

 

Source: LPL Research, Investment Company Institute 10/05/16

Important Disclosures: Investing in mutual funds and ETF’s involve risk, including possible loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise and bonds are subject to availability and change in price. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in the presentation may not develop as predicted.

5 Ways to Protect Yourself From Wall Street Volatility

Investor checking performance of financial portfolio online whilst reviewing investment statement
Cultura RF/Getty Images

Starting with a gut-wrenching plunge on the first trading day of the year, stocks have given investors one frightening day after another in recent weeks. It’s enough to shake the confidence of even the most cool-headed buy-and-hold investor.

If only you could buy an insurance policy that would pay off if stocks go over a cliff.

Actually, you can. By purchasing a type of stock option called a put, you can lock in the right to sell your shares at today’s price no matter how far prices fall. That’s just one of a number of ways to protect against losses, or to minimize them – and investors are wiseto know how each works.

“While weathering the storm is likely the best strategy, ongoing liquidity needs and inability to stomach paper losses make this a difficult strategy to implement,” says Karan Sood, CEO of Vest Financial in McLean, Virginia. “What is required is a consistent risk management strategy that contains the volatility at all times.”

Weathering the storm is the most common risk-control strategy, since the broad market always eventually recovers from downturns. That’s why experts typically say investors should plan on holding their stocks and stock funds for at least five years.

But although the broad market has a great record of recoveries, individual stocks and funds can be wiped out. That’s where the second-most common strategy comes in – diversification.

“For those panicky clients, and anyone we meet with for that matter, the message is always the same – diversification among key asset classes and rebalancing are the ways to minimize market volatility,” says Betsy Vallone, partner in Essential Asset Management of Norwell, Massachusetts. Rebalancing means restoring the intended mix of assets after the price changes get the portfolio off target.

Stocks tend to be among the riskiest of holdings, but tend to provide the biggest returns over time. Bonds are less risky and generally less generous, though not always. Cash is safe, but earns almost nothing.

The basic idea is to have uncorrelated holdings, so that when some go down, others go up. Stocks in energy-producing companies, for example, are likely to fall when oil prices drop, as they have recently. But low fuel prices can be good for companies that use lots of energy.

Professional traders constantly bet on these shifting factors, but that takes a lot of knowledge, effort and stomach for risk. Small investors are usually told to own a wide variety of stocks, so that some will do well while others are in trouble. This can be done quite easily by holding mutual funds that contain many stocks of different types.

Other loss-control techniques are more complex, and although useful in times of high risk, they are often too expensive to employ all the time. Most work best with individual stocks, or with exchange-traded funds and index-style mutual funds such as those that track the Standard & Poor’s 500 index. Your broker can walk you through the steps.

Purchasing puts. As mentioned, these are stock options that allow their owner to sell a set number of shares at a given price anytime over a period of days, weeks or months. If you bought a put to sell 100 shares of XYZ Corp. at $10 a share, you could sell for $10 anytime until the option expired, even if the price fell to $5, $2 or zero. You could then buy the shares back at a cheaper price, or sit on the cash until the smoke cleared. Your stocks would be bought by the person who sold you the put.

Unfortunately, the “premium” you’d pay for this option could be sizable, and if you don’t exercise your option by the deadline you lose all you spent on the premium. Earlier this week, it cost nearly $650 to buy a single put contract, good until mid-March, on $18,500 worth of S&P 500 stocks, using an exchange-traded fund called SPDR S&P 500 Trust (ticker: SPY).

While an option’s price changes with market conditions, it’s too expensive to insure an entire portfolio all the time. It would be cheaper, however, to buy partial insurance. If your stock were trading at $10, it would cost much less to buy a put with the right to sell at $8 than at $10. You could still lose $2 a share, but would be protected against an even deeper sell-off.

“This is like very expensive insurance to cover the downside risk of your assets,” says Chase Hinderstein, wealth management specialist at The Wise Investor Group, a unit of Baird.

Selling covered calls. The opposite of a put, a call is an option giving its owner the right to buy a block of shares at a set price for a given period. The person who sells a covered call owns the shares involved – is covered – and agrees to sell them if the owner of the call exercises his right to buy. The buyer pays the seller a premium.

This technique doesn’t protect the call seller from loss if the share price falls. But the premium received helps offset some of that loss. It’s critical to be willing to sell at the strike price specified in the call, as you most likely will have to sell if the price rises above that level.

“Covered calls are so simple that anyone can do them. They are proven to have better returns with less risk and volatility than the buy-and-hold strategy,” says Mike Scanlin, CEO of Born to Sell, a software firm specializing in covered calls.

Use a stop-loss order. With this, you tell your broker to automatically sell certain shares if they fall to a set price, thus protecting you from deeper losses. The risk: if there is no buyer at that price you might end up selling even lower. You can add a limit, so the shares are sold only at a given price or higher, but then you risk not selling at all if prices plunge.

“For our clients with significant positions in a public company, we may set a stop order 5 percent to 10 percent below the current market price to reduce further declines,” Vallone says.

Saving some “dry powder.” This refers to cash kept available for a good investing opportunity. If stocks fall, your cash can be used to buy some bargains, offering gains in a subsequent rebound. But because cash does not earn much, having too much can undermine returns when the market is going up.

“We look at market drops as buying opportunities,” says P. Jeffrey Christakos, an investment expert at Westfield Wealth Management in Westfield, New Jersey, explaining that downturns are welcome if they are temporary.

Dollar-cost averaging. Buying stocks or funds with a set amount of money every month or quarter helps you avoid the temptation to try to spot the market’s peaks and valleys, says Andrew R. Avellan, founder of Philadelphia Wealth Management Co. Also, a given sum, such as $500 a quarter, will buy more shares when prices are down, reducing your average cost per share in a holding accumulated over time. That will maximize your gains and minimize your losses.

“When considering this strategy, investors should consider their ability to continue investing in times of market downturns,” Avellan says. That can be done by setting up automatic investments with a broker, a fund company or a workplace plan, such as a 401(k).

Written by Jeff Brown of U.S. News & World Report

(Source: U.S. News & World Report)

The Best Ways to Invest $5,000

You’ve padded your emergency fund, paid off your debt and saved up a few thousand dollars – $5,000 to be exact – that you’re ready to invest. But is it best to put it in a mutual fund, certificate of deposit, index fund or exchange-traded fund?

“If you’re asking what’s the best way to invest $5,000, it’s kind of like asking what should I have for dinner tonight? Well, it depends,” says Greg McBride, chief financial analyst of Bankrate. “What do you like? What don’t you like? Do you have any allergies? What are you in the mood for? The same thing [applies] here.”

Before you get to specifics, such as how much risk you can stomach or what to choose off the menu of investments, start with the basics.

“The first question you need to ask yourself is, ‘When do I need to spend that money?’” says Manisha Thakor, founder and CEO of MoneyZen Wealth Management. “My rule of thumb is investing is something you do for the long run, which I would define as a minimum of five years and ideally 10-plus years. Once you are sure it’s long-term money, now you’re ready to really get into the nuts and bolts.”

To help you delve into those nuts and bolts, we asked financial experts for advice on the best way to invest your $5,000. They suggested options for both the short and long term, if you’re hoping to grow that money for retirement decades down the road.

1. Short term

A man working on his laptop.

© Mark David/Getty Images A man working on his laptop.

Online savings account. The best place for money you need in a moment’s notice is an online savings account, McBride says. Even though interest rates for online savings accounts are low – hovering around 1 percent – they “pay the best returns relative to the savings account offers among all the financial institutions,” he says. The returns currentlycompare to those of CDs, but without the early withdrawal penalties.

CDs and money market accounts. If your time horizon is less than five years, Thakor recommends putting the money in a CD with a maturity date that matches your goal. This option may be ideal if you have a low risk tolerance, since CDs are insured by the Federal Deposit Insurance Corp. up to $250,000 per depositor. The downside? You can’t touch those dollars for a predetermined time without paying a penalty.

Alternatively, money market accounts, which are also insured by the FDIC, earn slightly less interest than CDs, but you can withdraw the money at any point. Just keep in mind that interest rates are generally inversely correlated with access to your money. As Thakor puts it: “If you want unlimited access to your money, you’ll get slightly lower rates. If you don’t mind tying it up for a defined period of time, which is what you do with a CD, then you can get a slightly higher rate.”

Given their low yields, CDs and money market accounts are better for shorter-term investments, since they don’t always keep up with the cost of inflation. “Even though on paper it might look like you’re protecting your principal and [your] deposit is growing a little bit in value, you’re actually losing ground because the purchasing power is not holding,” says Paul Granucci, a financial solutions advisor with Merrill Edge.

2. Long term

A trader works on the floor of the New York Stock Exchange.

© Spencer Platt/Getty Images A trader works on the floor of the New York Stock Exchange.

Actively managed mutual funds. Investors with a longer time horizon can afford to take on more risk for a greater return by putting their money in the stock market. Mutual funds offer an easy way for investors to gain exposure to a broad range of stocks. If picking stocks makes you nervous, fear not. With actively managed funds, a fund manager makes all the decisions for you, including what sectors of the economy to invest in and which companies are undervalued or poised for growth. But beware: Mutual funds come with fees. The average actively managed stock fund charges an annual fee of 1.26 percent, according to fund tracker Morningstar, and Thakor advises against buying mutual funds with an expense ratio of more than 1 percent.

If you do go the actively managed route, Granucci recommends a globally balanced mutual fund, which is diversified in stocks, bonds and cash and contains domestic and international investments.

Index funds. “If the goal is to try to achieve a lot of diversification and build a portfolio that you can more or less kind of set and forget, it’s hard to beat index funds,” says Christine Benz, director of personal finance for Morningstar.

With index funds, you don’t have the opportunity to beat the market, but you can keep up with the market, “which is not a bad place to be given that most active fund managers do not outperform their benchmarks over long periods of time,” Benz adds.

Thakor points out that index funds are the healthiest option on the menu – without organic food prices. “Index funds are the financial equivalent of a superfood like chia seeds or kale,” she says. “Depending on what type you pick … you can get exposure to literally thousands of stock and bond issues at a very nominal fee.” The average expense ratio for stock index funds is 0.75 percent, according to Morningstar.

ETFs. Mutual funds and ETFs are very similar. “When you buy one share of an ETF or one share of a mutual fund, you’re buying a small piece of a lot of different investments that make up that fund,” Granucci explains. “The difference is how they are managed.”

There’s no active management with ETFs, so if you’re thinking about investing in a handful, be prepared to rebalance your portfolio at least once a year (mutual fund portfolios should be rebalanced, too). Advantages include costs that are a lot lower than those of mutual funds (Morningstar reports ETFs have an average annual fee of 0.57 percent) and no minimum investment requirements. While mutual funds may demand initial investments of $1,000 or $3,000, ETFs – which are traded on exchanges and fluctuate in price during the day – cost only their current trading price, like stocks.

ETFs offer exposure to asset classes ranging from bonds to domestic and international stocks, and even alternative investments like commodities. “Instead of trying to do one fund that’s going to do it all, you might need to find three or four ETFs that are going to fill all the different buckets that you want to hit,” Granucci says.

3. Before diving in

A man holds a credit card.

© Johnnie Davis/Getty Images A man holds a credit card.

You might be ready to put that $5,000 to work, but before you settle on one of the above investments, McBride points out three places where your money would be better spent:

1. Paying down high-interest debt.

2. Saving for retirement in a tax-advantaged account, such as a 401(k) or individual retirement account.

3. Starting an emergency savings fund that covers six months of living expenses.

“For the vast majority of Americans, tackling those three priorities is going to more than chew up that $5,000,” he says.

And there’s a reason why paying debt is at the top of the list: You’ll get a higher risk-free rate of return by paying down credit card debt than you will investing in financial securities. As McBride says, “Paying off a 15 percent credit card balance is like earning 15 percent risk-free.”

But let’s assume you’ve paid off your debt, contribute to a 401(k) or IRA and have enough savings for a rainy day. Now you’re ready to sit down at the table. The experts might have different tastes, but they all agree on one thing: You have to know what you’re ordering.

In other words, if you don’t understand what you’re investing in, you might make some mistakes.

“The power of investing comes from compounded returns and time, and if you don’t understand what you’re doing and you’re afraid to ask questions, when the inevitable hiccup comes in the market,” Thakor says, “you will be more likely to change your course.”

Copyright 2015 U.S. News & World Report

Written by Stephanie Sternberg of U.S. News & World Report

(Source: U.S. News & World Report)

7 Questions to Ask Yourself Before Deciding to Retire

Few Americans save abundantly for retirement. Whether due to financial issues or a lack of foresight, a lot of people either don’t give much thought to retirement or are unable to save up enough to help them fund their elder years.

In fact, only 13 percent of people who haven’t retired yet say they’ve given a lot of thought to financial planning for retirement, according to the Report on the Economic Well-Being of U.S. Households in 2014 conducted by the Federal Reserve Board. Nearly 40 percent say they have given little to no thought to retirement planning.

Mapping out your retirement takes more than asking yourself, “When should I retire?” Consider these seven questions to help you better plan for financial and personal obstacles in retirement.

1. What kind of lifestyle do I want?

If you’re married, you’ll need to speak with your spouse to make sure your retirement plans are aligned.

© Blend Images/REX If you’re married, you’ll need to speak with your spouse to make sure your retirement plans are aligned.

Before you try to figure out how much money you need to retire, you need to consider what sort of lifestyle you want to have in retirement, said John Sweeney, Executive Vice President of Retirement and Investing Strategies at Fidelity. Do you want to stay in your current home or downsize? Will you want to move to a bigger city or someplace warmer? Maybe you want to travel the world.

No matter how you envision your retirement, you’ll need to plan ahead to fund it. Depending on your goals, you might need to save more than you originally planned. If you’re married, you’ll need to speak with your spouse to make sure your retirement plans are aligned.

2. What will my expenses in retirement be?

When to retire

© Provided by Gobankingrates When to retire

Sweeney said most people can expect to spend about 85 cents in retirement for every dollar spent before retirement. Depending on your health, however, you might need to save more to cover medical expenses. If you have a chronic condition or have mobility issues, over time you might end up needing to spend more money to maintain your quality of living.

To help you project rough estimates of your retirement costs, you can use an online retirement income calculator. With a financial planner, you can get a detailed cash-flow analysis and help managing taxes.

3. Will I have enough savings to cover my expenses?

© Ocean/Corbis

Less than half of all workers say they’ve ever tried to calculate how much money they will need to save to live comfortably in retirement, according to The 2015 Retirement Confidence Survey conducted by the Employee Benefit Research Institute. Scott Bishop, Director of Financial Planning at STA Wealth Advisors in Houston, recommends comparing your current monthly expenses with how much income you’ll have in retirement.

If your retirement savings can’t sustain your mortgage, insurance and other typical costs, you might want to reconsider your current savings plan. You will also want to calculate your Social Security benefit to determine how it will affect your monthly budget. When considering whether you’ll have enough income in retirement, assume you’ll be in retirement for 25 years and have access to four percent of your savings annually.

In retirement, you’ll want to revisit your withdrawal percentage, adjusting for your actual spending, said Bishop. Your retirement portfolio, which should include numerous asset types, should also be structured to outpace inflation. Sweeney recommends you have a mix of stocks — about 55 percent — in your early years of retirement to maintain growth, and fixed income, such as bonds, to guard against market volatility.

4. What impact will taxes have on my retirement income?

© Heide Benser/Corbis

Taxes don’t disappear when you stop working. In fact, your tax bill can take a big bite out of your retirement income.

Up to 85% of your Social Security benefits might be taxable if you have income in addition to your benefits. Withdrawals from tax-deferred retirement accounts, such as traditional IRAs and 401(k)s, are also taxed. So, if you need $5,000 a month to cover expenses in retirement, you might need to withdraw up to $6,000, thanks to taxes, Bishop said.

Higher-income taxpayers will have to pay taxes on profits from the sale of stocks, bonds, mutual funds and other investments not held in a tax-deferred retirement account. States have their own rules for taxing retirement income, so depending on where you live, you could be hit with an above-average tax bill.

The states that impose the highest taxes on retirees include California, Connecticut, New York, Oregon, Rhode Island and Vermont, according to a 2014 analysis of state taxes conducted by Kiplinger, a publisher of business forecasts and personal finance advice. A financial planner can help you figure out how taxes will impact you in retirement and what strategies you can use to minimize your tax bill.

5. Where will I get my health care?

© REX/Blend Images

Chances are your employer won’t continue providing health care coverage for you in retirement. Only 28% of companies with 200 or more employees offer retiree health coverage, according to the 2013 Kaiser/HRET Survey of Employer-Sponsored Health Benefits.

You are eligible for Medicare when you turn 65. You likely won’t need to pay a premium for Medicare Part A, which covers inpatient hospital stays, care at nursing facilities, hospice care and some home health care. If you want extended health benefits, however, you’ll need to pay a monthly premium for Medicare Part B, which covers most doctors’ services and outpatient services. Medicare Part B typically costs around $104.90.

If you retire early, you’ll have to get an insurance policy on your own. Couples who retire at 62 can expect to pay $17,000 a year for health insurance premiums and out-of-pocket costs until they’re eligible for Medicare, according to Fidelity. A retiree can expect to pay an average of $220,000 in medical expenses over the course of their retirement.

You also need to factor in long-term medical care, which could wipe out your retirement savings if you’re not prepared. The median annual cost of care in an assisted living facility is $43,200, and the average cost of a private nursing home room is more than double that, according to the Genworth 2015 Cost of Care Survey. To curb these types of costs, you can look into long-term care insurance.

6. How much debt do I have?

© JLP/Jose L. Pelaez/Corbis

The more debt you carry into retirement, the more retirement income you’ll need to pay off what you owe. When you’re deciding when to retire, you need to figure you how long it will take to pay off your existing debts. You should pay off any high-interest debts that aren’t tax-deductible first, such as credit card debt, said Bishop. If you have good credit, refinance any high-interest debt that’s tax-deductible, such as a mortgage, to get the lowest rate possible.

7. Am I emotionally ready to retire?

Glum businessman working in office

© Jose Luis Pelaez Inc/Getty Images Glum businessman working in office

Ask yourself what you will do once you retire. If you don’t know — and most people don’t — you might have a problem, said Bishop. Few people still have the traditional view of retirement of doing little more than playing shuffleboard all day. In fact, only around 22 percent of people surveyed by the Federal Reserve Board say they plan to stop working entirely in retirement.

You need to figure out before you retire whether you want to continue working in some capacity. If you initially choose not to work in retirement, you might have a harder time becoming employed after being out of the workforce for a while.

Deciding to retire, much less knowing how to map out a retirement plan, takes work and careful thought. Consider meeting with a financial planner to help you determine how to decide when to retire and to create an action plan for retirement. Knowing how and when you will retire will allow you to look forward to retirement.

Written by Cameron Huddleston of GoBankingRates

(Source: GoBankingRates)

Special Report on the Recent Market Volatility

Market Crash

The last 5 trading days (August 18th – 25th) have been crazy ones in the market, with the Dow Jones Industrial Average down 9.39%. Here are five key points to help you understand how Lake Avenue Financial has been managing their client portfolios during this time.

1. This market correction, long overdue, is exactly what Lake Avenue Financial’s proactive portfolios are built for. We have been prepared for this correction and have been cautioning against one for the last 6 months.

2. Our hedge positions and conservative allocations are working exactly as intended. Our long-term investments in gold and managed futures have helped smooth out the ride and have actually appreciated in value during this last week.

3. Our investments in municipal bonds and short-term bonds bolstered our actively managed portfolios. The fixed income portion also has been a great place for clients to wait as we realized a financial “storm” was on the horizon. We will maintain these positions till we feel that the “storm” has passed.

4. We will be utilizing the dollar cost averaging strategy to get back into the equity markets. This strategy allows us to purchase shares of any stock, mutual fund or ETF over a 3 to 6 month time frame. This way, we are not trying to time the market. Instead, our clients are getting an average price per share. Thus reducing the impact of volatility in the markets.

5. Lake Avenue Financial has partnered with the cutting edge technology at Riskalyze to help pinpoint our client’s acceptable level of risk and reward with unparalleled accuracy. This helps us ensure that our client’s portfolio aligns with their investment goals and expectations.This technology allows us to make the right financial decisions, manage their assets more efficiently and minimize the volatility in our client’s accounts. We invite you to click on the button below for your free portfolio risk analysis.

With your FREE Portfolio Risk Analysis, you’ll finally be able to answer questions like…

What is my Risk Number?

Does my existing portfolio fit me?

How would I align my current portfolio with my Risk Number?


What would happen to your portfolio if the 2008 crash happened again? Or how would the bonds in your account react in a rising interest rate environment?

 

If you want the answer to these questions and more, just click on the button below!

What’s the Difference Between an Index Fund, an ETF, and a Mutual Fund?

© Getty Images: Mike Kemp
© Getty Images: Mike Kemp

Q: What is the difference between index funds, ETFs, and mutual funds? — Gary

A: An easy way to think about it is this: Exchange-traded funds, or ETFs, are a subset of index funds; and index funds are a subset of mutual funds.

“It’s like a funnel,” says Christine Benz, director of personal finance at fund tracker Morningstar.

Let’s start with the broadest of the three categories: mutual funds.

What is a mutual fund

A mutual fund is a basket of stocks, bonds, or other types of assets. This basket is professionally managed by an investment company on behalf of investors who don’t have the time, know-how, or resources to buy a diversified collection of individual securities on their own.

In exchange, the fund charges investors a fee, which may run around 1% of assets annually or more. That means $100 for every $10,000 you invest.

In the case of most stock funds, holdings are selected by a portfolio manager, whose job it is to pick the stocks that he or she thinks are poised to perform the best while avoiding the clunkers. This process is referred to as “active management.”

But “active management” isn’t the only way to run a mutual fund.

What is an index fund

An index fund adheres to an entirely different strategy.

Instead of picking and choosing just those stocks that the portfolio manager thinks will outperform, an index fund buys all the shares that make up a particular index, like the Standard & Poor’s 500 index of blue chip stocks or the Russell 2000 index of small-company shares. The aim is to replicate the performance of that entire market.

But because index funds buy and hold rather than trade frequently — and require no analysts to research companies — they are much cheaper to operate. The Schwab S&P 500 Index fund, for example, charges just 0.09%, or $9 for every $10,000 you invest.

By definition, when you own all the stocks that make up a market, you’ll earn just “average” returns of all the stocks in that market. This raises the question: Who would want to settle for just “average” performance?

As it turns out, plenty of investors around the world. While it’s counter-intuitive, academic research has shown that the higher expenses associated with active management and the inherent difficulty of picking winning stocks consistently over long periods of time means that most funds that aim to beat the market actually end up behind in the long run.

“In general, active funds have not delivered impressive performance,” Benz says. Indeed, S&P Dow Jones Indices has studied the performance of actively managed funds. Over the past 10 years, less than 20% of actively managed blue chip stock funds have outperformed the S&P 500 index of blue chip stocks while fewer than 15% of small-company stock funds have beaten the Russell 2000 index of small-cap shares.

What are ETFs

Okay, index funds sound like a good bet. But what type of index fund should you go with?

Broadly speaking, there are two types. On the one hand, there are traditional index mutual funds like the Vanguard 500 Index. Then there are so-called exchange-traded funds, such as the SPDR S&P 500 ETF (SPY).

Both will give you similar results, but they are structured somewhat differently.

For starters, with a mutual fund, you often buy and sell shares directly with the fund company. The fund company will let you trade those shares once a day, based on that day’s closing price.

ETFs, on the other hand, aren’t sold directly by fund companies. Instead, they are listed on an exchange, and you must have a brokerage account to buy and sell those shares. That convenience typically comes at a price: Just like with stocks, investors pay a brokerage commission whenever they buy and sell.

That means for small investors, traditional index mutual funds are often more cost effective. “If you are on the hook for trading costs, that can really eat into your returns,” says Benz.

On the other hand, because they are exchange traded, ETF shares can be traded throughout the day. Being able to trade in and out of funds during the day is a convenience that has proved popular for many investors. For the past decade exchange-traded funds have been one of the fastest growing corners of the fund business.

Written by Ian Salisbury of Money

(Source: Time)

4 Reasons to Invest in Gold Now

Poor gold bugs. Everywhere they turn, another can of Raid.

Gold is “doomed,” says one gloomy headline. Gold demand is the weakest in six years. And perhaps the most insulting: Gold is just a “pet rock.”

Ouch!

For contrarians, about all we need now is the classic negative magazine cover to confirm it’s time to buy gold.

But really, there’s no need to wait for that. Sentiment is already gloomy enough. It’s time to buy gold — at the very least for the bear market rally that will soon take the metal 10% to 30% higher, say several gold experts.

The bullish percent index, an indicator that measures the number of stocks in a group that are in a bullish trend, was recently at zero for gold miners.

“People are gratuitously ganging up against gold,” says John Hathaway, manager of the Tocqueville Gold Fund . To him, the current price smackdown is “symptomatic” of a tradable bottom. “You see this supreme confidence that you can’t lose by being on a certain side of a trade.” That would be betting against gold.

“Capitulation in the gold miners is telling us the selling should be over soon,” says Lawrence McDonald, head of U.S. macro strategy at Societe Generale. “We are witnessing seller exhaustion, and we don’t believe the recent breadth of the selling is sustainable.” He’s betting on another bear market rally. And soon.

Credit Suisse gold analyst Anita Soni says gold is poised for a rally in the third and fourth quarters because the bearishness is overdone. She puts the trading range at $1,100 to $1,300 per ounce over the next several quarters.

Besides the tradable bounce, you might also want to take advantage of low gold prices to put some in your portfolio as a form of disaster insurance. More on that logic in a moment.

Meanwhile, get exposure via gold mutual funds like Hathaway’s Tocqueville Gold Fund, or a gold exchange traded fund like SPDR Gold Shares . Gold miners are down even more than gold, so that’s a good way to go, too. Consider the Market Vectors Gold Miners ETF . I also suggest several individual gold-mining stocks favored by Goldman Sachs, at the end of this column.

Before we get to those companies, click ahead to see four reasons you have to buy gold now.

Reason 1: Sentiment is extreme

 

© SeongJoon Cho/Bloomberg   

News headlines are a great way gauge sentiment, to line up contrarian plays. But there’s no shortage of quantitative measures for gold, too.

The short position, which measures the depth of the bet against it, is very high, points out Rohit Savant, the director of research at CPM Group, a commodities-research firm. He says investors were short 16 million ounces of gold as of July 21, 2015, compared with an average of 3.9 million since 1995. The last time the short position was that high — near record levels — was July 2013, and that was promptly followed by a 36% surge, according to analysts at Barclays.

The bullish percent index (BPI), a technical indicator that measures the number of stocks in a group that are in a bullish trend, was recently at zero for gold miners. That marked good entry points for gold in 2008, 2013 and 2014, points out McDonald. “This has been a good ‘buy’ signal indicator,” he says.

A measure called the Daily Sentiment Index recently put gold bulls at just 10%, says Hathaway. “That’s, for sure, an extreme,” he says.

He also cites high levels of outflows from gold funds, and lots of asset divestitures by mining companies trying to right their balance sheets — two other events that can mark the bottom for gold prices.

The bottom line: Investors have yellow fever. They are sick of gold. Good time to buy.

Reason 2: Dollar strength is unsustainable

Two gold eggs on pile of cash. Adrianna Williams/Getty Images

© Adrianna Williams/Getty Images Two gold eggs on pile of cash.

Typically when the dollar goes up, gold weakens. The dollar has been quite strong again lately, which helps explains gold’s plunge. But many analysts think the dollar is at an extreme peak that will reverse, too. If so, gold will strengthen.

But why will the dollar weaken?

Let’s look at two theories. One holds that the Federal Reserve worries a lot about dollar strength, because it’s bad for U.S. growth. A strong greenback makes exports more expensive. It makes foreign goods more attractive. It cheapens the reported value of overseas profits earned by U.S. companies.

To knock down the dollar, the Fed may well push out interest rate increases currently expected by consensus for September, believes McDonald. If not, it might raise by much less than the expected quarter percentage point. Either of those scenarios would weaken the dollar and support gold.

Wells Capital Management chief investment strategist James Paulsen also expects the dollar to weaken, but for different reasons. He thinks stimulus programs in Europe and emerging market economies are kicking in. As they boost growth, they’ll attract investment interest in those regions, and bid up their currencies against the dollar.

Two different scenarios. Both lead to a weaker dollar and higher gold prices.

Reason 3: China growth is picking up

A visitor touches Italian-American artist Arturo Di Modica's Charging Bull statue, which is a similar version of his Wall Street Bull in Shanghai, China.

© Eugene Hoshiko/AP Photo A visitor touches Italian-American artist Arturo Di Modica’s Charging Bull statue, which is a similar version of his Wall Street Bull in Shanghai, China.

One country to watch in particular is China, since its robust growth in the past 15 years played a big role in creating the commodities “super-cycle” — the sustained bull market in commodities for years.

Now, though, one of the chief reasons commodities, including gold, are so weak is investors’ angst that China’s growth will continue to cool. But if Paulsen is right that China’s growth is bottoming and about to pick up, that’ll reverse the negative sentiment toward commodities and put a bid under them. Including gold.

“China purposefully tried to slow its economy down in 2011. It was successful in that policy pursuit,” says Paulsen. “China really didn’t try to get its economy going until late last year,” he says, referring to government stimulus programs. “A year lag is normal.” The economy also gets a boost now from lower energy prices.

Indeed, now China’s growth is starting to improve. Recent data show either a stabilization or pickup in indicators like retail sales, exports, fixed asset investment, industrial production and exports.

Those results “are consistent with stronger-than-expected money growth and credit expansion, suggesting the earlier policy-easing measures have started to take hold,” agrees Barclays analyst Jian Chang.

Reason 4: Gold season is around the corner

Shopkeeper inspecting gold jewelry.

© Sukree Sukplang/Reuters Shopkeeper inspecting gold jewelry.

Historically, gold demand in China and India is strongest the fourth and first quarters, in part, because of buying related to religious holidays. The current low gold prices will also spark demand by people in both countries looking to pick up gold as an investment, or to protect against currency depreciation, says Credit Suisse’s Soni. Rising incomes in those countries will also add to higher demand for gold jewelry.

How to play the coming gold bounce

Besides gold ETFs and mutual funds, it makes sense to focus on gold miners because their stocks have sold off much more than the metal. Goldman Sachs analyst Andrew Quail has “buy” ratings on Goldcorp , Barrick Gold , Stillwater Mining and Silver Wheaton , a play on mine royalty income. Quail has 12-month price targets on all those stocks anywhere from 70% to 140% above current levels.

McDonald, at Societe Generale, doesn’t think you should wait that long if you buy gold miners now. He suggests selling right away into the bear market rally he expects to play out in the coming several weeks.

Gold as insurance

But holding at least some gold as portfolio insurance also makes sense. That’s because gold does well as a flight-to-safety play in a crisis. What might go wrong in the world? Anything, of course. But here are three scenarios.

First, rising U.S. debt levels could jeopardize confidence in the dollar, and that would spark a renewed interest in gold, says Tom Winmill, who manages the Midas Fund . “The U.S. government monetary and fiscal situation is not stable. When the wheels fall off is anyone’s guess, but it is just a matter of timing.”

Next, heightened central-bank lending and government-spending programs around the world could finally spark inflation. Inflation typically makes gold move higher, as investors buy it as a store of value.

And don’t forget that the current level of global central bank borrowing to save us all from the 2008 financial crisis represents an unprecedented policy experiment. By definition, this means there’s no playbook that tells us how they’ll get out of it. Sure, it could all end well. But if you think you know that for sure, you’re a dreamer. “Nobody knows how this is going to end,” says Hathaway.

How much gold and gold-mining stocks should you own as a hedge against disaster? Around 5% to 10% of your portfolio, says Matthew McLennan of First Eagle Investment Management. Less than 5%, and it’s not a hedge. More than 15% and it’s a directional bet, he says.

“We think gold has an enduring role in portfolios,” says McLennan. “And you can buy that hedge at lower price now than any time in the last five years.”

Written by Michael Brush of MarketWatch

(Source: MarketWatch)

Investors Scramble to Avoid Puerto Rico Losses

© Provided by CNBC
© Provided by CNBC

Once seen as a golden opportunity, big-money investors are now scrambling to keep their bets on Puerto Rico whole.

Hedge funds, mutual funds and other investors piled in over the last two years, thinking others had overreacted to the island’s fiscal problems by dumping local bonds.

But the value of their debt holdings fell sharply early this week on a string of bad news.

The U.S. territory’s governor surprised observers by saying its $72 billion in debts weren’t payable. The White House explained that it was not contemplating a bailout. Ratings agencies cut their assessments of Puerto Rican bonds. And a report by a group of former International Monetary Fund officials detailed just how bad the island’s fiscal problems are.

“The coming weeks will bring showdowns between … the governor and bondholders, and out of the rubble, we expect the PR government to emerge leaner, having shed some debt and restructured some operations,” Height Securities said in a report Monday.

In other words, more observers think that hedge funds and other creditors should expect to accept less than face value for the bonds they own. Some Puerto Rico bonds were trading at 68 cents on the dollar Tuesday.

The bad news doesn’t mean investors are giving up.

Two bands of mostly hedge fund bondholders continue to put pressure on local officials. They still hope to come up with a deal that gives Puerto Rico the money it needs to fund its operating budgets and, at the same time, provide a profit for investors. The negotiations are now more urgent giving looming deadlines: a total of $1.9 billion in various bond payments, including general obligation debt, are due on July 1, according to a market participant.

The largest band of investors owns different types of government-backed bonds.

A year old, the so-called Ad Hoc Group is made up of 35 members and represents $4.5 billion in Puerto Rican debt holdings such as GO bonds, seen as having the best chance of a full payment. Not all the investors in the group are disclosed, but its steering committee—those that actively negotiate with the government—are Fir Tree Partners, Centerbridge Partners, Davidson Kempner Capital Management, Stone Lion Capital Partners, Brigade Capital Management and Monarch Alternative Capital.

There was no comment Monday or Tuesday, but the group wrote in a letter on June 24 that it wanted to meet with government officials and “be part of the solution to the Commonwealth’s fiscal challenges.” The Government Development Bank for Puerto Rico, which represents the other side, declined to comment.

The other investor alliance is holders of bonds from the Puerto Rico Electric Power Authority, or PREPA. Also called an ad hoc group, it includes hedge funds Knighthead Capital Management, Marathon Asset Management, Goldman Sachs Asset Management, D.E. Shaw Group, BlueMountain Capital Management, Angelo, Gordon & Co. and large mutual fund investors Franklin Templeton and OppenheimerFunds.

Together the group holds about 40 percent of the utility’s bonds, or around $3 billion worth. Insurers such as MBIA  (MBI) and Assured Guaranty  (AGO) also have significant exposure to PREPA bonds and their stocks were hammered this week as a result.

The group negotiated with PREPA officials Monday, according to a person familiar with the situation, but no solution had been reached. PREPA owes about $400 million in a bond payment Wednesday, and a short-term deal could push the negotiating deadline forward in the hopes of a more comprehensive restructuring. Past extensions have been for 30 days.

A spokesman for PREPA bondholders declined to comment, and a representative for PREPA did not respond to a request.

Written by Lawrence Delevingne of CNBC

(Source: CNBC)