We have received a number of emails lately asking what steps can young people take to start getting their financial houses in order from the very beginning. In today’s show, Bo addresses what decisions can be made early on to begin on the right track to financial independence.

The first  thing Bo recommends is to build up your cash reserves. You want to make sure you have enough in a rainy-day fund to cover 100% of your health insurance deductible plus about 6 months of expenses. He notes that the first step to becoming financially independent is to truly step away from your caretakers and become individually independent.

The next thing you want to make sure you are doing is maxing out any employer match you may be entitled to. We have said it over and over… this is FREE money! It is an automatic 100% return on your investment. If you aren’t sure how much this will affect your cash flow, track your spending for a few months. It is amazing how much information you can collect about your spending habits if you just keep track of everything you spend.

This is also beneficial because it gives you an idea of how much additional money you have to work with. Once you have begun building up your cash reserves and then maxed out your employer match, you may want to consider contributing to a Roth IRA. For young people, Roths are very attractive because of the amount of time you have for that money to grow tax deferred and then even become tax free in retirement! Remember, as you are beginning to build assets, accumulation matters more than return! If you’ve saved $1,000 dollars and earn 8%, that’s only $80. If you’ve saved $1M and you earn 8%, that’s quite a different story ($80k).

Bo goes on in the show to mention what a young person should be thinking about when it comes to health insurance and even briefly touches on life insurance. If you are young and you haven’t yet begun to establish a credit history, Bo suggests going out and getting a credit card (to use responsibly) and begin establishing a record of credit. This will make big purchases such as homes and automobiles much easier down the road!

To close out the show, Bo addresses some out of the box issues that young people may want to begin thinking about now. As you listen, he touches on:

• Not getting too ahead of yourself

• Improving/adding to your skill sets

• Setting Goals

• Investing in your future health

• Enjoying your youth (you can’t get it back)

You may want to use some of these on-line resources as you begin to implement these steps:

Credit Card and Savings Account Research – www.Bankrate.com
Budgeting – www.mint.com
Free Credit Reports – www.AnnualCreditReport.com
Health Insurance Quotes – www.ehealthinsurance.com

What if I told you there was an investment where you had a guaranteed rate of return when the stock market was doing poorly, but then you could make even more when the stock market goes up? Sound too good to be true? Well, it just may be…

I feel like today’s show is very timely because I have been receiving questions about these products from both listeners and clients. The products I am speaking of are equity-indexed annuities or indexed annuities or fixed-indexed annuities or even ratchet annuities. These are all really different names for the same thing.

The way these products are typically pitched is by saying you are guaranteed a minimum return (usually around 2% – 3%) while still maintaining the potential to earn gains in the stock market. On the surface it sounds like a win-win proposition. But what are they not telling you?

There are two very big considerations that most investors don’t recognize when they are considering using these insurance products. They are:

1. There are usually surrender penalties of 10% to 15% that apply in the first year of the contract. These surrender charges usually decrease as time passes, but don’t disappear for 5 to 15 years. This is a big problem because it essentially locks up your money. While some products allow you to withdraw up to 10% a year penalty free, this is still a dangerous (and expensive) proposition if you have an emergency that requires access to this money.
2. These annuities limit your upside potential. Some only give you a percentage of the stock market gains while others will impose a cap on your earnings (usually around 7% – 8%) despite how well the index it is attached to performs.

So let’s look at some VERY simple numbers. We are going to assume you purchase a $100,000 Equity Indexed Annuity pegged to the S&P 500 with a guaranteed return of 3% that caps at 7%. We won’t even consider any fees associated (usually there is a 6% – 10% immediate commission to the salesman who sells this product). Finally, lets look at the last 20 years so we won’t even take into account having to access the money before the surrender period ends. We will compare these numbers to how you would have done had you just invested directly in the S&P 500:

Year	S&P	Growth of $100k		Annuity Return		Growth of $100k
1990	-3.2%	$                   96,830		3.0%		$                 103,000
1991	30.6%	$                 126,412		7.0%		$                 110,210
1992	7.7%	$                 136,107		7.0%		$                 117,925
1993	10.0%	$                 149,704		7.0%		$                 126,179
1994	1.3%	$                 151,666		3.0%		$                 129,965
1995	37.4%	$                 208,434		7.0%		$                 139,062
1996	23.1%	$                 256,520		7.0%		$                 148,797
1997	33.4%	$                 342,095		7.0%		$                 159,212
1998	28.6%	$                 439,865		7.0%		$                 170,357
1999	21.0%	$                 532,413		7.0%		$                 182,282
2000	-9.1%	$                 483,910		3.0%		$                 187,751
2001	-11.9%	$                 426,422		3.0%		$                 193,383
2002	-22.1%	$                 332,183		3.0%		$                 199,185
2003	28.7%	$                 427,519		7.0%		$                 213,128
2004	10.9%	$                 473,990		7.0%		$                 228,047
2005	4.9%	$                 497,263		4.0%*		$                 237,169
2006	15.8%	$                 575,831		7.0%		$                 253,770
2007	5.5%	$                 607,444		5.0%*		$                 266,459
2008	-37.0%	$                 382,690		3.0%		$                 274,453
2009	23.5%	$               472,622		7.0%		$               293,664

*Another confusing feature of these products is how each one calculates the indexes gain. Becuase of the varying calculation methods, it is very difficult to compare one annuity product to another.

Another thing you may want to think about is that this very simple illustration uses the S&P over the last decade which has been one of the poorest performing decades in history for this index. While looking at this (and again, this is a very simple illustration. We realize there are many other variable that aren’t shown), it is clear to see that you would have most likely been better off over the last 20 years to just buy the index as opposed to purchasing an indexed annuity.

As you listen to the show, we explain in depth some of the additional features as well as considerations you may want to make while looking at these particular products. We even walk through a quiz that was featured here at the Wall Street Journal online. Two other additional articles you may be interest in reading are Indexed Annuity: Buyer Beware and Ups and Downs of ‘Equity-Index’ Annuities.

We also share some of our thoughts from a macro-economic perspective and why things could potentially be looking up for the U.S. over the next 10 – 20 years.