You never thought it would happen. But it did: Your child has left home. Now it's time to take financial advantage of your "empty nest". The FAQ below will get you started.

• How can I pay off my credit cards?
• How can I figure out my net worth?
• Should I invest my extra cash or use it to pay off debt?
• What should I do if I determine that my income during retirement won't be enough to meet my retirement expenses?
• What is asset allocation and how does it work?
• Should I sell or rent out my present home?
• How do I figure the tax on the sale of my home?
• How late is too late to start saving for retirement?
• How can I gauge my risk tolerance?

Certainly the best way to pay off your credit card debt is with a single payment. If you can find the money to pay off all your credit card debt, you'll get back on solid financial ground quickly and without paying additional interest.

The next-best method is to pay off the card with the highest interest rate first. You'll want to pay as much as you can to that account and then send the minimum payment due to each of the other accounts. When you've paid off one card, start paying on the card with the next highest interest rate. Focusing on one card at a time gives you clear financial goals, minimizes your interest expense, and creates a sense of satisfaction.

If available, you can use a home equity loan to pay off credit card debt. The interest on home equity loans is typically lower than credit card rates and is usually tax deductible. This can be an effective repayment method if you can handle it with discipline. However, these loans can be as easy to abuse as credit cards, particularly if you have a line of credit. Also, you run the risk of paying down the home equity loan at the same time you're running up more debt on your newly cleared credit cards. Remember, your home equity loan, unlike credit cards, will be secured by a lien on your home. If you can't make your payments, you'll be in default, and the lender can foreclose on your home.

A less aggressive way to pay off your debt is to transfer your balances to lower-rate accounts. Known as credit card surfing, this method works until you run out of lower-interest opportunities. However, it does allow you to reduce interest fees and pay more against your existing balance.

It's always best to control new spending and pay more than the required minimum payment whenever possible. Invariably, these cover little more than the finance charges. You continue to carry the bulk of your balance forward for many years without actually reducing that balance. Ideally, charging only what you can afford to pay off each month gives you the best benefits of a credit card and few of the drawbacks.

Copyright 2003 Forefield, Inc.

To figure out your net worth, add up the current value of all of your assets, then add up the current amount of all of your liabilities. Subtract your total liabilities from your total assets. The amount you end up with is your net worth. Assets can include cash, checking accounts, certificates of deposit (CDs), mutual funds, stocks, bonds, IRAs, 401(k) plans, automobiles, and real estate. Liabilities can include debt from credit cards, student loans, mortgages, home equity loans, 401(k) loans, and car loans.

If you are married, take this a step further. List your assets and liabilities under the name of the owner, so you can then calculate net worth values for you, your spouse, and the two of you as a couple.

The first step in the financial planning process should be to calculate your net worth. Once you determine your net worth, you will know exactly what you have and what you owe, enabling you to begin mapping out your financial future. Keep in mind that your net worth constantly changes. As a result, you should calculate your net worth annually and make adjustments as needed to ensure that you are meeting your financial goals.

Copyright 2003 Forefield, Inc.

To answer this question, you must decide how your money can work best for you. Compare the money you might earn on other investments with the money you would pay on your debt. If you would earn less on investments than you would pay on debts, you should pay off debt.

Let's assume that you have $1,000 in a savings account that earns an annual rate of return of 4 percent. Meanwhile, your credit card balance of $1,000 incurs annual interest at a rate of 19 percent. Your savings account thus earns $40, while your credit card costs $190. Your annual net loss is 15 percent, or $150, the difference between what you earned on the savings account and what you paid in interest on the credit card balance. It's even worse when you consider the tax effect. The interest on the savings account is taxable, and you have to use after-tax dollars to pay your credit card bill.

In this instance, it would be best to use your extra cash to pay down the high-interest debt balance. The same principle would apply if you were to invest your extra cash in a certificate of deposit (CD), mutual fund, or other investment.

Now, let's look at another example. Say you have a student loan of $1,000 that you are repaying at an annual interest rate of 5 percent. Instead of paying off the debt, you invest $1,000 in a CD earning a 7 percent average rate of return.

Here, your best strategy would be to keep the loan and invest the extra cash, because your net gain will be 2 percent annually, or $20--the difference between what you earned on the investment, less what you paid on the debt.

Copyright 2003 Forefield, Inc.

Fortunately, you may have no need to despair. The further you are from retirement, the more time you have to resolve the expected shortfall. Even if you are closing in on retirement, there may be steps you can take to bridge the gap.

In some cases, the best solution is to cut back current expenses and use that money toward retirement. This will enable you to put more money into your IRA, 401(k), and other retirement savings vehicles. Although you may not think you spend much on dining out and entertainment, such expenses really add up over time. Eliminating large purchases like boats and other luxury items will also make a big difference. Another way to save a bundle is to look into public colleges where your child can get a quality education for a fraction of what a private college costs.

But you might be unwilling to make such sacrifices. If so, or if you simply can't afford to save any more than you already are, consider investing more aggressively. Weight your portfolio more heavily toward stocks and growth mutual funds, and less toward fixed-income securities. A more aggressive investment portfolio exposes you to heightened volatility, but it may also provide a much greater return over the long run. The result: a potentially larger nest egg for you to draw on during retirement.

Another alternative is to lower your planned expenses during retirement by setting more modest goals. Instead of buying that beach mansion on the Riviera, settle for a smaller house a few miles from the ocean. Similarly, instead of taking expensive trips around the world on a regular basis, travel closer to home and less often. The idea of a more frugal retirement lifestyle may not appeal to you, but financial reality may require it.

You can take a variety of other steps to make sure that retirement income will at least keep pace with retirement expenses. Some of the most common: work part-time during retirement or simply put off retiring until you're in a better financial position. Consult your financial planner for further advice.

Copyright 2003 Forefield, Inc.

Asset allocation is a technique used to spread your investment dollars across several asset categories. The investment categories may include cash equivalents, bonds, stocks, real estate, mutual funds, insurance products, or any other investment category imaginable. The general goal is to minimize volatility while maximizing return. The process involves dividing your investment dollars among asset categories that do not all respond to the same market forces in the same way at the same time. Ideally, if your investments in one category are performing poorly, you will have assets in another category that are performing well. The gains in the latter will offset the losses in the former, minimizing the overall effect on your portfolio.

The number of asset categories you select for your portfolio and the percentage of portfolio dollars you allocate to each category will depend, in large part, on the size of your portfolio, your tolerance for risk, your investment goals, and your time horizon (i.e., how long you plan to keep your money invested). A simple portfolio may include as few as three investment categories, with a percentage of total dollars divided among, for example, cash equivalents, bonds, and stocks. A more complex portfolio may include many more asset categories or break down each of the broader asset categories into subcategories (e.g., the category "stocks" might be further divided into subcategories such as Large Cap stocks, Small Cap stocks, international stocks, high-tech stocks, and so on).

Generally, the asset allocation that best suits your needs is determined with the help of a financial professional. (Instant asset allocation can be achieved by investing in an asset allocation mutual fund.) Whether you hire a financial professional or not, be sure to periodically review your portfolio to ensure that the mix of investments you have chosen still serves your investment needs.

Copyright 2003 Forefield, Inc.

If you are moving and trying to decide whether to rent out or sell your present home, consider two important factors:

• How your choice will affect your cash position
• How willing and able you are to manage a rental property

Are you buying another home? If so, you may need the proceeds from the sale of your present home to fund the purchase of your new one. If you anticipate that the sale might result in a loss, consider whether it would be better to rent out your present home, at least until the real estate market turns around. You may need to accept the loss to currently realize the cash that a sale now would bring. If the sale results in a capital gain, consider whether you will be able to exclude that gain from federal income taxation. (If you meet all of the requirements, you may exclude up to $250,000; up to $500,000 if you're married and file a joint return.) If you aren’t able to exclude all or part of the capital gain, you may need to reserve a portion of the proceeds from the sale to cover the taxes due. Or you may need to defer the sale and rent out your home in the interim.

If you decide to rent out your present home, will your rental income cover the ongoing expenses associated with the property? Will it cover mortgage payments, property taxes, and insurance? If not, determine whether you can afford to cover the difference on an ongoing basis. Will the tenants be responsible for all utilities, or will you have to cover some of these expenses? Consider what your anticipated annual maintenance expenses on the property might be. Most importantly, if the property were vacant even for a brief period, think about whether you could cover these expenses without a steady stream of rental income.

If you decide to rent out your present home, you'll be a landlord. You'll have to decide whether to manage the property yourself or hire a local property management service. The decision may hinge on whether you are moving a few miles away or a few states away. Familiarize yourself with the various laws that govern landlord/tenant relations. You'll have to meet health and safety code requirements and perform maintenance and repairs on the property yourself, or hire others for these tasks.

Renting out your home can also have tax implications. For instance, if you rent your home temporarily, you may still qualify for the capital gain exclusion when you later sell your home, but that's not the case if your property is considered permanent rental property. Assuming you rent your home on a temporary basis for more than 15 days during the tax year, you'll have to declare the rent you collect as income. However, you can offset rental income with allowable interest and property tax deductions. To the extent that the rental income exceeds these otherwise allowable deductions, you can also claim rental deductions for maintenance, insurance, and depreciation. These expenses, though, are limited to the amount of rental income. Depreciation deductions, it should be noted, may impact the amount of capital gain that you can exclude from federal income taxation when you sell the property.

If you permanently convert your home to rental property, the tax treatment may be different. Before you make the decision to rent out your home, you may want to consult an accountant or other tax professional. If you have friends or colleagues who have rented out their homes, you might also ask them about their experiences as landlords.

Copyright 2003 Forefield, Inc.

It depends on several factors, including whether the home is your principal residence or takes some other form (such as a vacation home or investment property). If you owned and used the home as your principal residence for a total of two out of the five years before the sale (the two years do not have to be consecutive), you may be able to exclude from federal income tax up to $250,000 (up to $500,000 if you're married and file a joint return) of the capital gain on the sale of your home. You can use this exclusion only once every two years, and this exclusion does not apply to vacation homes and pure investment properties.

For example, Mr. and Mrs. Jones bought a home 20 years ago for $80,000. They have used it as their principal home ever since. This year, they sell the house for $765,000, realizing a capital gain of $613,000 ($765,000 selling price minus a $42,000 broker's fee, minus the original $80,000 purchase price, minus $30,000 worth of capital improvements they've made over the years). The Joneses, who file jointly and are in the 28 percent marginal tax bracket, can exclude $500,000 of capital gain realized on the sale of their home. Thus, their tax on the sale is only $16,950 ($613,000 gain minus the $500,000 exemption multiplied by the 15 percent long-term capital gains tax rate).

What if you fail to meet the two-out-of-five-years requirement? Or what if you used the capital gain exclusion within the past two years with respect to a different principal residence? You may still qualify for a partial exemption, assuming that your home sale was due to a change in place of employment, health reasons, or certain other unforeseen circumstances.

You should also be aware that special rules might apply in the following cases:

• If you sell vacant land adjacent to your principal residence
• If your principal residence is owned by a trust
• If your principal residence contained a home office or was otherwise used partially for business purposes
• If you rented part of your principal residence to tenants
• If you owned your principal residence jointly with an unmarried taxpayer

Note: Members of the uniformed services and foreign service personnel may elect to suspend the running of the 2-out-of-5-year requirement during any period of qualified official extended duty up to a maximum of 10 years.

Consult a tax professional for more details.

Copyright 2003 Forefield, Inc.

This question is difficult because the answer depends on your income and assets, your goals for retirement, and many other factors. Ideally, you should begin saving for retirement in your 20s. More time to save enhances your chances of having the kind of retirement lifestyle you want.

If you're in your 40s or older and haven't saved much (or anything) yet, you may face a challenge in building the retirement fund you need. The shorter your time frame, the less room you have for error. But don't panic--it's never too late to start saving. You may still be able to secure a comfortable retirement for yourself, but you may have to make some tough choices to do so. Here are a few tips if you're getting a late start:

• Save as much as possible: The more you save, the more you'll have when you retire. Try to maximize your contributions to IRAs, 401(k)s, and other tax-advantaged vehicles. Then supplement your retirement fund with mutual funds, savings accounts, and other investments.
• Cut current expenses: Chances are, not all of your expenses are absolutely essential. If you can wipe out or trim certain expenses, such as videos, expensive coffees, and daily lunches out, you'll free up more money to invest for retirement.
• Invest more aggressively: This can help you build a large retirement fund in a short time. Certain stocks and mutual funds may enable your savings to grow more rapidly. The tradeoff: These investments are subject to market risk, which will expose you to greater volatility, including a possible loss of principal.
• Delay retirement: You may have no choice but to delay your retirement until after age 65. This strategy will buy you more time to build your nest egg. Plus, the more years you work, the fewer years of retirement you'll have to fund.
• Rethink your retirement goals: Set more realistic goals for your retirement (no beach house on the Riviera, for example). That way, you won't need as much money to fund your retirement.

If you fear you're getting too late a start, or you're not sure where to start, consult a financial professional. He or she can help you map out a plan to bridge the gap between where you are now and where you need to be when you retire.

Copyright 2003 Forefield, Inc.

Risk tolerance is an investment term that refers to your ability to endure market volatility. All investments come with some level of risk, and if you're planning to invest your money, it's important to be aware of how much volatility you can endure. Your tolerance for risk affects your choice of investments and the overall makeup of your portfolio.

If you are attempting to gauge your own tolerance for risk, consider the following factors:

• Personality: Are you able to sleep at night knowing that you've put a portion of your hard-earned dollars at risk in a particular investment? Remember, it might be easy to tolerate a high-risk investment while it is generating double-digit returns, but consider whether you'll feel the same way if the market takes a downward turn with your investment leading the way. It's best to pick investments with a level of volatility that you are comfortable with.
• Time horizon: If you will need your investment dollars to make a down payment on a house in two years, your risk tolerance is lower than if you're investing for retirement in 20 years. If you can keep your money invested for a long period of time, you can ride out any downturns in the market. In general, the longer you can wait, the higher your risk tolerance.
• Capacity for risk: How much can you afford to lose? Your capacity for risk depends on your financial position (i.e., your assets, income, and expenses). In general, the more you have to fall back on, the higher your risk tolerance.

In addition to the above, think about taking a risk tolerance test. Any number of risk tolerance tests can be found on the Internet and in books about investing. Most require that you answer a series of questions, and generate a score based on your answers. The score translates into a measure of your risk tolerance and may be matched with the types of investments that the author deems appropriate for someone with your risk profile. Although these tests may be helpful as a reference, an honest self-analysis and advice from a trusted professional financial advisor are still the best ways to determine what investment choices are best for you.

Copyright 2003 Forefield, Inc.