Fiscal Fitness

Best-selling personal finance author Steve Nelson shows how to turn your PC into a sleek money-management machine.

Steve Nelson

What's your million-dollar dream? Early retirement to a Kauai beach house? An open-ended world tour? College tuition for the triplets?

You could trust your dreams to good fortune, but most of us prefer to take our financial fate into our own hands. That's where PCs come in. Few people realize the potential of the financial software and services available on their desktops. You may use Quicken or Money to balance your checkbook, and you might go online to follow your mutual funds, but many other financial-planning tools lie at your disposal, and some of them are free.

The table "What Financial Software Packages Have to Offer" and the table "Personal Financial Management Web Sites" identify useful packages and sites and list their strengths and weaknesses. When you've gathered the combination of resources you need, the tips that follow will help you use your PC to create a true financial plan.

There's no time like tax time to take a good, hard look at where you are financially, where you would like to be, and how you intend to get there. Microsoft Money 2001 and Intuit's Quicken 2001--and their online counterparts, Money Central and Quicken.com, respectively--offer integrated financial-planning tools that can help you reach your short- and long-term goals.

Of course, many other useful online resources are available to help you make your financial plans, and we profile the best of these. Our tips focus on four areas: retirement, taxes, investments, and debt reduction. (For reviews of this year's top tax-preparation software packages, see "When the Taxman Cometh.")

Boost Your Mutual Fund Returns by $150,000

The most important predictor of mutual fund returns is the expense ratio--the ratio of the fund's expenses to its average net assets. The lower the ratio, the higher your net return, so high expense ratios hurt: A 1 percent increase in expense ratio for a $2000-per-year IRA investment will lose more than $150,000 over 30 years. To find a cheaper fund that's just as good, use Quicken.com's Mutual Fund Finder.

Click the Full Search hyperlink, select a relevant Morningstar fund category, and in the Expenses options, select none in the Front Load, Deferred Sales Charge, and 12b(1) Fees fields. Don't worry about redemption charges--they actually discourage the riffraff of the investment world from joining the fund. Click Show Results. In the Display box, indicate that you want to see expense information. Set the Sort By boxes to show funds sorted in ascending order by expense ratio percentage.

Get a Free Personal Financial Plan

Nothing beats a personal financial plan devised by an expert, but Microsoft Money's Lifetime Planner comes close. The Lifetime Planner's worksheets and questions help you create a suitable customized plan. To use the Lifetime Planner, start Money, choose Lifetime Planner on the Planner menu, and follow the on-screen instructions.

Quicken doesn't have a single, all-purpose financial planner, but its powerful Retirement Planner, College Planner, Home Purchase Planner, and Debt Reduction Planner wizards help you build a personal financial plan. You can select any of these wizards from Quicken's Planning menu.

Pay Off Your Credit Card Debt

Quicken's Investment Savings Calculator can help you eliminate your credit card debt. Start Quicken and choose Planning, Financial Calculators, Savings. Enter your credit card balance in the Opening Savings Balance box of the Investment Savings Calculator, the credit card interest rate in the Annual Yield box, and 0 in the Ending Savings Balance box. Select Months in the 'Number of' box, and enter the number of monthly payments you will make in the box to the right. Choose Regular Contribution in the Calculate For area, and click Calculate. You'll see the monthly payment required to the right of Contribution Each Month.

You can also accomplish this with Microsoft Money's Debt Reduction Planner. Open the program and choose Planning, Debt Reduction Planner. Then follow the instructions for entering the debts you want to pay off. Be sure to repay the credit cards with the highest interest rates first.

Repay Your Mortgage Early

Early mortgage repayment is easy money. With a 30-year, $150,000 mortgage at 8 percent interest, paying an extra $25 a month saves $24,780 in interest over the course of the loan. Quicken makes it easy to figure out how much you can save through early repayment.

Start Quicken and choose Planning, Financial Planners, Savings. Select Ending Savings Balance, and enter your current loan balance as a negative value in Opening Savings Balance. Enter the principal and interest payment (including the extra principal amount you're willing to pay) in Regular Contribution, and enter the mortgage interest rate in Annual Yield.

Now comes the tricky part: Experiment to find the value in the Number of Months box that produces an Ending Savings Balance near or equal to zero--that's your goal.

Check Your Social Security Benefits

Claims to the contrary notwithstanding, the Social Security system is not going bankrupt anytime soon. The system as currently administered will work until roughly 2039. And even if no reform occurs, Social Security receipts at that point will still be sufficient to pay 72 percent of promised benefits.

For an estimate of what your benefits will be (before any reduction), use one of the benefit calculators at the Social Security Administration's Web site. This link shows the site's Quick Calculator (not the assumptions listed). The average monthly benefit is $845 in today's dollars.

Supplementing Social Security

If you don't want to count on the government to underwrite your retirement (and you shouldn't--unless you'd be happy living out your golden years on $845 a month), Quicken lets you calculate what you need to save to counter a possible 28 percent drop in Social Security benefits.

Determine your estimated benefit by visiting the Social Security Web site (see the preceding item), then subtract 28 percent. The average drop is $236 a month, or $2832 a year. Use Quicken's Retirement Calculator to figure out how much you must save to offset the decline in available Social Security funds that some experts predict.

Choose Planning, Financial Calculators, Retirement, and select Calculate for Annual Contribution. This opens the Retirement Calculator. Enter 0 in Current Savings and again in Other Income, then enter your age, your anticipated retirement age, and your "Withdraw Until" age. Set the Annual Yield box to whatever return you expect your investments to deliver (probably 9 or 10 percent). In the Annual Income After Taxes box, enter your annual drop in Social Security benefits (as calculated above). Select Annual Contribution in the Calculate For area, and click Calculate. The amount shown is what you should save to compensate for the possible 28 percent Social Security shortfall (the average amount is $16 a month).

How Much Life Insurance Do You Need?

Quicken's Investment Savings Calculator can determine whether you have enough life insurance to protect your family. It does this by calculating the value of the income your family will lose if they lose you.

Choose Planning, Financial Calculators, Savings; then select Make Calculation for Opening Savings Balance, and enter the number of years you want your life insurance proceeds to support your family in the Number of Years box. Enter the annual income that you want to replace through life insurance proceeds as a negative value in the Contribution Each Year box. Choose Opening Savings Balance in the Calculate For area, and then click Calculate. This will yield the amount of insurance needed to replace your income. And to show them you care, round up.

When Does Refinancing Make Sense?

Refinancing is complicated. You want to replace a mortgage bearing a high interest rate with one that carries a lower interest rate. That's the simple part. You also need to make sure that the refinancing fees don't eat up the interest-rate savings, and that you'll actually end up paying less interest. This is where it gets complicated. Fortunately, Microsoft Money's Loan Worksheet can help.

Select Go, House Center, Compare the Cost Of the Loan Or Compare Two Loans. In the Loan A boxes on Money's Loan Worksheet Web page, enter your current mortgage payment, interest rate, balance, and repayment term. Then, in the Loan B boxes, enter the new mortgage's payment, interest rate, balance, and repayment term. Refinancing makes sense if the new loan's annual percentage rate is lower than the old loan's interest rate and if you will be paying less in total interest and fees on the new loan.

Get Practical Advice on Building a Portfolio

Want to build a portfolio of individual stocks? Join the Motley Fool Web site, and visit its discussion boards. Here, other Fools gladly share their investment experiences and their analyses of individual stocks; just remember to take the advice of strangers, even seemingly knowledgeable ones, with a grain of salt. Some of the site's investor education resources are useful, but the Motley Fool's premise that individual investors can beat the market by applying a simple formula is dubious.

Use Your Marginal Income Tax Rate to Make Smarter Decisions

Both Quicken and Money include Tax Planner calculators that let you estimate your taxes precisely. One useful bit of information these tools provide is your marginal income tax rate--the tax rate on your highest possible amount of taxable income. Knowing this tax rate allows you to calculate the savings you'll harvest from tax deductions, IRA and 401(k) plan contributions, and municipal bonds.

To calculate your marginal income tax rate using Quicken's Tax Planner, choose Taxes, Tax Planner and then follow the on-screen instructions. To use Microsoft Money's Tax Planner, choose Tax, Tax Estimator.

Once you have determined your marginal income tax rate, you can calculate your tax savings from deductions and retirement plan contributions by multiplying that tax rate by the total deduction amount. For example, if your marginal rate is 28 percent, a $2000 IRA contribution will save you $560 (that's the product of 0.28 times $2000) in income taxes.

Get Free Money for Investing

Knowing your marginal income tax rate lets you calculate what you save in taxes from your retirement accounts, too. If your marginal income tax rate is 28 percent and you put $100 into a retirement account, you'll pay $28 less in taxes. So in effect the government is paying $28 into the account and you're paying $72.

The tax savings compound when combined with employer matching contributions in some 401(k) plans and similar retirement accounts. You get the match on the $72 you pay and the $28 the government pays, so a 50 percent match on $100 of savings is actually $150, less than half of which ($72) would stay in your pocket if you didn't use a retirement account. To determine the amount you'll gain, you can use the calculator I created. The results may surprise you.

Who Doesn't Want to Be a Millionaire?

The OnMoney Web site maintains a great collection of easy-to-use financial calculators. One of the most interesting for people saving for their own retirement is the What Will It Take to Become a Millionaire? calculator. After you register, you can experiment to your heart's content. Getting to $1 million isn't as hard as you might think--especially if you apply some of our other tips.

Measure Your Investment Risk

Over long periods, the stock market's average return is 10 percent per year, but some years it returns more, and some years less. Interest rates and inflation fluctuate as well. To factor these variables into your planning, use the services of Financial Engines.

Founded by Economics Nobel Laureate William F. Sharpe, the site takes your existing and potential investment plans and passes them through thousands of scenarios to calculate how fluctuating returns, interest rates, and inflation may affect your long-term financial picture.

The forecasting tools at the Web site are available for free, but tapping into the site's advisory tools costs $15 per quarter. In return, you get very useful suggestions about how to tailor your portfolio to your investment needs and your sensitivity to risk.

Steve Nelson has written many personal-finance books, including Quicken 2001 for Dummies (IDG Books, 2000).

What Financial Software Packages Have to Offer (chart)

Product	Price          	Debt reduction	Taxes	Investment	Retirement	Comments                                                       
Microsoft Money 2001 Standard 800/624-9400 www.microsoft.com/money	$35 (before $10 mail-in rebate)	Lets user schedule debt reduction payments to get out of debt as quickly as possible	Includes a tax estimator	Minimal financial prioritization and investment forecasting	Lets user set up 401(k) accounts and download 401(k) statement details from supported providers	Advisor FYI offers custom financial tips; Budget Maintenance; tracks employee stock options; adds cash-flow projection
Microsoft Money 2001 Deluxe 800/624-9400 www.microsoft.com/money	$65 (before $20 mail-in rebate)	Same as Standard version	Same as Standard version, plus tax-withholding estimator, deduction finder, integration with Kiplinger TaxCut, tax export review/report	Same as Standard version, plus investment asset allocation wizard, inline Portfolio expansion; links to MSN MoneyCentral investment communities	Same as Standard version, plus 401(k) Manager, Lifetime Planner	Same as Standard version
Microsoft Money 2001 Deluxe for Business 800/624-9400 www.microsoft.com/money	$85 (before $20 mail-in rebate)	Lets user create a prioritized action plan and schedule payments to reduce debt	Same as Deluxe version, plus Tax Holdings Calculator (to estimate W4 allowances required for desired refund) and Tax Line Manager (to track taxes and map expense data to IRS forms)	Same as Deluxe version, plus capital gains estimator; IPO Advisor links to MSN MoneyCentral for information on initial public offerings	Same as Deluxe version	What-if scenarios; major-purchase advisor; Smart Internet Connection
Quicken 2001 Deluxe 650/944-6000 www.intuit.com	$60, $40 upgrade (before $20 mail-in rebate)	Loan management and spending/savings tracker, Debt Reduction Planner	Tax estimators for itemized deductions and withholding, Tax Alerts, Taxlink transfers data to TurboTax, Capital Gains Estimator integrated with Tax Planner	The new 401(k) Advisor provides customized fund recommendations and lets user download 401(k) information, including holdings, transactions, and total and vested balance; Portfolio View adds 30 new investment indicators	Life Event Planning Center includes retirement module	Activity Centers summarize and filter financial information
Quicken 2001 Home & Business 650/944-6000 www.intuit.com	$80 (before $20 mail-in rebate for previous Quicken users)	Same as Deluxe version	Same as Deluxe version, plus expense tracking and assignment of Schedule C and other small-business tax categories	Same as Deluxe version	Same as Deluxe version	Customized invoices; accounts payable; estimates and bids; job tracking; integrated payroll service
Quicken 2001 Suite 650/944-6000 www.intuit.com	$100 (before $20 mail-in rebate)	Same as Deluxe version	Same as Deluxe version, plus TurboTax Deluxe for 2000 and one free state TurboTax State download	Same as Deluxe version	Same as Deluxe version	Adds Quicken Family Lawyer 2001

Personal Financial Management Web Site (chart)

Web site	Planning tools/features
Financial Engines www.financialengines.com	Includes retirement goals overview and goal planner worksheet; Guided Advice includes Advice Action Kit.
Motley Fool www.fool.com	Calculators for credit, budget, retirement, and savings.
Onmoney.com www.onmoney.com	Features debt consolidation strategies, estate and retirement planning guides, and a guide to investing to pay for college.
PCWorld.com www.pcworld.com	Helps you find financial and accounting shareware; links to Web-based personal finance advisors.
Quicken.com www.quicken.com	First-rate retirement planner and 401(k) guide; more than a dozen tax calculators.
Social Security Administration www.ssa.gov	Retirement planner features American Savings Education Council's Ballpark Estimator.