But today’s press announcements and market reactions brings up a few interesting observations about investing:

1. Sometimes market activity has nothing to do with performance. Countrywide could be just fine, but at the very hint of bankruptcy, investors take their money and run. It’s a knee-jerk reaction that has more to do with emotions and fear than actual performance. This is one aspect of investing that you just can’t plan for.

2. Sometimes investors know more than the company. I throw this one out there with a cautionary warning. At times, a few savvy investors can spot the warning signs early enough to bail right before a stock tumbles. The key is to watch those investors Perhaps Countrywide isn’t going to file for bankruptcy, but chances are that the investors believe the story is not only possible, but plausible.

3. Sometimes companies lie. I know, it’s hard to believe but Countrywide could be lying through their teeth. I’m not saying they are, but they could be. This is when you break out the spreadsheets and financial statements, pour over the figures, and crunch some numbers in the form of ratio analysis. You need to try and determine on your own if Countrywide could file for bankruptcy soon. What is the debt to equity ratio? Does it have enough cash on hand to pay interest this year? These are the types of questions you should be asking yourself before you jump ship yourself. Who knows, if you’ve done your homework Countrywide could be the perfect stock to BUY right now!

For those of you that don’t know, a Flexible Spending Account allows an employee to set aside pre-tax dollars to pay for “qualified” expenses that usually include health care and/or dependent care. I know what you’re asking… Isn’t that why you sign up for health insurance?

A FSA goes above and beyond your typical health care plan by helping you pay for everything your insurance company doesn’t. All those $10 co-pays, deductibles, and prescription drugs can be paid for using pre-tax dollars. Many plans also allow you to pay for vision, dental, and even over-the-counter medication using your FSA!

The plan typically works by allowing you to elect a certain amount to be deducted from your paycheck, before taxes, each month (up to $5,000 per year). As you spend money on plan-covered items, you simply submit a claim for a refund which is paid from your pre-funded plan balance. In recent years, many plans have included a FSA debit card which allows you to directly pay for your medical expenses from your plan balance, without the hassle of submitting refund claims.

But a Flexible Spending Account is not without it’s dangers. One major drawback is that the money must be spent within the coverage period. This coverage period is usually defined as the period that you are covered under the cafeteria plan during the “plan year”. Any money that is left unspent at the end of the coverage period is forfeited back to the company; this is commonly known as the “use it or lose it” rule. However, most plans now allow you to spend any remaining money at the end of the year on non-prescription drugs or medical supplies. So just run to Costco and stock up on Tylenol and Band-Aids!

A second requirement is that all applications for refunds must be made by a date defined by the plan. If funds are forfeited, this does not eliminate the requirement to pay taxes on these funds if such taxes are required. For example, if a single person elects to withhold $5,000 for child care expenses and gets married to a non-working spouse, the $5,000 would become taxable. If this person did not submit claims by the required date, the $5,000 would be forfeited but taxes would still be owed on the amount. (Re-read that last sentence. $5,000 would be forfeited to “the company” and the person forfeiting it still pays taxes on it.)

But the main advantage of a FSA is the tax savings. An FSA allows money to be deducted from an employee’s paycheck pre-tax and then spent on qualified expenses.

For an example of potential tax savings associated with a flexible spending account, a person in the 28% Federal marginal tax bracket and an example 4% state tax (along with FICA taxes of typically 7.65%, for a total tax of almost 40%), could deduct $2,000 and put that money into an FSA for health care. This would result in almost $800 in tax savings. There’s a great little FSA benefits calculator at http://www.ebsbenefits.com/members/fsa_calc.htm#taxsav that will allow help you to estimate your yearly medical expenses, and calculate the potential tax savings from enrolling in an FSA.

So the moral of the story is… if your employer offers a FSA, I would highly recommend enrolling. If your employer doesn’t, then request that they do. Similar to my thoughts on enrolling in your employer’s 401(k) plan, there’s no reason you should be passing up this “free money.” You pay for medical expenses each year, so why not save money while doing it?

This woman, Kathleen Casey-Kirschling, filed for early retirement Monday, becoming the first baby boomer to start collecting Social Security. Born one second after midnight in January 1946, the retired teacher leads the way for as many as 80 million individuals who will qualify for the retirement payout. And thus begins the end of social security…

What? Do you think I’m being a little too over-dramatic? Well, David Walker agrees with me! He’s the comptroller general of the Government Accountability Office, Congress’ legislative arm, who warned the Social Security system will soon have more recipients coming than it can afford to pay out.

“We face a tsunami of spending due primarily to the retirement of the baby boom generation and rising health care costs,” Walker said. “So what’s happened is we’ve gone from 16 workers paying into Social Security for every person drawing benefits in 1950 to 3.3 to one today, and we’re going down to two to one by the time the boomers retire in big numbers and that’s about where it will stay over the long run.”

Democratic Representative Tim Penny is also worried.

“We’re going to have tens of thousands of baby boomers retiring every week over the next decade or so and that means that by time we get to 2017, just 10 years away, we will no longer be collecting enough payroll taxes to pay Social Security benefits.”

Under current law, Social Security won’t have enough money to pay promised benefits in 2041, but there is another crunch much, much sooner, the result of the the federal government relying on Social Security to pay for its annual spending.

When Social Security gets payroll taxes it pays out most of the money in benefits. The rest is supposed to go into a trust fund. Instead the government, in it’s infinite wisdom, has been spending the money on other government programs, and putting IOUs into the trust. When Social Security needs the money it’ll turn to the government waiting for the payback. But the government won’t likely have any. It’s estimated that over the next 75 years between Social Security, Medicaid and other entitlements, the federal government will be in a $50 trillion hole.

So by the time I hit retirement age… I’ll be pulling in a nice $3/month from the government, after paying thousands and thousands of dollars into it during my lifetime.

That’s why I’m a little worried…

However, I didn’t want to deprive my loyal (or not so loyal) readers of the excitement that comes with watching the tips, tricks, and advice I jot down each week come to life in a real world example. So, I’ve decided to create the “BeancounterBlog Wish Fund” which will serve as my surrogate net worth meter. With your help, we’ll invest the BeancounterBlog Wish Fund wisely and watch it grow until we’re so rich we begin to live off the interest.

But to begin this little exercise/experiment, I need to set some ground rules. I don’t want to make this example overly-complicated, but I also don’t want to throw the money into an HSBC online savings account and let it accrue interest at 5%. So, here are the guidelines that we’re going to start with:

1. Monthly amount available to invest: $1,000. Some might say this is a bit too high, or perhaps not high enough. But this will represent 30% of a $40k after-tax salary, or 20% of a $60k after-tax salary. I realize that it’s VERY difficult to put away 30% of your income… but just roll with me on this one.
2. We’re going to begin by using investment options available on Yahoo! Finance. As I mentioned, we’re going to start off simple, by using stocks, bonds, and mutual funds available for tracking on Yahoo! Finance. As the experiment progresses, we’ll throw in a few more complicated investment options and diversify our portfolio a bit more. But as a real world example, this is fairly realistic. Most people sign up with an eTrade or ShareBuilder account and begin making monthly stock purchases because they’re less familiar with mutual funds, bonds, foreign currency, etc.
3. Assume broker commissions of $10 per stock trade
4. Assume broker commissions of .30% for mutual funds
5. Assume dividends are going to be re-invested

So what I need from you right now are ideas for investment opportunities. If you have a favorite stock you want me to invest in, or have a “feeling” about a certain mutual fund… let me know in the comments section below. I’ll be making the final decision by the end of next week, so be sure to add your comments by then.

As this project progresses, we’ll revisit the portfolio often to see what has worked, what hasn’t worked, and why. We’ll also begin to compare return percentages for each type of investment, and compare short-term vs. long-term goals.

So… I’ve got a $1,000 of cash for October, what should I invest in?

“I like the idea of giving every baby born in America a $5,000 account that will grow over time, so when that young person turns 18, if they have finished high school, they will be able to access it to go to college,” Clinton said.

Clinton failed to offer any details on how the program would be funded, but the idea of a “baby bond” prompted me to create the following poll.

Would you support a $5,000 baby bond?

And after seeing my first paycheck after enrollment, I have come up with one more reason why enrolling in a 401k plan is a good idea: forced savings.

To be honest, it’s hard for me (and many of you I imagine) to write a check for $500 each month to a bank or broker to put towards your retirement. But if you never had that $500 to begin with, because it was automatically withdrawn, then you wouldn’t feel the “pain” of writing that check.

And sure it hurts during the first month or two every time you look at your smaller paycheck; but after a while, you will forget about it – just like you forgot about your healthcare deductions, life insurance deductions, etc. You and your monthly budget will adjust, and you’ll be on your way to saving for retirement.

And, if I can throw one more word of advice in regarding retirement savings, I recommend putting most, if not all, of your annual raise right back into your retirement fund. If you’re contributing 6% now, and you get a 8% raise come Christmas, then keep 3-5% to keep up with increased living expenses (like rent), and then increase your contribution percentage to 9-11%. If you can keep that up you’ll continue to live within your means while building quite a nest egg.

However, many of eBay’s top executives used their keynote speeches during the recent eBay Live! conference to announce new PayPal security initiatives, including a service for eBay sellers that will alert them to potentially risky buyers. PayPal has, admittedly, done a vigilant job of trying to prevent online theft and identity theft. One of my favorite new features is PayPal’s new Security Key. The key is similar to corporate products from companies like RSA but is targeted at helping consumers prevent fraud. The key generates a unique six-digit security code about every 30 seconds. You enter that code when you log in to your PayPal or eBay account with your regular user name and password. Then the code expires – so no one else can use it.

Feeling comfortable within the digital world, but not content to simply help you pay for your winning bids, PayPal has begun to spread its wings. With an admirable 143 million user accounts, PayPal still pales in comparison to the likes of Visa or Mastercard who have over than a billion accounts. So, to compete among the “big boys,” PayPal is becoming more like a bank.

For the past year, PayPal has tested a virtual debit card enabling users to make purchases with PayPal on Web sites that do not offer it as a payment option. The service, which PayPal plans to launch broadly before the holiday shopping season, provides a one-time MasterCard number for a given purchase. The money is then debited from the user’s PayPal account.

Also like a bank, PayPal has long doled out interest on balances left in PayPal accounts. The rate, often more than 4%, is typically higher than that offered by brick-and-mortar banks. It also offers actual plastic credit cards, through a partnership with GE Consumer Finance (GE), for which it gives buyers 1% back on transactions. In addition, PayPal allows users to wire money through eBay’s Skype online phone service. There also are plans to give users the ability to view receipts for past transactions online, says Thompson.

So the question is, how much do you trust PayPal? Do you trust it enough to use it as your main banking account? Or have the security issues of the past tainted its image so much that it will never become the great online bank it wants to be?

For those of you who may not know, an index fund is a very diversified mutual fund – and one of my personal favorites. These funds usually own shares in most, of not all, companies within a certain index – such as the S&P 500. This way, when the S&P 500 goes up, so does the value of your mutual fund. And if one stock takes a plunge, it’s offset by 499 other stocks – just like the stock market itself. I really like index funds because they are fairly risk-adverse and provide a steady increase in return over the years.

So when you compare traditional index funds to the Pioneer Cullen Value fund you can see why their index fund is a bit different. Apparently, the strategy behind the fund is to access a part of the market where it looks like it will be hard to beat the index. But, as you can probably imagine, the volatility of this type of fund is amplified due to the decrease in diversification.

But the real question is, does this type of fund work? Is it for you?

The Wall Street Journal mentions a 2004 study conducted by researchers at the University of Michigan and the University of British Columbia who looked at the returns of actively managed mutual funds from 1984 to 1999. They found that concentrated portfolios slightly outperformed — even on a risk-adjusted basis — their diversified counterparts. A sampling of 10 top-notch focused funds returned an average annual 17.3% over the past three years, clobbering the Standard & Poor’s 500-stock index by six percentage points.

Although the focused funds seemed to outperform their diversified counterparts, you need to assess your own financial situation to see if the additional risk is something that you can afford to take on right now. If you are in the beginning phases of saving for the future, than focused funds might be a good opportunity for you to beat the market. However, if you don’t have the time for the volatility in the market to average itself out over time, then you might want to look for other options.

But regardless of what you plan to do personally, I will now give focused funds a second look when it comes to finding an index fund.

How Does an IRA Work?
A traditional IRA allows you to contribute a specified amount of pre-tax income each year ($4,000 if you’re under 50) to your savings plan. All of your contributions and earnings accumulate tax-free; however, your withdrawals at retirement are taxed as income.

Once your money has been contributed to an IRA, you can begin to direct your broker or “IRA custodian” where to invest your money. You can use your IRA dollars to purchase most types of securities (stocks, mutual funds, etc.) and even some non security financial instruments.

Besides their favorable tax status, IRAs are also protected during bankruptcy like many other retirement accounts.

Different Flavors
Just like every other investment under the sun, there are a number of different IRAs – each with its own strengths and weaknesses.

• Traditional IRA: contributions are made with pre-tax assets and earnings are also tax-free. Withdrawals at retirement, however, are taxed as income.
• Roth IRA: contributions are made with after-tax assets but your earnings and withdrawals are usually tax free.
• SEP IRA: an employer established and funded Simplified IRA, where the employer can put up to 15% of your compensation into a special IRA account. Sole proprietors may also establish these plans for their own benefit.

Short or Long-Term Investment?
Whenever we’re talking about retirement we’re talking about long-term investing. And you should keep this fact in mind when deciding how to invest your IRA funds. Sure, you can play the market a bit more while you’re in your 20s, but if you keep up an aggressive investment strategy beyond then, you could be disappointed at the nest egg you’ve built up.

Potential Risk
The biggest risk associated with an IRA is the return on your investment – which is decided in large part on the types of investment decisions you make. The stock market has been a proven ground for long-term investment, but it also has its ups and downs…

Another thing to watch out for with IRAs is what I’ll call the “little things.” These are things like brokerage fees, following the contribution and withdrawal rules, etc. For example, Uncle Sam makes you start taking cash out of your IRA at age 70 1/2. If you neglect to do so, the IRS will take 50% of what you should have withdrawn without so much as a “thank you.” On the flipside, if you touch that money before age 59 1/2, Uncle Sam will fully tax your distributions as ordinary income and slap you with another 10% penalty just to get the message across that retirement savings are for just that… retirment.

Potential Return
The “base return” of your IRA will depend completely on how well you invested it. If the stocks or mutual funds did well during the 30 years you contributed, then you will have invested wisely and you will be pleased with your return. If, however, you took a more aggressive investing strategy and your stocks slid, you’re going to be disappointed.

However, the main benefit of an IRA is not the “base return” but the fact that you can earn a return with a tax delay (note that IRAs are not “tax free” – you’ll have to pay taxes either at the time you contribute or at the time you withdraw your money). For example, if you believe that you’ll be in a 15% tax bracket at retirement age, while right now you are in a 30% bracket, then you’re going to effectively save 15% in taxes at the time you withdraw your funds.

Who is this a Good Investment For?
Everyone! Unless you’re only a few years from retirement and long-term investments aren’t going to do you any good anyway, IRAs are a great long-term investment for everyone. You’re going to have to think about which flavor is best for you (traditional IRAs are typically for lower-income brackets) but regardless of your situation an IRA is a very smart investment.

Other Online Resources:
This post is in no way meant to be comprehensive, so be sure to do your homework before contributing to an IRA. However, here are a few places that might be able to help:

• Fool.com IRA Main Page
• IRS Publication 590 – IRAs (for all that good tax info)