Municipal bonds have long been a safe haven for higher-income investors looking for safety and greater tax efficiency. The credit squeeze put the municipal bond market through its paces like other competing markets this year, but it may be time to take a second look at both municipal bonds and muni bond funds.

Let’s start with a definition of what a municipal bond is. A municipal bond, or muni, is a bond issued by a local government or their agencies to raise funds for a host of reasons tied to keeping the government going.  The potential issuers may include cities, counties, redevelopment agencies, water and sewer projects, school districts, publicly owned airports, seaports and other transportation entities.  They pay for everything from immediate government expenses to new roads and various public projects. Municipal bonds come in two flavors—general obligation bonds and revenue bonds. General obligation bonds are intended to raise immediate capital to cover government expenses; revenue bonds are the ones that fund infrastructure projects.

As an incentive for investors to buy these bonds, interest income is often exempt from federal income tax as well as the income tax of the state in which they are issued.  Mutual funds that invest in municipal bonds also offer the same tax treatment.

This year has held lots of excitement for muni investors and those who were hoping to be. The credit crunch sucker-punched funding sources for public projects as well as private investments–many municipalities ended up dropping certain projects because investors weren’t there to buy the paper and other sources of financing had dried up as well.

Who’s fled the muni market? Hedge funds, issuers of structured notes and municipal bond mutual funds trying to keep up with redemptions from tapped-out investors. Right now, the best source of demand for munis is individuals, who can account for only so much business. But in the absence of other buyers, that’s potentially good news for you.

Keep in mind that even during the Great Depression, no state defaulted on its general-obligation bonds, and while some munis have defaulted, overall, such defaults are very, very rare.

So where’s the opportunity for you? Look at some of the highly rated outstanding bonds.  You’ll find some amazing yields that you certainly won’t find in CDs and other investments. Even though their prices have plunged, some municipals late last year were offering long-term, tax-free yields of five percent and above, which translate into the equivalent of nearly seven percent for taxpayers in the 28 percent bracket and nearly eight percent for someone in the top 35 percent bracket when the tax exemption is considered.

That’s a very nice return relative to U.S. Treasuries, considered the safest investments of all.

But before you buy, here are some things to know and steps to follow.

Are munis right for you? The first call you make shouldn’t be to a broker. It should be to your tax professional and your financial adviser. A CERTIFIED FINANCIAL PLANNER™ professional can take a look at your entire taxable investment portfolio (there’s no point in putting tax-exempt munis into tax-exempt accounts like IRAs or 401(k)s) and determine whether they’re the right approach to take for your investments.

What munis are in trouble? There are some governments who issued a hybrid muni known as a variable-rate demand note. These were sold mainly to institutions with maturities of up to 30 years that were paying at rates reset as frequently as once a day. During the crisis, the rates on these notes have shot up to double-digit territory, putting the municipalities that issued them under particular strain due to short-term interest rates that can be reset as frequently as once a day.

Keep an eye peeled for the AMT: While most munis pay interest that’s free from federal income taxes, some may pay rates that are subject to the alternative minimum tax, known as the AMT.  It’s a little more complicated than we have space for here, but this is absolutely why you need to talk to your tax professional or financial planner before making a move into munis.

Don’t forget to ladder: “Laddering” is a portfolio structuring term. To ladder bonds means that you are buying them with maturities occurring at regular intervals, so when they mature, you’ll have money to reinvest at those same regular intervals.

Watch those ratings: Yes, the main private investment ratings firms–Moody’s and Standard & Poor’s among them–have been in the doghouse for rating many battered investments highly, not just munis. But most municipals rated AA or AAA are generally safe to consider. It’s also important to check the issuer’s long-term ratings history. If they’ve been consistently highly ranked over decades and the municipality has no financial scandal (something that can be checked through news archives on the Internet), that’s another good way to research a bond issuer before making a purchase.

January 2009 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Martin V Higgins,CFP , a local member of FPA.

Money worries are the most common cause of holiday stress, according to Mental Health America. The 2006 study showed that parents are more stressed than all other demographic groups by finances and females are more likely than men to feel stressed by finances.

Money isn’t everyone’s No. 1 worry, but if it’s yours, why not consider the following New Year’s resolutions to improve your financial life?

Resolve:

1. To write down your goals: Have you ever written down the big things you want in life? Granted, all great dreams don’t cost money, but many of them do. Money buys freedom – to travel, to retire early, to start a business, to change careers.  Putting goals in writing gives them a formality and a starting point for the planning you must do.
2. To evaluate your risk tolerance: One of the most beneficial things financial planners do is help you articulate your financial goals and establish (or re-establish) your tolerance for risk. With the market turbulence that’s marked 2008, many individuals would benefit from an analysis of how much risk they want – or need – to take given what they want to achieve with their money.
3. To track your spending: If you haven’t purchased financial accounting software or set up a reliable accounting method of your own, this is the year to do it. Diligent expense tracking is the first critical step to getting personal finances in order.
4. To consider advice on taxes and planning: Maybe you’ve always winged it with your taxes and considered your company 401(k) the ticket to your financial future. Chances are your planning is inadequate. Start getting references on good tax professionals and consider sitting down with a CERTIFIED FINANCIAL PLANNER™ professional to discuss your current retirement savings picture and what you can do to improve it.
5. To cut your credit card debt: If you can’t ever seem to get yourself completely out of credit card debt, make this the year to do it. Take inventory of your balances, figure out if you can consolidate them under your lowest-rate card, and resolve to pay off an amount that exceeds the minimum – on time, every month.  Oh, and pay cash from now on.
6. To save: If you haven’t signed up for your employer’s 401(k) plan or begun a savings plan tailored for the self-employed, this is the year. And resolve to save at least 5-10 percent of your take-home pay based on your cash flow, and place the maximum in whatever retirement savings plans you qualify for.
7. Get ahead on your mortgage: This advice isn’t for everybody, but if you’ve paid off your credit cards by paying more than the minimum, you can apply the same principle to your mortgage payment. Every dollar you prepay will potentially save thousands in interest over the life of the loan if you plan to stay in your home long-term. In fact, if you make one extra payment a year, either at once or in equal monthly shares over the course of a year, you can cut at least five years of payments on a 30-year loan.  Just don’t short your retirement investment plans to accomplish this.
8. Invest in yourself: If going back to college or taking specific coursework will help you advance in your career, plan to do it. If investing in a health club membership that you actually makes sense for your health as well as your insurance costs, do it.
9. To redefine the way you shop: If you’re an impulse shopper, break the habit in ’09. As a suggestion, get a legal pad and make that your centralized shopping list – use a single page for groceries, stock-up goods (it’s wise to start buying essentials in bulk if you can measure the savings), essential clothing or big expenditures you’ll need to make at specific times. Taking that pad with you wherever you spend money is a good way to keep a grip on your wallet as long as you don’t stray from the list.
10. To attack that miscellaneous column: Do you really need deluxe cable? How much are you paying for your Internet service? Can you wear a sweater around the house and lower the thermostat? In every budget, there are items that can be cut – or at least trimmed. Take a hard look at all your “essentials” to see how essential they really are. Aim for a target of at least 10 percent and start setting that money aside on a regular basis.