As I have mentioned previously credit unions do a much better job than any other financial category of providing customer value. Instead of trying to trick you and rip you off, credit unions often just provide services at a reasonable cost. What a sensible idea. Credit Unions Slowly Fill Void As Payday Lenders Leave D.C.
The credit unions’ products vary, but generally they are loans of $300 to $1,000 with an annual percentage rate of up to 18 percent. Unlike payday loans, in which borrowers sign over part of their next paycheck for the cash advance, the credit unions’ new products have longer terms, from thirty days to a year.
It is still an indication of bad personal finances to take the short term loan, but if that is the choice you make, paying a reasonable rate will greatly reduce the damage to your personal financial health.
Related: personal loans – Ohio Acts to Protect Citizens from Payday Loan Practices – Dragged Down by Debt – Don’t Let the Credit Card Companies Play You for a Fool – Sneaky Fees
The Declining Value Of Your College Degree by Greg Ip:
For decades, the typical college graduate’s wage rose well above inflation. But no longer. In the economic expansion that began in 2001 and now appears to be ending, the inflation-adjusted wages of the majority of U.S. workers didn’t grow, even among those who went to college. The government’s statistical snapshots show the typical weekly salary of a worker with a bachelor’s degree, adjusted for inflation, didn’t rise last year from 2006 and was 1.7% below the 2001 level.
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To be sure, the average American with a college diploma still earns about 75% more than a worker with a high-school diploma and is less likely to be unemployed. Yet while that so-called college premium is up from 40% in 1979, it is little changed from 2001
The job market is more challenging than it was, it seems to me. Counting on being able to steadily progress during your career, without any gaps or times when you must accept much less than you hoped, is risky. This is one more reason why it is so important to spend less and save more in the good times in your career.
Related: What Do Unemployment Stats Mean? – Engineering Graduates Again in Great Shape – USA Job Growth – The IT Job Market
Are You Financially Literate? Do this Simple Test to Find Out by Annamaria Lusardi.
a) More than $102
b) Exactly $102
c) Less than $102
d) Do not know
2) Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, would you be able to buy more than, exactly the same as, or less than today with the money in this account?
a) More than today
b) Exactly the same as today
c) Less than today
d) Do not know
3) Do you think that the following statement is true or false? “Buying a single company stock usually provides a safer return than a stock mutual fund.”
a) True
b) False
c) Do not know
…
To be “financially literate” you need to answer correctly to all three questions.
And I would add, just answering those 3 simple questions does not mean you are. But if you don’t answer all 3 correctly you are not financially literate. We provide several resources to help people improve their literacy, including: our blog posts on financial literacy, Curious Cat Investing Dictionary and Curious Cat Investing Books.
Related: Questions You Should Ask About Your Investments – Annual Percentage Rate (APR) – Ignorance of Many Mortgage Holders
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I posted before on how universities seek profits instead of helping students develop good financial literacy and habits. Here are some tips on how you should use your credit card. College Credit-Card Hustle
Using state public disclosure laws, Business Week has obtained more than two dozen confidential contracts between major schools and card-issuing banks keen to sign up undergraduates with mounting expenses for tuition, books, and travel. In some instances, universities and alumni groups receive larger payments from the banks if students use their school-branded cards more frequently.
The growing financial alliance between schools and banks raises questions about whether universities are encouraging students to incur additional high-interest debt at a time when many young people graduate from college owing tens of thousands of dollars.
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Universities rarely negotiate favorable terms for their students, according to people familiar with the practice. On the contrary, some schools and booster groups entice undergraduates to sign up for cards with low initial interest rates that are soon replaced by steep double-digit rates.
Schools (and if some try to play legal games about alumni associations being separate, I don’t accept that) should fully disclose exactly what they are doing. I know they can make all sorts of excuses about why being open and honest is not right for them. Well, I think it is easy to predict they will be selling out their students and hiding that fact (if they must be open about what they are doing they will avoid some of the most egregious behavior because they know there will be consequences if they obviously sell out students). And, now Business Week has evidence that many are.
If a school is not open and honest about the deals they are making just assume they are selling out the students for their own gain. I can’t really see why we would want to support such behavior and I would encourage us not to.
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Many Retirees Face Prospect of Outliving Savings, Study Says
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Middle-income Americans entering retirement now will have to reduce their standard of living by an average of 24 percent to minimize their chances of outliving their financial assets, the study found. Workers seven years from retirement will have to cut their spending by even more — 37 percent.
This is one more study pointing out how many people are failing to take the most basic steps to manage their finances. Saving for Retirement is not very complicated. The details can get a bit complex but some of it is really basic like saving at least 5-15% of your earnings each year (or more if you fall behind) in tax differed savings accounts (IRA, 401(k)…). Many people just choose to sacrifice their future to buy more toys today.
There are different strategies but the minimum you should be doing (in the USA where social security will provide a portion of retirement savings) is saving, in a 401k, IRA or something similar: 5% in your 20s, 8% in 30s, 10% in your 40s, 11% in your 50s, 12% in your 60s. If you save more earlier you may be able to save less later. And if you fall behind you will have to save more. To retire earlier, than say 68 (today, or say 70 by 2020, and if you assume life expectancy rates will continue to increase you need to plan on working longer or saving more for a longer retirement), you should save more.
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I commented on, WaMu Free Checking: The High 3.3% APY May Be Worth A Look, yesterday:
I agree it is worth considering. It has FDIC insurance. But the bank is not very stable. The stock price, for example, was above 40 in the last year. It is below 5 now. But as long as your entire deposit is covered by FDIC you are in safe (though if a bank goes under – not that likely – there can be a delay in getting your money). Normally a bank’s assets would be bought out by another bank.
And today I read of the second largest bank failure in the history of the USA, IndyMac Bank seized by federal regulators:
Regulators said depositors would have no access to banking services online and by telephone this weekend, but could continue to use ATMs, debit cards and checks. Online banking and phone banking services are to resume operations Monday.
Federal authorities said based on a preliminary analysis, the takeover of IndyMac would cost the FDIC between $4 billion and $8 billion.
It is important to make sure your deposits are FDIC insured (in the USA), and to know the limits of the coverage.
FDIC Failed Bank Information Information for IndyMac Bank, F.S.B., Pasadena, CA
IndyMac was a huge mortgage focused bank. Their stock price had fallen from a high of nearly $30 in the last year to below $5 in April, $2 in May and $1 in June. It is a very good thing we have the FDIC.
Related: Credit Crisis (August 2007) – Credit Crisis Continues – Homes Entering Foreclosure at Record
Failing to save is a huge problem in the USA. Spending money you don’t have (taking on personal debt) and not even having emergency savings and retirement savings lead to failed financial futures. Even though those in the USA today are among the richest people ever to live many still seem to have trouble saving. Here is a simple tip to improve that result for yourself.
Anytime you get a raise split the raise between savings, paying off debt (if you have any non-mortgage debt), and increasing the amount you have to spend. I think too many people think financial success is much more complicated than it is. Doing simple things like this (and some of the other things, mentioned in this blog) will help most people do much better than they have been doing.
There are lots of ways to spend money. And many people find ways to spend all or more than all (credit card debt, personal loans…) they have which are sure ways to a failed financial future. So anytime you get a raise (a promotion, new job…) take a portion of that extra money and put it toward your financial future. The proportion can very but I would aim for at least 50% if you have any non-mortgage debt, don’t have a 6 month emergency fund, or are behind in saving for retirement, a house…
Exactly how you calculate if you are behind, I will address in a future post (or you can look around for more information). By taking this fairly simple action you will be setting yourself up for a successful financial future instead of finding yourself falling behind, as so many do. And then when things go badly, as they most likely will sometime during your life, you will have built up a financial position to draw on. Instead of, as so many do now, find that you were living beyond your means when things were going well – which it doesn’t take a genius to see will lead to serious problems when things take a turn for the worse.
So lets say you take a new job and get a raise of $4,000 a year. Instead of spending $4,000 more just put $2,000 away (pay off debt, add to your retirement savings, add to savings for a house, add to your emergency fund…). Then you get a promotion of another $3,000, increase your spending by $1,500 and save the rest. It is such a simple idea and just doing this you can find yourself in the top few percent of those making smart financial decisions. And if you get to the point that you are ahead in all your financial areas then you can take more of each raise you get (but most of the time you will have learned how valuable the extra saving are and figured out the extra toys really are not worth it). But if you want to, once you have created a successful financial life, you can choose to buy more toys.
Related: Retirement Savings Survey Results – Earn more, spend more, want more
There are external risks to your financial health. Many people ruin their financial health even before any external risk can, but lets say you are being responsible then what risks should you seek to protect yourself from?
| Risk | Strategy | Also |
|---|---|---|
| medical costs | health insurance | emergency fund, healthy lifestyle to reduce the likelihood of needing medical care |
| property losses (house damaged, car stolen, property damage…) | homeowners insurance, rental insurance | |
| job loss | emergency fund, unemployment insurance (provided by the government and paid for by the company in most cases – in the USA) | updating skills, maintain a career network, education, learning new skills |
| disability (which both damages your earning potential and often has medical care costs) | disability insurance, health insurance | social security disability insurance – in the USA |
| investment losses | sound investment portfolio and strategy (diversification, appropriate investments, adjusting investment strategy over time) | extra savings |
| having to pay damages caused to others | homeowners insurance often includes personal liability coverage (and car insurance often includes some coverage for damage you cause while driving). check and likely choose to pay for extra liability insurance – costs to add coverage is normally cheap. | |
| unexpected expenses | emergency fund | extra savings |
| loss of income of someone you rely on (spouse) | life insurance | extra savings |
Another protection is to be financially literate. You can risk your financial health by being fooled in spending money you should save, borrowing too much for your house, failing to buy the right insurance, using too much leverage, investing too much in high risk investments…
Related: credit card tips – personal finance tips – personal loan information
Poorer Than You posed the question: Where to Stash Your Rainy Day Fund?
Pros: Interest rate usually meets or beats inflation, transfers to checking account, separation from checking decreases temptation to spend, no minimum balance requirement
Cons: Slow transfers may hinder urgent emergencies, limited by federal law to 6 transfers out of the account per month
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Personally, I’m using a credit card/online savings account combination right now. After I graduate from college and grow my emergency fund, I’ll move most of the fund to a money market savings account, and perhaps keep a couple hundred dollars in cash as well.
Here are my thoughts:
A money market fund is where I used to hold emergency funds, but things have changed. Money market funds are paying less than inflation (especially true inflation – which exceeds reported inflation). Right now high yield savings is where I have my emergency funds. You need to not only pick a good choice but pay attention to see if the marketplace shifts and certain options are not as appealing as before.
I would use a credit card for immediate spending needs and then paying the balance in full with funds from high yield savings. But right now high yield savings accounts pay more than money market funds, so just stay with high yield savings. If money market funds pay more in the future then I would put the emergency funds there.
Related: Personal Finance Basics: Health Insurance - personal finance tips
New research confirms feeling powerless leads to expensive purchases. So in addition to learning about personal finance logically it can be important to build your self esteem in order to improve your financial position. For many people understanding human psychology helps them take more control of their own life. And can help when helping others.
In a study that may explain why so many Americans who are deeply in debt still spend beyond their means, authors Derek D. Rucker and Adam D. Galinsky (both Kellogg School of Management at Northwestern University) found that research subjects who were asked to recall times when someone else had power over them were willing to pay higher prices for status-symbol items.
“This increased willingness to pay for status-related objects stems from the belief that obtaining such objects will indeed restore a lost sense of power,” write the authors.
Instead of allowing yourself to submit to this impulse you will put yourself in a better position if you refrain from trying to buy a sense of power. Take a real look at your position and make changes that move your personal finances in the right direction.
Related: Buy Less Stuff – Too Much Personal Debt – Financial Illiteracy Credit Trap – Curious Cat Investing Library: Personal Loans