10 things your bank won’t tell you
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For people who travel a lot, Arnold recommends a Capital One credit card, which charges no overseas-transaction fees (and even declines to pass on Visa and MasterCard’s 1% fee to customers).
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Last year, the Government Accountability Office sent investigators to see how well banks explained their fees and other conditions to potential customers. Though banks are required by law to make this information available, the GAO said one-third of the branches it surveyed didn’t provide the required information. Worse, more than half didn’t have any fee information on their Web sites.
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Though big banks offer many conveniences, they can come at a price: high fees. In 2006, the 10 largest banks generated 54% of revenue from fees and service charges. By contrast, the 10 smallest banks generated just 28% from those sources.
Related: Sneaky Fees - Don’t Let the Credit Card Companies Play You for a Fool - Majoring in Credit Card Debt - Avoid Getting Squeezed by Credit Card Companies - Legislation to Address the Worst Credit Card Fee Abuse, Maybe -Bad Practice: .05% Interest From a Stock Broker - Hidden Credit Card Fees
Bankruptcies among seniors soaring
The average age for filing bankruptcy has increased and the rate of bankruptcy among those ages 65 and older has more than doubled since 1991, say researchers Teresa Sullivan of the University of Michigan, Deborah Thorne of Ohio University and Elizabeth Warren of Harvard Law School.
Expensive health care costs from a serious illness before a patient received Medicare and the inability to work during and after a serious illness are the prime contributors to financial crises among those 55 and older. But even among those 75 to 84 and receiving retirement, Social Security and Medicare benefits, the rates soared—from just 1.8 percent of all filers in 1991 to 5 percent in 2007.
Most Americans have two major assets: their homes and their retirement plans. And borrowing against those assets can present new risks when home values and stock markets decline, Sullivan and colleagues say. In some cases, older Americans trying to help children and grandchildren, borrow too much, putting themselves at risk.
Related: Boomers Face Retirement - Retirement Tips from TIAA CREF - Saving for Retirement
Retirement planning is a huge financial need and one of the areas where financial literacy can pay off very well. Understanding the incredible power of compound interest can be used to start your retirement savings early and provide you with a huge benefit. Understanding the risks of inflation can guide your investment decisions. The recent Business Week Retirement Guide is very good. In Spending Safely, they explore how to spend while preserving your capital in retirement.
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Bengen now suggests that the 4% figure - actually 4.1% for a 60/40 portfolio of large caps and bonds and 4.5% if you toss in small caps - merely seems impressive when plugged into Excel (MSFT) spreadsheets. In practice, the strategy, which Bengen stopped using with his own clients about three years ago, is inflexible and unrealistic he says - and the formula is too stingy.
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Flexibility is factored into Bengen’s revised approach, which permits withdrawals to fluctuate within guidelines. His “floor-and-ceiling strategy” suggests that an initial withdrawal rate of 5.16% would be appropriate if a retiree pares back subsequent withdrawals by as much as 10% of the initial withdrawal during hard times (the floor). On the other hand, a retiree could withdraw extra cash equaling up to 25% of the first-year withdrawal (the ceiling) when the market is strong.
This adjusted thinking is correct I believe. People want simpler answers but some things just require a more complex understanding.
Related: How Much Retirement Income? - Add to Your Roth IRA - Retirement Tips from TIAA CREF - Our Only Hope: Retiring Later
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
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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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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
Graduates should put off living large after college
The key, experts say, is a simple one: Live like a poor college student for a couple more years. While you’re doing that, you can pay off your debt, start a savings plan and embrace healthy habits that will serve you well for life.
This is exactly what I did. Outside of paying for college, extra living expenses in college were small. Just retaining the spending habit of college gets your personal finances off on a good start.
Patty Procrastinator lives a little better when she first gets out of college and doesn’t start saving in the 401(k) until she’s 32. From that point, she also saves $500 a month, her employer adds $250 a month, and she earns a 9% return — just like Sallie. But at age 65, Patty will have only $1.7 million. That decade of delay will cost Patty $2.4 million.
Incidentally, Sallie contributes from her own money just $60,000 more than Patty does. The rest of the difference comes from employer contributions and investment returns.
By immediately starting to save for retirement and other needs you create a great foundation for your finances. Start saving for a house, a new car, create an emergency fund… Then you can create a situation where the only loans you need to take are for a house and maybe a new car - avoiding credit card debt or other personal loans.
Related: Personal Finance Basics: Health Insurance - Initial Retirement Account Allocations - Why Americans Are Going Broke
The best method to avoid problems with debt collectors is to avoid debt problems (Create Your Cash Reserve - use your credit card responsibly - Buy less stuff). But if you do run into problems and get stuck dealing with debt collectors in addition to the financial trouble you may find yourself very frustrated and stressed. The Fair Debt Collection resource of the Federal Trade Commission provides useful information:
Debt collectors may not harass, oppress, or abuse you or any third parties they contact. For example, debt collectors may not:
- use threats of violence or harm
- publish a list of consumers who refuse to pay their debts (except to a credit bureau)
- use obscene or profane language; or repeatedly use the telephone to annoy someone
Debt collectors may not use any false or misleading statements when collecting a debt. For example, debt collectors may not:
- falsely imply that they are attorneys or government representatives
- falsely imply that you have committed a crime
- falsely represent that they operate or work for a credit bureau
- misrepresent the amount of your debt
- indicate that papers being sent to you are legal forms when they are not
- indicate that papers being sent to you are not legal forms when they are
Why is such a resource needed? Because many debt collectors have behaved unethically and illegally. To file a complaint use that link or call toll-free, 1-877-382-4357.
FTC 2008 Report on Fair Debt Collection Practices Act
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The recent drastic reductions again emphasize (once again) that changes in the federal funds rate are not correlated with changes in the 30 year fixed mortgage rate. In the last 4 months the discount rate has been reduced nearly 200 basis points, while 30 year fixed mortgage rates have fallen 18 basis points.
I have update my article showing the historical comparison of 30 year fixed mortgage rates and the federal funds rate. The chart shows the federal funds rate and the 30 year fixed rate mortgage rate from January 2000 through April 2008 (for more details see the article).
There is not a significant correlation between moves in federal funds rate and 30 year mortgage rates that can be used for those looking to determine short term (over a few days, weeks or months) moves in the 30 year fixed mortgage rates. For example if 30 year rates are at 6% and the federal reserve drops the federal funds rate 50 basis points that tells you little about what the 30 year rate will do. No matter how often those that should know better repeat the belief that there is such a correlation you can look at the actual data in the graph above to see that it is not the case.
Related: real estate articles - Affect of Fed Funds Rates Changes on Mortgage Rates - How Not to Convert Equity - more posts on financial literacy
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Much of personal finance is not amazingly complex once you take some time to lay out the basics. We have covered some important topics previously: tips on using credit cards, retirement saving, creating an emergency fund… One of the most critical factors is to insure yourself against possible catastrophic events.
Some personal finance mistakes can set you behind, say falling to save for retirement when you are 28 or cashing in your 401(k) when you switch jobs at 27. Those mistakes however are most often manageable. You just need to save more later. For health insurance the critical need is to protect yourself from huge costs.
Bankruptcies are a huge problem due to health costs. If you have done everything else right and have saved up say $150,000 in mutual funds (in addition to retirement savings and a house) at age 40 but have no health insurance there is little I can think of more likely to result in your losing that saving than a health crisis when you are without coverage (disability insurance is another critical personal finance need that I will discuss in another post and the another such risk - as is an uninsured home). The costs of health care are just too large for any but the richest to survive a major cost without either ruining an entire lifetime of smart financial moves or coming close.
There are certain things that cannot be compromised in your personal financial situation. Health coverage for significant costs is one of those. If you can afford a $5,000 (or higher) deductible that is fine. The critical need for health insurance is not the first $2,000 or $20,000 but the 2nd, 3rd, 4th… $100,000 bill. A bill for $2,000 you can’t afford is a challenge but a bill for $100,000 you can’t afford can ruin decades of smart and diligent financial moves.
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