Archive for Sep, 2012

What Are the Best Savings Account Rates? Does it Matter?

Do you wonder what is the best rate of return that you can get on a savings account, does it really matter? Toward the end of this article I will give you some rates I found, but even though it does matter, it doesn’t matter as much as you think, so don’t sweat it too much. Even though your savings gets a poor rate of return, the idea is the low rate is the cost of having insurance. I don’t mean insurance in the traditional sense, but self-insurance if something happens and you need to get your hands on it for a health condition, lost employment or the transmission going out on your car. The cost of ‘insurance’ is the low rate of return. The benefit is having money readily available, insured by FDIC, and in something that won’t go down in value. Remember what Mark Twain said: “I am more concerned with the return of my money than the return on my money.”

That is the reason I don’t think it is too important to loose sleep over the low interest rate your savings account is earning. Also, the difference in rate of return isn’t going to add up that much anyways. For example, if your account is earning .50% and another one is offering .65%, the difference in accumulation in 1 year on $10,000 is only $15 dollars. However, as you save more money, and you are going to have it in savings a long time, then you should do more homework to find a great rate.

Saving money is all the rage these days. In April of 2005 the US personal savings rate was .80%, today it stands at about 4%. More people are saving money as a result of the recession, now that they see the value of having a safety net. Hopefully the trend to save instead of spending almost all we make will continue and we won’t return to a spend and borrow culture that helped contribute to a recession. People are taking classes, learning from experience and understanding the value of having an emergency fund of savings.

The challenge many people face is where to put their money. We are told to deposit it into a safe money market account, pass-book savings, or certificate of deposit, but the interest rates are horrible. We are supposed to save 3 – 6 months of expenses in case of a rainy day. If someone is self-employed it may be good to have 12 to 18 months of savings, in case of business slumps. If people are paying off debt, Dave Ramsey suggests they start with baby-step #1 and put $1,000 into savings, then start to snowball debt reduction with a gazelle run-hard mentality.

Basic bank and credit union savings and money market accounts are great, because they are easy to get to, don’t go down in value like the stock or bond market, and are insured against loss by the FDIC. Make note though, there are some money market accounts that are not insured.

I looked around the web and found some decent rates, in the neighborhood of .65% to 1.05%, the best from my quick search was at CITBank and Salliemae. I found some institutions with rates as good as 1.50%, but had requirements like balances and checking. Checking the average money market account was paying from .50% to .70% depending upon minimum balance. Find a good institution, with a good rate, keep an eye on it, but don’t sweat it too much initially.

Free Fun Idea, Free Museum Admission 9/29/12 had a great post for those that are looking for something fun and free to do this weekend.

Smithsonian Magazine Sponsors Free Museum Day

by Jim Wang

Museum Day Live! is an annual event hosted by Smithsonian Magazine where you can get admission into participating museums across the country absolutely free. This year, Museum Day Live! will be this Saturday, September 29th, and you can see a list of participating museums here.

To get admission for two, you will need to get a ticket here. The ticket is emailed to you after you submit your information and you’ll need to print out the email to gain free access.

There are quite a few venues participating, including every Smithsonian Institution Museum (they are always free anyway, with the exception of the Cooper-Hewitt and National Design Museum). Here in Maryland, we have several dozen museums participating in Museum Day Live!

It’s a fun way to visit museums with your family without paying a penny!

Kids Saving More Money

Do you think your children are learning from their parent’s financial woes and are practicing better personal finances, such as saving more money? The Wall Street Journal yesterday reported in “Watching Parents Fail Sparks New Rebellion: Saving Money.”

I think this could indeed be true, I know we have been transparent with our kids about things we have learned, sometimes the hard way, and their attitudes about finances are very spot on. It seems as though for prior generations finances were sometime more secretive. Today in light of parents perhaps not saving enough or budgeting like they should have, the recession has exacerbated family finances, and kids have witnessed first hand their difficulty, and they don’t want to go through the same thing.

I know when we lead the Dave Ramsey Financial Peace University class it seems there are almost two groups of people: those in their 20′s who want to get it right for a lifetime, and those who are older who have gone through difficulty and have regrets. There are about 20% who actually are doing okay, but just want to do better too.

Have you noticed teenagers and young adults trying to take control of their finances more these days?

Options for the Unbanked

Several media sources report that 1 in 12 households or 10% of Americans today do not use bank checking accounts, but use cash for everything. Most people have had checking accounts at some point.  Some have had to close them because they never learned to manage them well. Others closed accounts after life’s circumstances put them in a bind, resulting in bounced checks and accumulated fees and making it too difficult for them to try opening another account. Many banks don’t want to deal with people who have had bad checking account and credit history.

Not having a checking or other bank account makes it difficult for people to establish credit, which is often a barrier to home ownership or buying a car to get to work. Thus people remain economically depressed because of their failure or refusal to deal with banks. Many people with modest incomes, or those who have gone through terrible financial circumstances, as well as those in poverty, don’t have traditional bank accounts these days.  Bankless or under-banked people can wall themselves off to financial advancement by not learning good financial management and the knowledge required to manage bank accounts. This seems to be another consequence of our bad economy. The best thing these folks can do is to take a financial class, often held by non-profits in their community, or at a Dave Ramsey Financial Peace University course.

For those that continue to go the non-bank route, they might be victims to high charges for the only options that are available to them:

  1. Check-cashing stores are the first option many choose when they have problems with bouncing checks. These unscrupulous enterprises provide a payday advance {loan} until the paycheck arrives, charging high fees and interest, sometimes several hundred percent. They provide a handy service to the person who gets stuck and needs quick cash, yet they charge exorbitant amounts of interest. Many people get stuck, unable to catch up, and have a hard time breaking the pay-day loan, cash advance, check-cashing store cycle. I recommend that people avoid all these if at all possible.
  2. Some people cash their paychecks and then buy everything with cash. If they need to send a bill, they pay for utilities at a local bill-paying place such as some grocery stores offer, or they buy money-orders. Money orders aren’t cheap if you calculate the cost throughout the year, and having cash can make security an issue and budgeting a challenge. I recommend that people who do this use the envelope system until they can get re-established with a bank checking account.
  3. Pre-paid credit cards are another option that people may use. Companies like RushCard provide a nice way for people to pay bills easily, as their paychecks are automtically deposited and they can use these debit-like cards to pay bills. Some of these services have high fees that really add up. Some of them have an annual fee, monthly fees, and per-transaction (bill paying and ATM) fees. Searching these companies on Google, I found numerous complaints, often concerning the quality of service, money not being deposited on time, and mis-used account numbers (theft of account numbers). Some users of pre-paid cards hope to establish good credit by using them, but I am not sure they accomplish that. What I do like about the RushCard is the budgeting tools and bill managing capability. This feature might teach some to get back on their feet and to practice and learn good personal finances, thereby helping them build a bridge back to financial health.

Those with modest incomes and those who are in or near poverty are a vast population under-served by most mainline large financial institutions. It would be welcome news if just one of these institutions made it corporate policy to design a plan to serve this population. They could start by offering new creative services and education and customer support especially designed for the under-served population, all with an affordable cost structure.

How Does Inflation Affect Savings?

People are aware of inflation, since it is talked about all the time on the news and they see gasoline prices increasing astronomically and erratically. You may have heard someone talk about loss of purchasing power, but what does that mean?

As a quick review, when you invest or save money, and you pull it out later, it should be worth more. This is because it either pays interest (e.g., bank pass-book savings, money market account, certificate of deposit [CD], bond), or earns dividends (e.g., stocks), or appreciates in value (e.g., stock, real estate).

If you invested in a savings account, CD or money market account, you are typically going to earn 0 – 1.5% annually.

Inflation (increase in the cost of goods), on the other hand, averages about 3.5% over time. If the money you deposit in an interest earning account earns less than the rate of inflation, you won’t be able to buy the same amount of goods when you take your money out to buy something as you could have bought before you invested the money. You have lost what is called purchasing power.

If you buried the money in a coffee can in the back yard or hid it in your mattress, it would not appreciate in value at all. Each year you left it in the ground or in your mattress, it would actually go down in value an average of 3.5% per year, since you can’t buy the same amount of goods with it when you take it out as you could have bought with it when you buried it or hid it.

Some people are very risk averse, meaning they are afraid stocks or bonds may lose value. However, as you can now see, even by taking no risk, your money can go down in value if not invested wisely.

How to Sell Your Scrap Gold

The price of gold is climbing again to about $1,800 per ounce, close to its all time high of $1,895 on 9/6/11, so many people are thinking about selling their old gold jewelry they have lying around. If you are interested in selling yours, here are a few tips to help you get the most for it.

  • 24 carat gold is 99.9% pure gold, and the price fluctuates everyday
  • 99.9% 24 carat gold is very soft; most jewelry is either 10, 12, 14, or 18 carats, but it can be other grades as well
  • Coins and bars might be pure gold
  • Jewelry stores and gold buyers have to buy your gold at a discount, either because the market price may go down tomorrow or they need to make a profit when they sell it
  • 10 carat gold is 41.7%, 14 carat is 58.3%, and 18 carat is 75% gold
  • Your scrap gold is weighed in grams, and it is purchased from you at the buyer’s per gram quote offer, depending upon your gold’s carat rating
  • There are approximately 28 grams in an ounce
  • An Example: If gold is selling at $1,700 per ounce and you have 14 grams (1/2 ounce) of 14 carat gold, the current market value of your gold equals 50% of $1,700 ($850), and then 58.3% of $850 (to account for the amount of gold in your item), or $495. Go to Wikihow for additional information before selling.

When you decide to sell your scrap gold, first have a reputable jeweler grade your gold (with a little acid and stone test), and weigh it. Next ask their purchase price per gram for each item, and then ask for the total amount they will give you for your items. Then call or visit some other gold buyers for their prices per gram for your carat weight. Make sure each item is tested and weighed separately, since each one could be a different carat. Don’t ever mail your gold to any gold buying firm.

Take each item, such as old gold teeth, bars, coins and scrap jewelry, in a separate ziplock bag, and take your time. Some buyers talk fast and the process can be intimidating. A few days ago, a relative took 4.7 grams of 14 carat gold to 2 places. Assuming a $1,750 per ounce (solid gold), or $62.50 per gram. If 14 carat would be 58% of that, or $36.25 per gram. The retail price is $170.35. They were offered $40 from a coin shop (23% of the value) and the attendant didn’t weigh it. The second offer was from a jewerly store was for $90 (52% of the value). Don’t be hurried, understand what you have, if you don’t do your homework and visit 2 or more reputable buyers, you might get ripped off.

Financial Diligence Is Required More Now Than Ever

Various news sources last week reported that inflation-adjusted median incomes haven’t increased since 1995. The recession is partly to blame, since many higher paying white-collar jobs are gone. Over the past 20 years many factories have moved overseas, so higher paying blue-collar jobs are rare.

As if those challenges aren’t enough, those with modest incomes have a tougher uphill battle than ever before. Gasoline has doubled in price since 2009. Grocery costs have gone up, and package sizes have come down. Many people living on the margin are driving older cars, needing more repairs.

Health insurance costs climb at rates faster than inflation, and with higher deductibles common with many plans, consumers have to pay more out of pocket. Many people don’t have health insurance even though Obamacare was passed (but it will not be fully implemented until 2014), and still business owners haven’t really figured out how to pay for benefits for low income and uninsured workers. So many modest and low income people continue go without regular health care, so they must pay everything out of pocket.

I know many people that are going back to college to get degrees in nursing or computers in order to find better jobs. Yet college costs have increased way beyond normal inflation, and many people graduate with burdensome loans. When financially strapped with debt, many exhaust their savings and are forced to use credit cards and check-cashing stores. Those with modest incomes and the poor are further hit with high interest rates, making it all the more difficult.

Is Obama or Romney coming to the rescue? Well I have been listening closely to both presidential candidates, and I hear they are concerned about all these challenges, yet I haven’t heard either articulate about their actual plans; their rhetoric remains abstract.

With all of these challenges, Financial Diligence is required more now than ever. Politicians and government in the end might help some, but it will take quite a long time. To make changes to present circumstances, it is up to me and you.

Financial Diligence

  • Making personal finances a priority
  • Committing time to do banking and budgeting
  • Investing time and money to take a class, e.g., Dave Ramsey’s Financial Peace University
  • Being smart and wise with decisions
  • Planning shopping trips and putting limits on grocery buying, eating out and entertainment expenses
  • Not borrowing for consumer goods
  • Saving for emergencies
  • Getting cost savings books from the library and implementing homemaking cost reduction measures
  • Obtaining advice from a financial coach about all areas, and especially before all major expenses
  • Being a great employee–learning extra skills or going back to school, and asking for more work when you have down time
  • Lastly, praying for wisdom to make good non-emotional decisions, and asking for all kinds of heaven-sent help for such things as financial miracles, raises, jobs, and good health for you as well as for your possessions that might break down and require budget-breaking expenses

Conclusion: The challenges are greater now than ever, yet it is not hopeless; it just requires greater concentrated Financial Diligence. You are smart, intelligent, and gifted; you can do it! You will repay debt, make more money, accumulate savings, and have more for good and fun things in the future. Don’t be discouraged–I have seen it happen to people over the past few years as they endure and improve through difficulty.

Credit or Gift Card Positives, Negatives and Innovation

The banking industry has never been known as innovators or centers of creativity, that’s why an article in the Wall Street Journal caught my attention today: Ice-Cream Bank’s Rocky Road. I’ll get to the article in a moment, but my gripe with credit cards and gift cards is that although they provide a definite convenience, their negatives outweigh their positives for many Americans.

Credit cards, and debit cards are definitely handy. No one wants to carry thousands of dollars around when making large purchases and they are necessary for making flight, hotel and car rental arrangements. They also provide reward points that can be used for gifts, cash, and travel; maybe a few percentages of the purchase.

Then there are the negatives: retailers are charged 1.5% – 3% on purchases, inflating the cost of goods we buy automatically. The credit card industry makes a lot of money on these fees. They also like it when people don’t pay-off their balance each month, because they charge up to 30% interest on unpaid balances. The credit card issuers are really nice when they offer you a card, tempting you with points, no interest for the first year, and maybe waive the annual fee. However if you run into hard times, and miss a payment, many of them increase your interest rate to their highest rate nearly 30%, making it even harder to get caught up.

Research shows that people that use plastic to buy goods instead of cash psychologically feel less pain, and spend more per purchase.

In summary, you use credit cards out of convenience, the retailers charge more for the goods to cover the cost, you spend more money, may end up paying high interest rates, and in return you get convenience and points. Now some people have awesome discipline and don’t spend more, and really profit from the points. I wouldn’t recommend this to most people, but if you are really disciplined, the points can cover your vacation costs every year, potentially saving a few thousand dollars from your budget.

Gift cards on the other hand, are a nice way to buy gifts for people. Some people buy them at grocery stores, and get reduced cost of gasoline; Kroger and Giant Eagle are common grocery and gas bundlers in our area and some people do this when making large purchases at other retailers. The negative side of gift cards is they can sometimes get lost in the mail, forgotten or lost once we receive them, or lose value if not used within a specific time.

Now back to the story about an Ice-Cream Bank. Seems there’s this boutique ice-cream parlor in Pittsburg that pays 5.5% interest per month on their cards. The interest can be redeemed for items they sell such as ice-cream and coffee. The banking regulators are in turmoil trying to shut down this parlor offering bank like products, but so far they haven’t figured out how to shut down the niche the proprietor found in banking and securities regulations.

I like innovation, and admire Ethan Clay’s (the owner), creativity and courage to come out with an interesting idea to attract and reward customers. This got me thinking, why doesn’t the credit card, banking and major retailers come up with ideas to not just add convenience and points, but to encourage saving money on purchases, maybe provide a discount on purchases if you use their card? Wouldn’t it be cool if a credit card company rewarded people who finally paid off their balance, by depositing money into a special savings account (redeemable only the future) for each month that the balance is reduced? Maybe even increase that amount for every month that this is maintained, and then repaid. They probably cook up ideas like this all the time, but they are not approved when they get to the executive team, for fear of losing revenue, since they make more money on interest and fees. But like Ethan Clay’s small Whale Bone Cafe, small companies can try new ideas. Maybe a smaller credit card issuer will read this story in today’s Wall Street Journal and provide a card that has positive innovations to help people more.


Low Cost Hearing Aid Solutions

Yesterday’s Wall Street Journal had an interesting article about some lower cost alternatives for people with hearing loss. Some people can’t afford FDA approved hearing aids, since they often cost up to $4,000 a pair; often insurance doesn’t pay for them either. According to the article, 20% of 36 million Americans suffer from hearing loss, so these new devices might be an option for some who have gone without hearing because of the expense of FDA approved devices. They come in various designs and models, and range in price to around $50 to less than $1,000.

Ironically, in Monday’s Journal there was an article about George Martin, rock music’s most famous record producer and producer of all of the Beatles’ albums except one. His proximity to loud music for decades is being blamed for his near deafness. George can afford the best hearing aids, and with the alternatives mentioned in today’s Journal article, many of us suffering from the recession might now have affordable, if not the best, solutions to this growing malady.

Annual Cost of Gasoline

With gasoline hitting or exceeding $4 per gallon in many parts of the country, it is important to consider your annual cost of gas when purchasing a new or used car. In 2009 gas was less than $2 per gallon, and it seems that we have gotten used to the current costs. With the price of groceries and healthcare steeply increasing over the past several years, the average American’s budget is really being stretched. Throw on a doubling of gas prices, and there is little room for many extras, making vehicle purchase decisions that much more important.

The chart below illustrates that it is easy to spend thousands of dollars each year on gas; however, it might not seem that big a deal to some people. But if you add it up for 5 years, the difference in cost between a full-sized SUV averaging 15 miles per gallon and a small or medium-sized one averaging 25 mpg is $5,333. Upgrading from a sedan averaging 25 miles per gallon to an ultra-efficient hybrid averaging 50 miles per gallon could save $4,000.

Many people react to this and wonder if they should buy a hybrid to get better gas mileage. However, the cost of the hybrid model sometimes is more than the gasoline cost savings. Anyone considering purchasing a hybrid should factor in expected savings based on the yearly mileage, as well as the additional cost to purchase the hybrid vehicle. Caution, don’t totally rely on the published MPG ratings on the sticker. Consider the number of miles you drive on the highway and in the city, and then take a conservative approach by rounding down that number by at least 10%.

Using some of this methodology may help you make important calculations when considering a new car purchase. In a couple of prior blogs I mentioned used cars to avoid and an evaluation of the potential cost savings of a newer, more fuel efficient car with monthly payments. If you are in the market for a car, these articles might also be good to read.

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