Why Not Walk Away from My Mortgage?

Kelli writes in:

My husband and I are sitting on a thirty year mortgage (with twenty six years left to go). We still owe $330,000 on our home. A week ago, a very similar home to ours two blocks away sold for $220,000, so we’re under water by at least $100,000. We are thinking of just walking away from this mortgage and renting an apartment for a while until our credit clears up. What do you think?

First of all, there’s a strong personal moral element to this type of decision. Is it morally wrong to walk away from a mortgage? You’ll get strong, impassioned answers on both sides of the question. Some will argue that if you make an agreement with another entity, you’re obligated to stick to it to the best of your ability. Others will argue that banks know what they’re getting into with a mortgage and that foreclosure is a risk they accept in the agreement, so you’re just doing something within the bounds of the agreement.

As with most morality questions, I can’t tell you what to think. I personally feel walking away from your agreements when you have the capacity to fulfill them is morally wrong, akin to lying. If I were a lender, I would never lend to someone who walked away from a mortgage because I would simply view them as too big of a risk. But I’m not a mortgage lender.

Aside from that moral concern, though, is it really a good financial choice? I think it can be, but it depends on the other choices that the person makes.

First of all, walking away from a mortgage will drop your credit rating by 150 points and it will take several years to recover. Such a drop has a huge impact if your credit is good, but a much smaller impact if your credit is already bad.

What kind of impact? It will become incredibly difficult to get a car loan or another mortgage with any sort of competitive interest rate. Lenders will look at your credit score and if your score is low, they won’t offer you a prime loan (if they offer you one at all). You have to accept that you’ll either be paying for cars and homes in cash for the next several years or you’re going to be taking out loans with incredibly painful interest rates and down payments.

If you’re going to do this, your best approach is to make sure you have housing and automobiles lined out for the next several years before your credit collapses. If you’re going to get a mortgage on a second home, do it now and get a fixed rate mortgage while your credit is still good. If you’re going to rent, get your rental agreement set up now before you walk away. If you’re going to need a car in the next seven years, you might want to make the move now (unless you’ll have the cash to do it later).

Another impact is that many other services use your credit ratings to determine what to charge you and whether to do business with you. Insurance is one example of this – most insurance companies regularly do a “soft pull” of your credit and use declining credit as a reason to raise your rates. Many upscale renters will do the same thing and not rent to people with poor credit, which may limit the places where you can rent your housing. Potential employers often pull your credit (I’ve had two employers in the past do this) and use that as an element of their hiring decision, often leaning towards people with good credit over people with poor credit. These are all serious additional costs of walking into foreclosure.

In the end, I don’t think Kelli should walk away from her mortgage as a first response. She should try several other avenues first that would preserve her credit and perhaps even allow her and her family to remain in the home.

First, I’d simply talk to the lender. Explain your situation and discuss options available to you. It’s often easier for a lender to just refinance with you (sometimes even removing some of the principal) than it is to put the homes in foreclosure. Many lenders are currently focused on refinancing in this way rather than taking on more foreclosed homes, so it’s certainly an option.

Second, I’d look at the extra financial costs of what will happen if you do foreclose. Run the numbers carefully here. Include all the extra costs – a serious bump in your insurance rates, for example – and make sure you also include some estimate of the cost of the risks mentioned above – the extra cost of a new car or the challenge of finding a rental home or a new job. Those things have serious financial costs if they occur – or they might have no cost at all. A good way to appraise it is to figure out the cost if it does happen, then estimate the odds of it happening. So, if something has a cost of $100,000 and has a 40% chance of happening, it’d be a $40,000 cost.

You might be surprised to find that staying put is the best option, even if you happen to be underwater in your mortgage. If you still find that abandoning is the best option. then it becomes the moral question discussed above – and moral questions are things we all have to decide for ourselves.

Continue reading Why Not Walk Away from My Mortgage? …

From The Simple Dollar.

Privacy, Honesty, Marriage, and Debt

Archie writes in:

In our marriage, my wife and I have agreed not to open financial statements addressed to each other. We supposedly did this so that we would be able to hide things like gift purchases from each other. Whenever we talked about our finances, we just talked about balances on accounts and didn’t worry about individual items on each other’s bills.

Over the last few years, I’d noticed more and more bills from various banks sent to my wife, but I hadn’t really thought too much about it. Yesterday, we received a call from someone from Citi who wanted to speak to my wife about her account and made it clear that the account was overdrawn and past due.

I was frustrated and worried, so I dug through the mail and found her most recent statement from Citi, which was unopened. I opened it. She had a balance of over $7,500 on it. I was just shocked, so I opened some of the other statements with her name on it that I could find. From just what I could gather in a few minutes, I found that she has $30,000 at least in credit card debt.

I put all of the statements in my bedside table for now. I don’t know what to do next. We certainly don’t have $30,000 to pay these off right now and even the minimum payments are difficult. It looks like my wife has been juggling accounts a lot because there aren’t many payments on our recent bank statements.

What do I do next? I don’t know what to do and I’m afraid of the big fight we’re going to have.

I originally included Archie’s note in my reader mailbag for this week, but I had enough to say about his situation (and I figured readers would, too) that I decided to devote a whole article to it.

First of all, this isn’t just about your discovery of the credit card debt. There has been a long history of dishonesty here – and that’s what I would call it, dishonesty. Marriage is a union based on trust and $30,000 in credit card debt is a pretty strong violation of that trust. It is going to take a lot of work to dig out of that debt.

In short, my suggestion would be that you seek marriage counseling, first and foremost. You’re in a situation now where you’ve both violated the trust in the marriage – your wife has been hiding tens of thousands of dollars in debt and you’ve opened up private correspondence to her. You have a perfectly good reason to feel that your trust has been violated and to feel upset. So does your wife.

This means your marriage has some very serious trust issues that you need to work through in order to be able to move forward successfully with a financial plan.

Why? A financial plan in a marriage only works if you can fully trust one another. You need to be able to trust that your partner is actually working towards the same goals with the same methods as you are and that if either of you run into trouble, you’ll work it out together. If you can’t trust each other, then a financial plan cannot work.

The first order of action, then, is to re-establish the trust.

If you’ve reached a point where you feel that you can trust each other again, then turn your eyes to your financial situation. View the past as water under the bridge; instead, focus on where you’re at now and how you can make your situation better from your current position. What-ifs don’t help with the here and now.

The first step to recovery would be a mutual commitment to spend less than you earn. Remember, of course, that part of your required spending is the debt repayment and also remember that you (as a couple) are spending far beyond your means (witness the $30,000 in credit card debts). Thus, this will be a lot harder than you might think. This step will take some serious work on its own. You’ll both have to face your spending head-on and make some difficult choices. But you have to get that spending under control.

Second, you need to create a debt repayment plan. A debt repayment plan is easy to set up and helps you develop an orderly method for paying your debts down.

Finally, and most importantly, the two of you need to discuss goals together. What do you want for your mutual future? Where do you see yourselves in five years or ten years or twenty years? What exactly will it take to get there? Obviously, getting control over your spending and getting rid of your debts are two big steps, but those are just two steps. You need to work together to figure out what comes next and how to get there.

Good luck.

Continue reading Privacy, Honesty, Marriage, and Debt …

From The Simple Dollar.

Can You Actually Make Money Chasing Rates?

One common tactic I see on personal finance blogs is what I like to call “rate chasing.”

This tactic usually involves carefully watching the yield rates on savings accounts over at Bankrate.com (or a similar service), always signing up for one of the top accounts, and transferring their savings to that highest-yield bank.

For me, at least, I don’t find this tactic of much use at all. Here’s why.

The interest difference between a good bank’s interest rate and the top interest rate is pretty small. I took a look at Bankrate’s 50 newest additions to their database and sorted them by APY. The best rate found on that list was 1.40%; the median one (the one in the middle) was 0.95%. In other words, you’re gaining just 0.45% by choosing the top bank over a random bank.

That’s not much money. Let’s say you have $5,000 sitting around to play with in this fashion. The amount you’ll gain over the course of a year is $22.50 by rate hopping from the median bank above to the top bank above. And, in truth, it’s usually worse than that.

It takes time to locate the right offers. In order to keep up with these offers, you have to visit sites like Bankrate very regularly to find out what’s on top today. This is a small, continual drag on your time as you have to actually evaluate the top offers to make sure there’s not some sort of catch and to make sure that the rate was actually reported correctly to Bankrate.

It takes time to sign up for new accounts. If you do find a new offer, you have to sign up for that account. This can be an arduous process depending on their sign-up procedures, sometimes requiring mailing documents back and forth and waiting quite a while – another source of eating away at your valuable time.

The more accounts you have, the more identity risk concerns you have. While banks have amazingly strong security procedures, no security system is perfect. Each individual bank might have a 99.9% chance of keeping your personal data safe this year, but if you have fifty accounts out there, the chance of all of your accounts being safe this year drops to 95%. Identity theft is a real mess to clean up, so it’s worth your while to minimize the number of access points to your personal data.

Diminishing returns are in effect. Let’s say you’re at a bank offering 0.5% on your savings account. You can earn at least a little by hopping to an account earning 1.3%, right? That’s $80 extra per year on $10,000.

But once you’re in that 1.3% account, the benefit of the next leap is much smaller. You might dig for a while and find a 1.5% account, earning you $20 for the jump per year. The next time, you have to search a long while to get 1.6%, earning you $10 more.

My approach is simple. I usually encourage people to simply get an online savings account with a great customer service reputation and a reasonably competitive rate and just stick there without worrying about what other banks are doing with their rates.

Would I ever rate hop? Yes, in certain situations, I would rate hop. First, the interest rate competition in online banks would have to heat up. If you were seeing a top rate of 6% APY versus a median of 3%, then you’re talking about some significant interest. This is particularly true if you’re dealing with a large balance – say, $50,000 or more. 3% of $50,000 is $1,500 – that’s definitely worth your time.

But that doesn’t reflect the reality of the banking market and it also doesn’t reflect the day-to-day reality of most people. So, for now, I have to say that rate chasing is a pretty ineffective tactic for spinning more money out of your savings.

Continue reading Can You Actually Make Money Chasing Rates? …

From The Simple Dollar.

AARP’s Top Mistakes that Hurt your Credit Score

There’s been quite a bit of discussion in the personal finance blogosphere about the importance of credit scores. The credit card rules have changed, banks are expect different scores these days for best loan rates, etc.
The basic concepts, however, of keeping a good credit score haven’t changed much. They include: pay your bills on time, [...]

Continue reading AARP’s Top Mistakes that Hurt your Credit Score …

From Monroe on a Budget.

ING Savings ~ Free $25

ING Direct is offering $25 to folks who open a new ING Direct account with an initial deposit of $250 or more. You do need a special link to receive the $25, so if you are interested email me at molly at econobusters dot com. If you are not serious, please don’t request a link, as they are limited. Why should you consider an ING Savings account? I have one and there are a few things I really like about it.

1) The interface is very simple and easy to understand. Nothing confusing here at all.

2) You can simplify things by quickly and easily setting up an automatic savings plan so funds are automatically transferred from your regular bank account on the date of your choosing.

3) Interest is higher than most banks (though, at this point, not particularly impressive). It’s about 1.10% (it was 1.24% last month) at this time, but is always higher than any brick and mortar banks that I’m aware of.

4) My FAVORITE thing about ING Savings accounts is that you can set up sub-accounts. Setting one up is  a little odd as it seems like you are setting up an entirely new account, but you’re really not. I used this tutorial when I set mine up and found it simple to follow. So now, I can set up my savings with sub-accounts for taxes, vacation, remodeling, Christmas, etc. When I deposit money, I simply allocate it accordingly and it’s easy to see what I have available in each account.

5) This online bank has been around for quite a few years now and has developed a trusted following. Oh, yes, your deposits are FDIC insured and all that good stuff.

So, if you were already considering setting up an ING account just email me and I’ll send you a link to take advantage of the $25 bonus. Enjoy!

Continue reading ING Savings ~ Free $25 …

From Econobusters.

Reader Mailbag: Vehicle Shopping

My wife and I have looked at somewhere around a dozen vehicles in the last month as we search for a replacement for my truck that will be capable of seating five (and preferably capable of seating more).

Rather than rushing in and just buying the first option we find that minimally matches our needs, we’re being patient. We have the cash sitting there to write a check for the vehicle we want in the price range we want.

Now we wait. And test drive. And wait again.

I have a friend who [in my opinion] is not in very good financial shape and has just borrowed a lot more money from the bank to purchase some more property hoping to make a return on it & for this to help him financially in the long run. It was bought as an investment but I find it very risky. If him or his wife lose their job and are not able to lease/rent the property commercially, then they will be in a lot of trouble. Their finances were not good to begin with and I was horrified that the bank even loaned them the money. If this was 20 years ago, this wouldn’t have been possible, the bank would have never lent them the money but I am finding that banks are more and more willing to put people in financial jeopardy, they don’t care. Although I highly believe in investing money, I don’t believe that going way over your head [even if it is for the right reasons] is ever a good idea. I wanted to suggest that they reduce their costs, pay off a lot of debt before they got into this situation but decided against it.

All that being said, I came very close to telling him not to do it but knew it could put some stresses on the friendship. I have some regrets but at the same time, he is an adult and in my opinion it was not my place to determine whether he should have done it or not.

How do you feel about confronting friends with possible bad financial decisions? Friends are supposed to try to prevent each other from big mistakes but is it crossing the line if we meddle with their bad financial choices?
- Tina

I don’t think you should “confront” your friend about it. The best thing you can do here is to try to help him logically think through what he’s doing a little bit more.

The route I would take is simple. I would tell him that I’m really interested in how he’s able to make these investments and ask to see how he pulls it off because you’re thinking of trying it, too.

As he explains it, ask lots of questions. Make some of them positive ones so he can talk about the positives of what he’s doing, but make sure some of them do address the seemingly heavy risks of what he’s doing, like asking “what happens if you lose your job?”.

At the end, you can simply say, “I’m glad that works for you, but it’s just way too much risk for me. I would never want that much risk on my shoulders, because if even a little thing goes wrong, the whole thing crashes down.” Or something to that effect.

March Madness picks, please (so we can laugh at how awful your picks are)!
- Len

My brackets are usually pretty boring. I have a couple 11s over 6s and one 12 over a 5 (Cornell is the best Ivy League team I’ve watched in a very long time) – other than that, I have almost all the favored teams winning the early rounds.

My Final Four is Kansas, Kansas State, Kentucky, and Duke. I have Kansas and Kentucky in the national title game, with Kansas winning it all.

Of course, most of this will turn out to be wrong, as it does with most of the brackets people pick.

My boyfriend and I are seriously contemplating marriage and therefore are thinking about how we would combine our finances after the wedding. We know that we would like to have children fairly soon and that I would be a stay at home mom, at least for the first few years. So I was thinking that when we get married, we should live off of just his income from the very first day to get a better idea of how things would work and to resist lifestyle inflation.

I haven’t worked out all the details but wanted to get your opinion on the concept. Basically, his income (approx 100k a year) would pay for our housing, food, car, discretionary spending, utilities, some savings, and the minimum payment on the consumer debt we both bring into the marriage (we’re working on getting rid of it and have stopped accumulating more.)

My income (approx 60k a year) would be divided into long term savings – to build a healthy emergency fund, and extra debt payments to hopefully get rid of all of our debt before we have kids.

My thinking is that I want to know that we’ll be okay when we make the switch to a single income – I don’t want to be dependent on both incomes. What do you think of the plan and do you have any suggestions?
- Mary

That makes complete sense. I think that’s a very good plan.

One thing to consider, though, is taxes. When you go to a single income, you will be paying a lot less in income taxes. Not only will your family’s total income go down a lot (meaning you drop into a much lower tax bracket), you’ll also have a bundle of deductions and credits in the form of your baby. That will help some, especially to offset the expenses of the baby.

I would try very hard to not touch your income unless you find yourself not pregnant in a couple of years and want to use a large chunk of your savings to wipe out debt.

I’m debating on cashing out my IRA early (the value is approximately $10,000) and using the funds to pay off two credit cards. Do you have any advice concerning this idea? I know a 10% penalty will be assessed for the early withdrawal, but I’m tired of carrying the debt.
- Rob

There’s not only that penalty, but there’s also the indirect penalty of losing money in your IRA. That means less money at retirement. Yes, the $10,000 doesn’t seem big now, but in thirty years, that money will be on the order of $100,000.

In this situation, the decision should really rest on how much retirement savings you have in total. I would run a retirement calculator both with and without your IRA savings and see how much the removal of that IRA money would actually affect your retirement picture. If it turns something workable into something impossible, then I wouldn’t do it. If you’re okay either way, then it’s more up to you.

Honestly, though, I would be very reluctant to ever take money out of a Roth IRA to pay off consumer debt.

How can I become more responsible for my own finances?

Currently, I assume my husband manages all finances. I mean everything, buying a car, filing taxes, selecting and paying for services (gas bill, electric bill, and insurance), paying the mortgage and paying credit cards, etc.

I’ve become aware (creditors calling, tax lien placed on my credit union account) of mismanagement (bills not paid on time, creditors calling, credit cards not paid, taxes not filed since 1996) but find myself lacking courage to ask what’s going on, and not having access to significant accounts (SCHWAB investing, on line access of joint bank accounts) to find out for myself.

I get short answers when I ask my husband questions [...] I read your blog and enjoy being financially fit and enjoy living frugally, but I have no control over my husband’s behavior, although I believe his is frugal and financially capable, just lazy I guess.

Other than working on our obvious poor communication and the relationship part myself, do you have advice for me?
- Shelly

I excised some of your story, but I think that you really need to get at least some sort of grip on the financial situation in your household.

I’d suggest reading Financial Infidelity by Dr. Bonnie Eaker Weil, for starters. The book covers more or less the exact type of situation you find yourself in – a situation of not trusting your partner when it comes to finances.

At some point, you need to sit down and talk your way through this with him. That means working on your communication, first and foremost. If he refuses to participate, then there are some deeper marital issues going on beyond just your finances, and you should consider seeking marriage counseling.

My husband and I are in the market for a new or late-model used car and have been doing some research on local dealerships. It seems that nearly all of them have switched to a no-haggle system. Is there any way we can still negotiate to save money on a vehicle or are we really locked in on a price?
- Ellie

“No haggle” pricing is nothing more than price fixing. It simply means that they’re part of a large group of dealers and manufacturers that are agreeing to keep their prices at a certain level.

Unfortunately, there’s not much you can do with such dealerships. My own experience – and the experience of quite a few readers – is that their prices are the bottom line, period. They won’t negotiate and will wave at you as you walk off the lot. Your best bet is to search hard to find dealers who don’t do it this way and negotiate there.

I suspect that this arrangement won’t last for too long, as it’s virtually identical to the “trust” situation in the late 1800s. Competition between dealers and manufacturers is leaving the marketplace and they’re all effectively acting as one company. That’s a monopoly.

Today’s post advised a young couple to do something else with the excess over $25,000 in an emergency fund. You also mentioned that you live off of your hefty emergency fund during those months when income isn’t so steady. May I ask the size of your emergency fund? Or, alternatively, how many months’ living expenses does the number represent and what do your monthly expenses total?
- Melinda

Our emergency fund right now covers living expenses for a little over a year. Of course, our living expenses are going to go up a bit when the new baby arrives.

That’s quite a bit higher than I would suggest for people who have a steady job. The regularity of a paycheck means that you don’t have to have cash reserves for the months when income is low.

I will say this: there were several months in the middle of last year where our income for that month was below our expenses. It was made up for by a handful of stellar months. It’s for that reason that we have such a hefty fund – we can live through a run of poor months and still be okay without having to make panic-based career shifts.

My wife and I bought a house about 3 years ago, right at the peak of the housing market. Since then I’d estimate that our home has lost about $50,000 or about 20% of its value. The house is fantastic and we love our neighborhood, so up until now I hadn’t really cared all that much because we weren’t planning on going anywhere.

That was all before we decided to start a family. We still love the house, and with our first child on the way, we’ll have plenty of room for the three of us. However; we’d like to continue to grow our family over the next few years and the house just wouldn’t work for our family of four.

We’re aggressively saving for retirement currently, but at the same time, we’d like to start putting some money away so that when we’re ready (within 5 years for sure) we can either add on to the house or move to a larger home in the neighborhood. We’re going to start allocating enough money each month so that even if the housing market doesn’t improve we’ll have plenty saved up to move into roomier environs 5 years from now. I guess my question just boils down to where to put the money? Should we be putting it all into CDs or another safe investment like that or paying off more of our mortgage each month? I’m leaning towards a split of 2/3 into cash/liquid investments and 1/3 into paying off the 2nd mortgage for 20% of the house value on the house that’s carrying a 9% interest rate, but I’d be interested to hear what you or your readers have to say.
- Pat

Put it towards whatever earns you the most on interest.

What’s the interest rate on your home loan? Your smaller one seems to be 9% – what’s your bigger one? Do you have any other debts? What’s the best rate you can get on a CD?

The best thing you can do right now is throw your money towards the highest interest rates. If it’s that mortgage, throw all of it towards the mortgage (assuming, of course, that you have some sort of emergency fund).

When you get to the point of buying another home, the equity in your first home will help you to make it happen.

I am looking to shift gears in my career. I currently work at a small conculting engineering company as the resident Quality Assurance person. When I took the job, I had just been let go from a position I hated. This job has been much better, except for the last two years.

I love to edit other people’s work… And am supposed to be doing just that but for the 40+ hours I spend pushing paper for QA. I’ve not edited a single document in nine months.

Basically, I’m looking into an Asst. Editor position at a web based PR firm.

Switching jobs would mean at least two things: one, a significant pay decrease from $45k to $35k and two, there is a possibility of working nights (1p to 10p).
The pay decrease would be tough but not impossible … Working nights even for six months would be an almost impossible adjustment.

I have run the financial numbers on switching careers and my concern right now is that the economy may take another steep dive & I don’t want to switch jobs/career paths only to find myself unemployed or severely under employed.

Other than sticking to my current position which I’ve become disillusioned with and being miserable, I am stuck as to what I could do… I love to edit, but haven’t found a suitable way to include that in my day-to-day activities without switching jobs.

Any suggesstions, things/areas I may have overlooked?
- Danielle

I think you’ve got the general picture right. I also think you should seriously look at changing careers.

One big thing I would do is start building up some cash savings right now before you make the switch. Focus on spending as though you’re earning $35K now and sock the rest away into savings. That way, when you actually do make the switch, you’re not at the mercy of Murphy’s Law right off the bat.

Keep in mind that it’ll likely take some time to find a job in that field. Start shopping for one now and recognize that it won’t happen overnight. Good luck.

My parents purchased a whole life policy for me when I was 1. I’m not sure what to do with it. It has a cash value of about $4000 right now, a death benefit of $50,000 and an accidental death benefit rider of $40,000, with a guaranteed purchase option of $10,000 every three years. The current premium is $200 per year. This past year it earned 6% (before cost of insurance was taken out) and is guaranteed to earn 4%. The current premium is $200.

I currently don’t have a term life insurance policy, but will be purchasing one in the next couple of months. I’m not sure if I should cash this out, keep paying, or stop paying and keeping the insurance until the cash value runs out.
- Adam

You need to evaluate whether this policy is worthwhile as it stands right now. It may or may not be, but there’s not enough information in this letter to know.

First of all, are you engaged in any occupations or hobbies that might violate the accidental death benefit rider? In other words, are you doing anything that causes an elevated risk of accidental death? If so, the company may refuse to pay the rider, making your policy only worth $50,000 if you die. If not, it’s worth $90,000.

Then, get some quotes on term insurance for whatever that amount is. Be honest when getting the quotes. See how much your premium would be for a term policy matching the value of your whole life policy.

Once you have that quote, see how much more you’re paying for the whole life policy compared to the term. Is that difference worth the investment benefit you’re getting at this point? Or would it be better to cash out that investment and put it elsewhere?

I saw a horrible message about you on [link to messageboard removed]. Somebody certainly has an axe to grind! Why don’t you go there and defend yourself?
- Kelly

Honestly, I don’t really care.

There are a lot of people out there who use the anonymity of internet messageboards to blow off steam. I run a website that has hundreds of thousands of readers. It’s not surprising at all to me that some of those people blow off steam in my direction. If I spent my time worrying about it, I’d worry about nothing else.

Yes, sometimes in doing that, I overlook actual legitimate issues and complaints. It’s a tradeoff, but it’s a tradeoff that needs to happen to maintain some degree of sanity and personal happiness.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag. However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

Continue reading Reader Mailbag: Vehicle Shopping …

From The Simple Dollar.

Headline roundup on credit card changes

Here’s a few more weekend headlines on the credit card law changes that take effect Monday:

• MonroeNews – Credit card confusion and Key terms of new card law
• CNN – Banks nervously await new credit card law
• Michelle Singletary / The Color of Money – Beware of loopholes in new credit card law

Continue reading Headline roundup on credit card changes …

From Monroe on a Budget.

Making banking easier for those on tight budgets

If you think you don’t have enough cash flow to justify opening a bank or credit union account, it’s time take another look at what your options are.

I’ve found several options for free or low-cost accounts for my local readers in Monroe, Mich., and now here’s a national article on the topic. CNNMoney has this report: Banks and consumer groups target consumer savings.

A snippet:

16 major banks have recently lowered minimum balances on savings accounts, making it easier for people to save without having to worry about getting socked with low balance fees. US Bank has no minimum savings account balance, while Regions has a $5 balance and Bank of America has a $25 minimum balance.

Continue reading Making banking easier for those on tight budgets …

From Monroe on a Budget.

Personal Finance 101: Getting Started with Banking

We all did it at the beginning of our financial lives. We grew up. We moved out. We opened accounts at a bank on our own, quite often a different bank than the one used by our parents.

And we had to figure it out. How should we pick a bank? How do we move the money over? What should we put in our checking account? Our savings account? What are these CD things?

Michael writes in:

I’m a student, just trying to firm up my financial situation after having read your blog. For the last several years, I’ve used Washington Mutual largely because my parents had an account there but since being taken over by Chase, customer service has gone downhill, and the interest rate on my savings account is ridiculously low.

I’m looking at having an interest-bearing checking account and a savings account at different banks, to maximize my savings. However, how easy is it to transfer money from an account at one bank to one at another? Also, I’ve seen money market accounts, savings accounts, and no penalty CDs? What’s the difference, and how would you allocate money between them?

My first comment would be that I would value customer service strongly at the bank where I held my checking account, but view it as more of a secondary factor at the bank where I held my savings account. The bank with the checking account will handle the vast majority of your transactions for you, while the savings account bank will just handle a small number. So, when you evaluate your checking account bank, ask around and Google for information on their customer service.

Transferring Money Between Accounts
How does transferring money between accounts at different banks work? If a bank features online banking, it’s usually just as easy as logging on and requesting such a transfer. Most likely, if you’re seeking a high-interest savings account, you’ll be getting an account that’s managed primarily online, as most of the best interest rates are offered by online banks such as ING Direct, HSBC Direct, and so on.

In those cases, the online account is often “linked” to your checking account. That means you record the information about your checking account (the account number and the bank’s routing number, which you can get from them upon request or often simply from their website or from Google. Once that’s set up, you will be able to initiate transactions either way – both from checking to savings and from savings to checking – with just a few mouse clicks.

Such transactions are done electronically and usually take around two business days to complete.

Choices for Savings
Michael also wondered about several different options for saving his money. Let’s look at them.

Savings accounts are the default choice. Savings accounts allow you to deposit money as you please and withdraw money up to six times a month. Savings accounts usually have a fixed rate of return that doesn’t change all that often. Usually, high interest savings accounts change their rates whenever the Federal Reserve changes rates, so if you hear about Ben Bernanke on the news, pay attention to your rates.

Money market accounts sometimes offer a higher rate of return than straight savings accounts, but the rate of return on a money market account is variable and is quite often not as high as the online offerings. It changes based on the state of the money market – to put it simply, the money you put into that account is invested by the bank in highly secure government investments. Those investments change rates regularly (based on what the government is offering at a given time, which is usually related to the demand of the market) and thus the rates you get in the account go up and down. On (extremely) rare occasions, money markets will return nothing at all or just a tiny, tiny fraction of a percent – at other times, they’ll blow savings accounts away. Most of the positive legacy of money market accounts comes from the early 1980s, when they returned money hand over fist because treasuries had absurdly high rates of return.

CDs are much like savings accounts, except they have a higher rate of return. The big difference is that you can’t actually touch the money you’re saving during the life of the CD. So, if you picked up a one year CD with a sweet interest rate that’s much higher than your savings or money market options, you wouldn’t be able to touch that money for a year without a stiff penalty. The “no fee” part you mention is something that’s offered by a lot of banks today – the days of charging fees to buy a CD are rolling into the past.

Splitting Up the Money
So what should Michael do?

In my experience, money market accounts and online savings accounts are usually very comparable. If anything, I’ve consistently seen online savings accounts offer a slightly larger return over the years I’ve been following them, but money market accounts at your local bank will likely trounce their savings account rates.

When compared rates between maoney market accounts and online savings accounts are close (say, within half a percent or so), I generally stick with banks that have a good customer service reputation, but I don’t view it as being as important as it is with my primary bank that holds my checking account and handles most of my transactions. Rate-hopping (or rate arbitrage, as some call it) isn’t worth the effort, in my opinion, unless you’re moving around high five-figure or six-figure amounts, in which case I wouldn’t have a large portion of that in a savings account.

What about CDs? CDs can be a really great way to tack on a bit more return for your savings, but it’s often easy to get caught up in CDs and put more of your savings into it than you should. I would make sure that I had a healthy emergency fund in my cash savings (a savings account or a money market account). If you’re single, this would probably be about two months’ worth of living expenses. The ability to just grab cash when you need it to deal with an emergency is vital.

The big question I’d ask myself is why I would want to put money in CDs. This goes beyond just earning a higher rate of return – if you just want that, put the money in a CD that will mature within a year and keep recycling it (unless you have a year or more worth of living expenses in your savings account, then you can shoot for longer ones). Are you saving for a particular goal? When do you expect that goal to come to fruition? If you have a goal in mind, buy the highest rate CD that matures before that goal.

Of course, if you’re finding that you want to get more aggressive with saving for goals, you can begin to look into index funds… but that’s another story entirely.

Good luck, Michael.

Continue reading Personal Finance 101: Getting Started with Banking …

From The Simple Dollar.

Personal Finance 101: Getting Started with Banking

We all did it at the beginning of our financial lives. We grew up. We moved out. We opened accounts at a bank on our own, quite often a different bank than the one used by our parents.

And we had to figure it out. How should we pick a bank? How do we move the money over? What should we put in our checking account? Our savings account? What are these CD things?

Michael writes in:

I’m a student, just trying to firm up my financial situation after having read your blog. For the last several years, I’ve used Washington Mutual largely because my parents had an account there but since being taken over by Chase, customer service has gone downhill, and the interest rate on my savings account is ridiculously low.

I’m looking at having an interest-bearing checking account and a savings account at different banks, to maximize my savings. However, how easy is it to transfer money from an account at one bank to one at another? Also, I’ve seen money market accounts, savings accounts, and no penalty CDs? What’s the difference, and how would you allocate money between them?

My first comment would be that I would value customer service strongly at the bank where I held my checking account, but view it as more of a secondary factor at the bank where I held my savings account. The bank with the checking account will handle the vast majority of your transactions for you, while the savings account bank will just handle a small number. So, when you evaluate your checking account bank, ask around and Google for information on their customer service.

Transferring Money Between Accounts
How does transferring money between accounts at different banks work? If a bank features online banking, it’s usually just as easy as logging on and requesting such a transfer. Most likely, if you’re seeking a high-interest savings account, you’ll be getting an account that’s managed primarily online, as most of the best interest rates are offered by online banks such as ING Direct, HSBC Direct, and so on.

In those cases, the online account is often “linked” to your checking account. That means you record the information about your checking account (the account number and the bank’s routing number, which you can get from them upon request or often simply from their website or from Google. Once that’s set up, you will be able to initiate transactions either way – both from checking to savings and from savings to checking – with just a few mouse clicks.

Such transactions are done electronically and usually take around two business days to complete.

Choices for Savings
Michael also wondered about several different options for saving his money. Let’s look at them.

Savings accounts are the default choice. Savings accounts allow you to deposit money as you please and withdraw money up to six times a month. Savings accounts usually have a fixed rate of return that doesn’t change all that often. Usually, high interest savings accounts change their rates whenever the Federal Reserve changes rates, so if you hear about Ben Bernanke on the news, pay attention to your rates.

Money market accounts sometimes offer a higher rate of return than straight savings accounts, but the rate of return on a money market account is variable and is quite often not as high as the online offerings. It changes based on the state of the money market – to put it simply, the money you put into that account is invested by the bank in highly secure government investments. Those investments change rates regularly (based on what the government is offering at a given time, which is usually related to the demand of the market) and thus the rates you get in the account go up and down. On (extremely) rare occasions, money markets will return nothing at all or just a tiny, tiny fraction of a percent – at other times, they’ll blow savings accounts away. Most of the positive legacy of money market accounts comes from the early 1980s, when they returned money hand over fist because treasuries had absurdly high rates of return.

CDs are much like savings accounts, except they have a higher rate of return. The big difference is that you can’t actually touch the money you’re saving during the life of the CD. So, if you picked up a one year CD with a sweet interest rate that’s much higher than your savings or money market options, you wouldn’t be able to touch that money for a year without a stiff penalty. The “no fee” part you mention is something that’s offered by a lot of banks today – the days of charging fees to buy a CD are rolling into the past.

Splitting Up the Money
So what should Michael do?

In my experience, money market accounts and online savings accounts are usually very comparable. If anything, I’ve consistently seen online savings accounts offer a slightly larger return over the years I’ve been following them, but money market accounts at your local bank will likely trounce their savings account rates.

When compared rates between maoney market accounts and online savings accounts are close (say, within half a percent or so), I generally stick with banks that have a good customer service reputation, but I don’t view it as being as important as it is with my primary bank that holds my checking account and handles most of my transactions. Rate-hopping (or rate arbitrage, as some call it) isn’t worth the effort, in my opinion, unless you’re moving around high five-figure or six-figure amounts, in which case I wouldn’t have a large portion of that in a savings account.

What about CDs? CDs can be a really great way to tack on a bit more return for your savings, but it’s often easy to get caught up in CDs and put more of your savings into it than you should. I would make sure that I had a healthy emergency fund in my cash savings (a savings account or a money market account). If you’re single, this would probably be about two months’ worth of living expenses. The ability to just grab cash when you need it to deal with an emergency is vital.

The big question I’d ask myself is why I would want to put money in CDs. This goes beyond just earning a higher rate of return – if you just want that, put the money in a CD that will mature within a year and keep recycling it (unless you have a year or more worth of living expenses in your savings account, then you can shoot for longer ones). Are you saving for a particular goal? When do you expect that goal to come to fruition? If you have a goal in mind, buy the highest rate CD that matures before that goal.

Of course, if you’re finding that you want to get more aggressive with saving for goals, you can begin to look into index funds… but that’s another story entirely.

Good luck, Michael.

Continue reading Personal Finance 101: Getting Started with Banking …

From The Simple Dollar.

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