Investing Curiouscatblog

Category: Financial Literacy

  • FDIC Limit Raised to $250,000

    The FDIC limit has been raised to $250,000 which is a good thing. The increased limit is only a temporary measure (through Dec 31, 2009) but hopefully it will be extended before it expires. I don’t see anything magical about $250,000 but something like $200,000 (or more) seems reasonable to me. The coverage level was increased to $100,000 in 1980.

    What does federal deposit insurance cover?
    FDIC insurance covers funds in deposit accounts, including checking and savings accounts, money market deposit accounts and certificates of deposit (CDs). FDIC insurance does not, however, cover other financial products and services that insured banks may offer, such as stocks, bonds, mutual fund shares, life insurance policies, annuities or municipal securities.

    Joint accounts are covered for $250,000 per co-owner. The limit is per person, per institution, so all your accounts at one institution are added together. If you have $200,000 in CDs and $100,000 in savings you would have $50,000 that is not covered.

    FDIC is an excellent example of good government in action. The Federal Deposit Insurance Corporation (FDIC) was created in 1933 and serves to stabilize banking by eliminating the need to get ahead of any panic about whether the bank you have funds in is in trouble (which then leads to people creating a run on the bank…)

    From an FDIC September 25 2008 news release: the current FDIC balance is $45 billion (that is after a decrease of $7.6 billion in the second quarter). The FDIC is 100% paid for by fees on banks. The FDIC can raise the fees charged banks if the insurance fund needs to get increased funds.
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  • Leverage, Complex Deals and Mania

    Anyone involved in finance should understand mania in the markets. It is not a shock that financial markets do irrational things. They do so very frequently. Anyone who has not read, Manias, Panics, and Crashes: A History of Financial Crises, should do so. Leverage often is a catalyst that turns bad investments into panics that damage the economy. A previous post on this topic: Misuse of Statistics – Mania in Financial Markets.

    Enron was the pit canary, but its death went unheeded

    Just as Enron packaged bad investments into a private equity fund run by its chief financial officer, Wall Street packaged mortgages given to people who couldn’t afford the payments into sleek new instruments called RMBS and CDOs. But Enron’s machinations couldn’t make the losses go away, and Wall Street’s shiny acronyms can’t turn a defaulted mortgage into good money.

    As for the lessons we’ve forgotten, how about this one: financial statements aren’t supposed to be fairytales.
    …
    when all was booming, Wall Streeters said they deserved their pay because the market said they were worth it. But now things are falling apart, they say the market doesn’t work, and we need to stop short-selling, and taxpayers need to pony up. If there is a tiny bit of good in all this, it’s that Wall Street, although it was complicit in the Enron mess, managed to walk away relatively unscathed. This time, Wall Street has brought itself down.

    I think the odds that Wall Street has brought itself down is very low. Even that the ludicrous excesses of Wall Street are at risk is very unlikely. Perhaps for a few years their might be some restraints put on excesses. But most likely politicians will respond to huge payments by arranging favors for those that want to bring excesses back. If this can be prevented that would be great, but I doubt it will.

    Related: Investing books – Tilting at Ludicrous CEO Pay – Losses Covered Up to Protect Bonuses

  • 3 Month Treasury Bill Yield Reached .03%

    On Wednesday of last week the United States 3 month treasury bill yield reached .03%, yet another remarkable chart from the current crisis.

    chart of 3 month treasury bill yield

    via: No one wants to hold risk … – “I guess this is what a close to systemic financial crisis in the US looks like”

    Daily Treasury Yield Rates show that the rate for Friday the 12th of September 1.49%, Monday the 15th 1.02%, Tuesday .84%, Wednesday .03%, Thursday .23% and Friday .99%.

    Related: Corporate and Government Bond Yields – Curious Cat Investing and Economics Search – Credit Crisis Continues (April 2008)

  • Jumbo v. Regular Fixed Mortgage Rates: by Credit Score

    Example 30 year mortgage rates (from myfico.com – see site for current rate estimates). Previous posts on this topic: Feb 2008 – August 2007 – May 2007. Since the last post both jumbo and conforming mortgages rates are up (and are up most for high credit scores).

    FICO score APR Aug 2008 APR Aug 2008 – jumbo APR Feb 2008 APR Feb 2008 – jumbo APR Aug 2007 APR May 2007
    760-850 6.12% 7.00% 5.53% 6.61% 6.27% 5.86%
    700-759 6.34% 7.22% 5.75% 6.83% 6.49% 6.08%
    660-699 6.62% 7.50% 6.04% 7.12% 6.77% 6.37%
    620-659 7.43% 8.31% 6.85% 7.93% 7.58% 7.18%
    580-619 9.45% 9.63% 9.22% 9.40% 9.32% 8.82%
    500-579 10.31% 10.49% 10.20% 10.37% 10.31% 9.68%

    For scores above 620, the APRs above assume a mortgage with 1.0 points and 80% Loan-to-Value Ratio. For scores below 620, these APRs assume a mortgage with 0 points and 60 to 80% Loan-to-Value Ratio.

    Since February the premium for jumbo loans has decreased to 88 basis points (from 108) for all credit scores above 620 (the combination of higher down payment and higher regular interest rates below 620 result in very little premium from Jumbo loans, under 20 basis points.

    Related: 30 Year Fixed Rate Mortgage Rate Data – Learning About Mortgages – How Much Worse Can the Mortgage Crisis Get? – Real Free Credit Report (in USA)

  • Salaries with a College Degree

    The Declining Value Of Your College Degree by Greg Ip:

    A degree, she says, “isn’t any big guarantee of employment, it’s a basic requirement, a step you have to take to even be considered for many professional jobs.”

    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.
    …
    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?

    Are You Financially Literate? Do this Simple Test to Find Out by Annamaria Lusardi.

    1) Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?
    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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  • Student Credit Cards

    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

    Universities and their alumni associations have discovered an unlikely and disturbing source of revenue: Increasingly, they are selling students’ personal information to big credit-card companies eager for young customers.

    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.
    …
    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

    Many Retirees Face Prospect of Outliving Savings, Study Says

    Nearly three out of five middle-class retirees will probably run out of money if they maintain their pre-retirement lifestyles, a new study from Ernst & Young has concluded.
    …
    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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  • 2nd Largest Bank Failure in USA History

    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:

    The Office of Thrift Supervision in Washington, the chief regulator of IndyMac, said it transferred control of the $32-billion bank to the Federal Deposit Insurance Corp. Branches will be closed over the weekend, but the FDIC will reopen the bank Monday as IndyMac Federal Bank, the OTS said.

    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

    Principal and interest on insured accounts, through July 11, 2008, are fully insured by the FDIC, up to the insurance limit of $100,000. You will receive full payment for your insured account. Certain entitlements and different types of accounts can be insured for more than the $100,000 limit. IRA funds are insured separately from other types of accounts, up to a $250,000 limit.

    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

  • Save Some of Each Raise

    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