Investing Curiouscatblog

Tag: Financial Literacy

  • Picking the Right Bank Can Eliminate ATM Fees

    Unfortunately large banks have a very strong tendency to try to take as much of your money as they can get away with. Rather than having to stay ultra-vigilante (as though I am in business with a thief that I have to watch ever minute or expect my money to be stolen) I would rather pick those I going into business with to avoid those seeking to rip me off. Credit unions are usually the best bet. Some credit unions join nationwide ATM networks, so if ATMs are important to you check this out before selecting a credit union.

    Hate ATM fees? Try these fee-friendly banks

    In fact, if you frequent an out-of-network ATM once a week, you could end up paying more than $200 in ATM fees a year.

    If you’re looking to avoid those fees, Ally, Charles Schwab (SCHW, Fortune 500) and USAA not only let all of their customers use out of network ATMs free of charge, but they also refund the fees that their customers are charged by other banks. State Farm Bank doesn’t charge you for going out of network and reimburses fees of up to $10 charged by other banks.

    In general, the best advice is to avoid large banks like you would someone with a dangerous communicable disease.

    BankSimple is a very promising new offering from Alex Payne, one of Twitter’s first employees and CTO of BankSimple, that promises “to simply put people first. Real customer service, no surprise fees, and a deep desire to help people is what makes BankSimple different.” Now the large banks are perfectly comfortable saying they try to help while trying to find any way possible to trick customers out of money. So Banksimple’s words don’t mean much. but I think there is a real chance they will be different. It is a great market to be in, huge amounts of money to be made and your competitors all treat customers egregiously poorly. That should give you a great opportunity to gain a huge market share.

    They are not yet open for business but it might open in early 2011. They are not actually going to be a bank, but instead provide the customer value and partner with existing banks (so we can deal with someone that isn’t trying to rip us off and they can let some bank deal with the administration of managing the money.

    Related: Worst Business Practices: Fees to Pay Your Bills – Credit Card Regulation Has Reduced Abuse By Banks – FDIC Study of Bank Overdraft Fees – Sneaky Fees

  • Avoiding Withdrawing Retirement Savings Starts Early

    In the USA we fail to save nearly enough for retirement by and large. And fail to save emergency funds or prepare for economically difficult times. We by and large chose to spend today and hope tomorrow will be good rather than first establishing a good financial safety net before expanding spending.

    When people are debating withdrawing from their retirement account it is actually not the important decision it seems to be (normally). Normally the important decision was years before when they chose to take on consumer debt and not to build up an emergency fund. And when they failed to just build up saving beyond that which could be used for nice vacations, a new car, or to live on in economically challenging times.

    If someone had been saving 15% of their salary in retirement since they started working if they took an amount that left them at 10% that is hardly a horrible result. While someone that was already behind by say adding just 3% to retirement savings and they took out all of it that would be much worse.

    And we should remember even having a retirement account to withdraw from might put you ahead of nearly 50% of the population (and our state and federal governments, by the way). If you have to resort to withdrawing from your retirement account don’t think of that as the failure. The failure was most likely the lack of savings for years prior to that. And as soon as possible, re-fund your retirement account and build up a strong emergency fund, even if that means passing spending on things you want.

    Related: Retirement Savings Allocation for 2010 – 401(k)s are a Great Way to Save for Retirement – Save Some of Each Raise

  • Selling Covered Call Options

    Options strike most as exotic investment transactions. And some option strategies can be risky. But stock options can also be used in ways that are not risky. Call options give you the right to buy a stock at a certain price (the strike price) on, or before, a certain date (the expiration date). So if you want to speculate that a stock will go up in a short period of time you can buy call options. This is a risky investment strategy – though it can pay off well if you speculate correctly.

    Someone has to sell the call option. The seller gives the buyer the right to buy a stock at a certain price by a certain date. A speculator can do this and take the risk that the price will not rise to the level where a person chooses to exerciser their option. The also carries a significant risk, as if the stock price rises the speculator that sold the option has to either buy the option back (at a significant cost) or provide the stock (which they would have to purchase on the market). In order to trade in options you must be approved by the broker (at least in the USA) as an investor with the knowledge, finances and goals for which options trading is appropriate.

    An investor can also sell an option to buy a stock they own – this is called selling a covered call option. This means you get the price the speculator is willing to pay to buy the option and may have to sell the stock you own if the person holding the option chooses to exercise it.

    Lets look at an example. Lets say you own some Amazon stock. (more…)

  • 401(k) Options – Seek Low Expenses

    401(k), IRAs and 403(b) retirement accounts are a very smart way to invest in your future. The tax deferral is a huge benefit. And with Roth IRAs and Roth 401(k)s you can even get tax exempt distributions when you retire – which is a huge benefit. Especially if you don’t retire before the bill for all the delayed taxes of the last 20 years starts to be paid. The supposed “tax cuts” that merely shifted taxes from those spending money the last 10 years to those that have to pay for all the stuff the government spent on them has to be paid for. And that will likely happen with higher tax rates courtesy of the last 10 years of not paying the taxes to pay for what the government was spending.

    When looking at your 401(k) and 403(b) investment options be sure to pay close attention to expenses for the funds. Some fund families try to get people to investing in high expense funds, that are nearly identical to low expense funds. The investor losses big and the fund companies take big profits. Those people serving on the boards of those funds should be fired. They obviously are not managing with the investors interests at heart (as they are obligated to do – they are suppose to represent the investors in the funds not the friends they have making money off the investors).

    Here is an example (that I ran across last week) expense differences for funds that have essentially identical investment objectives and plans in the same retirement plan options: .39% (a respectable rate, though more than it really should be) for [seeks a favorable long-term rate of return from a diversified portfolio selected to track the overall market for common stocks publicly traded in the U.S., as represented by a broad stock market index.], .86% [for “The account seeks a favorable long-term total return, mainly from capital appreciation, by investing primarily in a portfolio of equity securities selected to track the overall U.S. equity markets based on a market index.”]. Do not rely on your fund provider to have your interests at heart (and unfortunately many companies don’t seek the best investment options for their employees either).

    The .47% added expense isn’t much to miss for 1 year. However, over the life of your retirement account, this is tens of thousands of dollars you will lose just with this one mistake. Personal financial literacy is an easy way to make yourself large amounts of money over the long term. It isn’t very sexy to get .47% extra every year but it is extremely rewarding.

    $200,000 at 6% for 25 years grows to $858,000
    $200,000 at 6.47% for 25 years grows to $958,000

    So in this case, $100,000 for you, instead of just paying the fund company a bit extra every year to let them add to their McMansions. In reality it will be much more than a $100,000 mistake for you if you save enough for retirement. But if you save far too little (as most people do) one advantage is the mistake will be less costly because your low retirement account value reduces the loss you will take.

    Related: 401(k)s are a Great Way to Save for Retirement – Retirement Savings Allocation for 2010 – Many Retirees Face Prospect of Outliving Savings
    (more…)

  • Greenspan Says Congress Should Let Tax Cuts Expire

    Alan Greenspan made several huge errors while chairman of the Federal Reserve. Failing to deal with the massive risk taking and fraud by the member banks of the Federal Reserve was one. And supporting tax cuts for a country that was hugely in debt (while current deficits were still huge was another. Yes anyone can claim (and he did) future surpluses, but there had yet to be a single year of surplus, and obviously we would have been in deficit even before the tax cuts put us much much further in debt, history has shown .

    But Greenspan said government estimates project more than enough surplus funds to pay off the debt and reduce taxes too.

    That is either amazingly bad economic forecasting or a lie. My guess is he knew this wasn’t true. Which would make it a lie. If he really was that out of touch with economic reality, we have to question why we ever thought he had insight into the economy.

    Greenspan Says Congress Should Let Tax Cuts Expire

    WOODRUFF: On those tax cuts, they are due to expire at the end of this year. Should they be extended? What should Congress do?

    GREENSPAN: I should say they should follow the law and let them lapse.

    WOODRUFF: Meaning what happens?

    GREENSPAN: Taxes go up. The problem is, unless we start to come to grips with this long-term outlook, we are going to have major problems. I think we misunderstand the momentum of this deficit going forward.

    Related: Estate Tax Repeal (2006) – Charge My Government to My Kids (2007) – USA Federal Debt Now $516,348 Per Household

    Accepting that, I don’t agree with those that vilify his performance. He was Fed chairman from 1987-2006. He made some very bad decisions that cost people dearly. But it isn’t very surprising someone in such power for so long would make some very bad and costly decisions. My guess is he caved to pressure from political allies that reminded him how the current President Bush’s father blamed Greenspan’s decisions for his losing the Presidency. And so Greenspan was trying to do what he could to do what the then President Bush wanted. Not a very honorable explanation but people often do not make the most honorable choices.

    In 2003 he publicly disagreed with the wisdom of additional cuts:

    Alan Greenspan, the Federal Reserve chairman, today rebutted many of President Bush’s arguments in favor of big new tax cuts, saying that the economy probably does not need any short-term stimulus and warning that budget deficits could spiral out of control.

    Politicians, eager to give favors, at the expense of the future, went ahead and passed more tax cuts – weakening the country for their (and their political allies) short term benefit.

    Related: Estate Tax Repeal (2006) – Charge My Government to My Kids (2007) – USA Federal Debt Now $516,348 Per Household

    Greenspan’s thoughts on the economy, from his July 16th 2010 interview:
    (more…)

  • Have We Lost Our Capitalist Heritage?

    I read various things stating that the USA is behaving in socialist (or similar ways). And there are often attempts to state that what the writer desires is capitalism and what they don’t like is an attack on motherhood, apple pie and capitalism.

    I’m not sure when or where those writers would say capitalism did exist. It is true we have corporations using their power (political power and market power [oligopolies, monopolies]) to serve their interests. This would not surprise Adam Smith at all, from the Wealth of Nations:

    People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise the prices/

    He knew that is what they would attempt to do and said they had to be regulated to allow capitalism to function (but many that say they want capitalism don’t want any regulation of the sort they don’t want). Some seem to agree that some regulation is needed but any regulation they don’t want is seen as “socialist” or “anti-capitalist” or… At least the Libertarians are very consistent about practically no regulation – I question that being capitalism, but at least I understand their position.

    Maybe the amount of direct cash payments and sheer amount of not very indirect subsidies (free money from the Fed, huge government contracts to political friends, tax breaks for big contributors [hedge fund managers, corporations using offshore tax havens…], quotas to aid political contributors) have been very high recently. But those changes are more a matter of degree than a qualitative change from the few years before that and few year before that and so on.

    I am not sure if people are thinking back to the days when we had large trusts as “capitalism”? Some people equate “capitalism” with essentially no government (no FDA, no SEC, no DoD, no FDIC, no EPA…) – so then maybe the wild west or Afghanistan today is capitalism. I don’t. I would say that we have been become less interested in maintaining a free market (allowing oligopolies and monopolies to exist and distort markets) and an excessive amount of letting those with gold pay politicians to get special deals lately (the last 20-30 years). But it is really just a matter of being worse in those areas not some huge qualitative change.

    We broke up trusts for awhile but lately have been supporting those with lots of clout using the clout to prevent competition.

    Of course perfect competition is not really reasonable to expect in many markets in the real world. But the aim of shooting toward open and competitive markets is just not something we seem to have paid much attention to for decades. I’m not sure when we did. And paying attention to sensible things like externalities is still very weak. Even in the trust busting era the actions (to move toward a more capitalist economy where markets could function more freely) were fought by many. And while the efforts made a huge difference, it isn’t as though they went to anything close to perfect competition.

    Countries like Hong Kong (questionably a “country”) and Singapore do lots of things that are nice capitalistic practices. But they have plenty of practices that are not very capitalistic. I’m not really sure what paragons of Capitalism those that appose regulating markets suggest as better models than the USA. Perhaps they believe the USA is the most capitalistic but it is still not capitalistic enough. A perfectly reasonable positions, I would think, but I am not sure if that is their belief or not.

    Related: Ignorance of Capitalism – USA Spent $2.2 Trillion, 16.2% of GDP, on Health Care in 2007

  • You Can Help Reduce Extreme Poverty

    The Life You can Save

    But extreme poverty is not only having unsatisfied material needs…
    You have a pervading sense of shame and failure because you cannot provide for your children. Your poverty traps you and you lose hope of ever escaping from a life of hard work for which, at the end, you will have nothing to show beyond bare survival.
    The number of people currently living in such conditions is 1.4 billion. This is bad, but not as bad as things were in 1981, when there were 1.9 billion people living in extreme poverty. That was about 4 in every 10 people in the world, whereas now fewer than 1 in 4 are extremely poor.
    …
    UNICEF, the United Nations International Children’s Emergency Fund, estimates that about 24,000 children die every day from preventable, poverty-related causes.

    Personal finance is not just about living within a budget and making sensible steps to make safe financial decisions (safe investment portfolio, proper insurance, adequate savings, emergency fund) it is also about using your finances appropriately for you. I believe strongly in helping those that have not been as lucky to have the opportunities I have economically.

    Some of my favorite ways to help reduce extreme poverty are Trickle Up, Kiva and using Global Giving to find small organizations (like the Anupshahar’s Girls School, Build Women’s Fair Trade Businesses, Profit for Poor Farmers, and Vegetable Gardens for India). I encourage you to join me: let me know if you contribute to Kiva and I will add your Kiva page to our list of Curious Cat Kivans. Also join the Curious Cats Kiva Lending Team (I am happy to say we have made over $7,500 in loans so far).

    If you like that webcast you will like The Girl Effect.

    Related: Creating a World Without Poverty – Financial Thanksgiving – 100th Micro Finance Entrepreneur Loan (I am not over 200) – 2006 Nobel Peace Prize to Founder of Micro-finance Bank – High School Team Project to Provide Clean Water

  • Personal Finance Basics: Avoid Debt

    image of Droid Incredible cell phone

    Many aspects of personal finance can get a bit confusing or require some study to understand. But really much of it isn’t very complicated. Debt is often toxic to personal financial success. The simple step you can take to avoid the problems many face is to just not buy things until you save up for them. If you want some new shoes or new Droid Incredible or to go see a football game (American or World Cup style) that is fine. Just save up the money and then spend it.

    If you limit your borrowing you will get ahead financially. I think borrowing for a home is fine (I suggest saving up a 20% down-payment – or at least 10%, and many banks are again requiring this sensible step). And don’t overextend yourself – borrow what you can comfortably afford – even if you run into financial difficulty. It might be likely you earn more 5 years from now, but it is certainly possible you will earn less. Remember that.

    Borrowing for school is fine but be careful. Huge education debts are a large burden. Don’t ignore this factor when selecting a school. And don’t fall prey to the for-profit education scams that have become very prevalent. I would be very very skeptical of any for profit educational institution and would much prefer long term public or private institutions with long term success (colleges, universities and community colleges). Technical training can be very good but you have to be very careful to not be taken advantage of.

    Borrowing for a car is ok, but I would avoid it if possible. And other than that I would avoid debt, if at all possible. If you want a big expensive wedding, fine, save up the money. If you want a vacation to East Africa, great, save up the money. If you want the latest, new tech gadget, great save up the money first.

    And saving up for your emergency fund (if it isn’t fully funded already) and for retirement should be right after food, shelter, health and disability insurance and any debt you already have to be paying back. After you have committed money to your emergency fund and retirement then choose what to do with your remaining discretionary income. It is critical to have built up an emergency fund so if you have any emergency you can tap that without going into debt and digging yourself a personal financial hole you have to dig out of.

    Personal financial success is not some get rich quick scheme or magic. Success is Achieved by doing some really simple things well. It is not complicated but that isn’t the same thing as easy. Showing restraint is not what we are urged to do by the marketers. So while not buying what you can’t afford is not exactly an amazing insight, hundreds of millions of people (in the USA and Europe I know, and probably everywhere that consumer debt is easy to get) fail financially just because they refuse to follow this advice.

    Related: Avoid credit card debt – How to Protect Your Financial Health – Curious Cat personal finance basics – Can I Afford That?

  • Can Bankers Avoid Taking Responsibility Again?

    Banks continue to pay our politicians well to make sure they continue doling out special favors to the large banks. It is up to you, and your neighbors whether you hold politicians accountable for the actions they took to create the climate for the credit crisis and the huge favors granted (with your money) by politicians to those investment bankers. The bankers count on their money buying the politicians. I would have to say they are smart to believe that, though there is a small chance the invulnerability they feel is possible to pierce with enough foolish moves by the bankers and their friends (but in order for that to happen people would have to actually vote to elect ethical, intelligent and patriotic politicians instead of those who play the public for fools). I would put my money on the public again using their votes to elect those that will enrich special interests that pay the politicians at the expense of the country.

    Banks Say No. Too Bad Taxpayers Can’t

    Fannie and Freddie helped grease the nation’s housing machinery before and during the boom years, scooping up loans from all corners of the country. The more of these that Fannie and Freddie bought, the easier it was for banks to write new mortgages.

    To protect themselves from getting piles of garbage loans shoveled their way when they buy mortgages, Fannie and Freddie require lenders or loan servicers to sign contracts requiring those firms to repurchase loans that don’t meet certain standards relating to borrower incomes, job status or assets. Loans that were extended fraudulently, or deemed to have been predatory, are also candidates for buybacks.

    Surprise, surprise: banks don’t want to repurchase these loans. So when Fannie or Freddie identify problem mortgages and request repayment, a battle royal begins. Banks may argue, for example, that the repayment requests have flaws of their own.

    But for us as taxpayers, watching this battle from the sidelines, one growing concern is how aggressively Fannie and Freddie will pursue their requests. If banks refuse to buy back flawed loans, taxpayers will have to cover more of the losses.
    …
    According to March 31 figures from Freddie, for instance, the amount of problem loans that it has asked other firms to buy back stood at $4.8 billion — up 26 percent from $3.8 billion just three months earlier.
    …
    Banks have been unwilling to mark all of the bad loans they have and mortgage securities they hold to their true values because that would require a loss,” said Kurt Eggert, a professor at the Chapman University School of Law. “But this is about banks trying to avoid losses and having the taxpayers absorb them.”
    …
    Michael Cosgrove, a Freddie spokesman, said that the company is aggressive about enforcing its right to recover on questionable loans because it has a duty to be a good steward of taxpayer dollars. “These reviews are more important than ever; there is no reason why taxpayers should pay for decisions that led to the sale of bad loans to Freddie Mac,” he said.

    $4.8 billion? That seems amazingly low for all the fraudulent activity these banks are suppose to have engaged in. But so long as they can foist the problem loans into the taxpayers hands they can claim to deserve billions in bonuses for themselves. The staggering magnitude of the special favors bought by the bankers is amazing. The politicians have shown they are supporting their banking friends while saying a few tough words. And most likely the politicians and bankers will be celebrating another successful election this fall. If we want to change the outcome we can. But we don’t seem interested in doing so.

    Related: Paying Back Direct Cash from Taxpayers Does not Excuse Bank Misdeeds – The Best Way to Rob a Bank is as An Executive at One – Sabotaging Regulated Financial Markets Leads to Predictable Consequences – Congress Eases Bank Laws – 1999

  • Fiscal Irresponsibility Results from Financial Illiteracy

    Failing to pay for the deferred costs of current expenditures gets all those practicing credit card budget thinking in trouble. That includes lots of individuals. But it also includes many governments. They pay huge rewards to special interests and act like they think the cost doesn’t exist. Only an extremely financially illiterate society could elect so many of these people. We have not learned that in the modern financial economies financial illiteracy is a huge societal problem (along with scientific illiteracy).

    Padded Pensions Add to New York Fiscal Woes

    In Yonkers, more than 100 retired police officers and firefighters are collecting pensions greater than their pay when they were working. One of the youngest, Hugo Tassone, retired at 44 with a base pay of about $74,000 a year. His pension is now $101,333 a year.

    Such poor financial management by public sector organization (California is horrible also) are causing huge damage to those living in such poorly managed states.

    the cost of public pensions has been systemically underestimated nationwide for more than two decades, say some analysts. By these estimates, state and local officials have promised $5 trillion worth of benefits while thinking they were committing taxpayers to roughly half that amount.

    The use of public money for outsize retirement pay really stings when budgets don’t balance, teachers are being laid off, furloughs are being planned
    …
    Roughly one of every 250 retired public workers in New York is collecting a six-figure pension, and that group is expected to grow rapidly in coming years, based on the number of highly paid people in the pipeline.
    …
    Thirteen New York City police officers recently retired at age 40 with pensions above $100,000 a year; nine did so in their 30s.
    …
    Before Yonkers adopted a richer pension formula for police in 2000, for instance, it was told the maximum cost would be $1.3 million a year. But instead, the yearly cost is now $3.75 million and rising. David Simpson, a spokesman for the mayor of Yonkers, said pension cost projections were “often lowballs,” so the city could get stuck. “Once you give something, you can’t take it away,” he said.

    It isn’t complicated. So long as you elect people that are financial illiterate and only care about granting favors to special interests, not the consequences of doing so, you are setting yourself up for a great deal of pain once your credit card bill comes due.

    Related: NY State Raises Pension Age to Save $48 Billion – Charge It to My Kids – Bogle on the Retirement Crisis – Politicians Again Raising Taxes On Your Children