Investing Curiouscatblog

Tag: Personal finance

  • Medical Debt Increases as Economy Declines

    The health care system in the USA is broken, as I have written about previously: USA Paying More for Health Care, International Health Care System Performance… One of the many problems created by the current system is ruined person finances for millions of people in the USA due to health care costs. The Rising Costs of Care And a Failing Economy Drive More Americans Into Medical Debt

    New York’s Commonwealth Fund has reported that 72 million adults under age 65 had problems paying medical bills or were paying off medical debt in 2007, up from 58 million in 2005. Many had insurance, and 39 percent said they had exhausted their savings paying for health care.
    …
    Medical debt can quickly snowball. Consumers with unpaid bills can wind up in court defending themselves against lawsuits filed by doctors and hospitals, which typically charge the uninsured full price for care, without the hefty discounts negotiated by health plans. Debtors’ wages can be garnished, liens can be placed on their homes, and their future job and housing prospects torpedoed by bad credit ratings.
    …
    Unwilling to wait for federal action, a handful of states, most notably Massachusetts, have passed laws designed to expand health coverage or to protect medical debtors. An Illinois law passed last year caps rates that hospitals can charge the uninsured, while a New York statute bars foreclosures intended to pay off medical bills.

    Purchasing health insurance against the risk of medical costs is critical to any financial plan. The concept (buying health insurance) is simple but securing that coverage is not as easy as knowing it is required for a sensible financial plan.

    Related: Broken Health Care System: Self-Employed Insurance – Resources Focused on Improving the Health Care System – Excessive Health Care Costs

  • Consumer Credit Falls By Record Amount in November

    Consumer Credit Falls By Record Amount in November

    The Federal Reserve reported yesterday that borrowing through credit cards and other consumer loans dropped $7.94 billion in November, the biggest decline in 65 years of record-keeping. That also was much larger than the $500 million decline economists expected, and left total consumer credit outstanding at $2.57 trillion.

    This is good news. People need to stop spending money they don’t have. I understand perfectly well this means that spending will go down (which will likely lead to reduced economic output – though technically it doesn’t have to, a reduction in imported goods could more than offset the reduced spending and GDP would not decline). Living beyond your means is not a good thing. We should hope that consumer debt continues to decrease. If that means we have some suffering today to pay for living beyond our means for years the “fix” is not to continue to live beyond our means. The “fix” is to accept the consequences of past behavior and build a more sustainable economy now for the future.

    Ideally this decrease can be someone gradual, abrupt changes in the economy often cause problems, but far too many economists and policy makers only care about today and the next 6 months. They have been living this way for decades. And it is not sustainable. Consumer debt levels in the USA are far too high. The UK has an even worse personal debt problem. They should come down. Reducing those levels is good for the individuals involved (they gain most of the benefit) and also for the health of the economy (though it does decrease the current economy a bit while making the foundation for future economy much stronger).
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  • FDIC Study of Bank Overdraft Fees

    According to the FDIC study of bank overdraft programs during 2007, 75% of banks automatically enrolled customers in automated overdraft programs (which charge high fees). By contrast, 95% of banks treated linked-account programs as opt-in programs, requiring that customers affirmatively request to have accounts link (which are normally do not charge customers high fees).

    Automated overdraft usage fees assessed by banks ranged from $10 to $38, and the median fee assessed was $27. About one-fourth of the surveyed banks (24.6 percent) also assessed additional fees on accounts that remained in negative balance status in the form of flat fees or interest charged on a percentage basis.
    Fees assessed for linked-account and overdraft LOC programs were typically lower than for automated overdraft programs. Almost half of the banks with linked-account programs (48.9 percent) reported charging no explicit fees for the service. The most common fee associated with linked-account programs was a transfer fee; where charged, the median transfer fee was $5.

    There really is no excuse (other than trying to gouge your “customers”) for these fee levels. Charging any money to just move money from a customers saving account to checking account is just making it obvious the bank doesn’t want to serve the bank wants to take money from you. The banks in the sample used by FDIC earned an estimated $1.97 billion in NSF-related fees in 2006, representing 74 percent of the $2.66 billion in service charges on deposit accounts reported by these banks.

    Consumer complaints about automated overdraft programs were received by 12.5 percent of banks that operated these programs, compared with consumer complaints from less than 1.0 percent of banks offering linked-account programs and 1.5 percent of banks offering overdraft LOC programs. Complaints about automated overdraft programs were more common for large institutions than for small institutions (21.7 percent versus 10.6 percent).

    A small fee when lending the customer money may be justified but the banks seem to just operate in order to have a big pool of people to catch them with big fees. The model seems to be if we get more “customers” we can catch more of them with one fee or another. It is not an honorable business model to try and catch your customers with huge fees for minor items.

    Make sure you have a free linked-account overdraft protection that will tap your saving account if your checking account falls below 0. If they don’t have such a free program, choose a bank or credit union that does. Also an overdraft line of credit might be wise. If the fee is more than $10, go somewhere where they are not so greedy. You also will owe interest on your borrowings (probably a ludicrously high interest rate).

    Related: Don’t Let the Credit Card Companies Play You for a Fool – 10 Things Your Bank Won’t Tell You – Hidden Credit Card Fees – FDIC Limit Raised to $250,000

  • Credit Card Companies Willing to Deal Over Debt

    I don’t believe you should carry credit card debt at all. See my tips on using credit cards effectively. And you should have an emergency fund to pay at least 6 months of expenses to tap before using credit card debt. But if you do have debt and you are in such a bad personal financial situation where you will not be able to pay back what you have borrowed this might be useful information: Credit Card Companies Willing to Deal Over Debt

    After helping to foster the explosive growth of consumer debt in recent years, credit card companies are realizing that some hard-pressed Americans will not be able to pay their bills as the economy deteriorates.

    So lenders and their collectors are rushing to round up what money they can before things get worse, even if that means forgiving part of some borrowers’ debts. Increasingly, they are stretching out payments and accepting dimes, if not pennies, on the dollar as payment in full.
    …
    Lenders are not being charitable. They are simply trying to protect themselves. Banks and card companies are bracing for a wave of defaults on credit card debt in early 2009, and they are vying with each other to get paid first.
    …
    Card companies will offer loan modifications only to people who meet certain criteria. Most customers must be delinquent for 90 days or longer. Other considerations include the borrower’s income, existing bank relationships and a credit record that suggests missing a payment is an exception rather than the rule.

    While a deal may help avoid credit card cancellation or bankruptcy, it will also lead to a sharp drop in the borrower’s credit score for as long as seven years, making it far more difficult and expensive to obtain new loans. The average consumer’s score will fall 70 to 130 points, on a scale where the strongest borrowers register 700 or more.

    This is only an option to minimize a big mistake that results in you finding your self in a very bad situation. The credit card companies are not charities or known for giving away money. They are only going to do this when they figure they won’t get the full amount they are owed and figure getting some is the best they can hope for.

    Related: Americans are Drowning in Debt – Families Shouldn’t Finance Everyday Purchases on Credit – Don’t Let the Credit Card Companies Play You for a Fool – Hidden Credit Card Fees

  • How Much Will I Need to Save for Retirement?

    Retirement Myths and Realities provides some ideas from former Boeing President, Henry Hebeler:

    Hebeler says all Americans should become self-educated about retirement issues, even if they have a financial planner.
    …
    My father used to tell me to save 10 percent of my wages all the time for retirement. And so I did. I never looked at any retirement plan; we didn’t have retirement planning tools in those days.
    …
    I think the number is closer to 15 (percent) to 20 percent — that’s from the time when you’re a relatively young person, say, 30 years old or something like that.
    …
    A retiree’s inflation rate is about 0.2 percent higher than the normal Consumer Price Index. When you retire, you have medical expenses that continually increase. You have more need for this service and the unit cost is increasing much faster than inflation.
    …
    Now, if you’re going to retire at 80 years old, you could actually have a bigger number than 4 percent. If you’re going to retire around 65 or so, 4 percent is not a bad number. Some people are now saying 3.5 percent instead of 4 percent. If you’re going to retire at 55, you’d better spend a lot less than 4 percent because you’ve got another 10 years of life that you’re going to have to support.

    He makes some interesting points. I agree it is very important for people to become financially literate and take the time to understand their retirement plans. Just hoping it will work out or trusting that just doing what someone told you are very bad ideas. You need to educate yourself and learn about financing your retirement.

    I am not really convinced by his idea that you need to start saving 15-20% for retirement at age 30. But that is a decision each person has to make for themselves. Of course there are many factors including how much risk you are willing to accept, when you plan on retiring, what standard of living you want in retirement…

    Related: How Much Retirement Income? – posts on retirement – Saving for Retirement – Our Only Hope: Retiring Later

  • Insurers Raise Fees on Variable Annuities

    More Insurers Raise Fees on Variable Annuities

    Many insurance companies radically underestimated the cost of hedging their guarantees in a market meltdown. Now that the markets have crashed, some investors will find they’re paying a lot more for the same product.

    As SmartMoney has reported, this is one way that annuities are failing to live up to their big promises. The guarantees attached to the products – minimum returns of 6% per year or better, market upside, no chance of loss and a lifetime income stream – were designed to attract people in retirement or close to it.

    And it worked, attracting $650 billion in assets in the last five years. But the guarantees are only as good as the insurance company’s ability to hedge them, and even when the markets were rising, some insurance company executives admitted their strategies hadn’t been tested by real-life crisis conditions. Now some estimates suggest that hedging costs have doubled in the last year, and insurers are passing those costs along to their customers.
    …
    For example, an investor might purchase a $100,000 annuity that pays a guaranteed 6% annual return for 10 years, or market returns — whichever is better. The fees for a product like that might look something like this:

    • 1.3% annually on the current balance to cover the underlying investment
    • 1% annually on the current balance for the insurance wrapper (called the mortality and expense charge)
    • 1% of the original purchase price to cover the guarantee

    The fees now rising are all in that last category — charges that cover guarantees. At the Hartford, the fees of three different kinds of guarantees are rising, from the current charge of 0.35% to 0.75%.

    In general I am not inclined to insurance investment products. They are frequently overloaded with fees. Annuities can provide some balance in retirement, so annuitizing a portion of assets at retirement may be reasonable. But I would not use insurance investment products for a significant portion of my retirement assets.

    Related: Personal Finance: Long-term Care Insurance – Many Retirees Face Prospect of Outliving Savings – Investor Protection Needed – Retirement Tips from TIAA CREF

  • Lowest 30 Year Fixed Mortgage Rates in 37 Years

    We now have the lowest 30 year fixed mortgage rates since data has been collected (37 years) in the USA. Is this due to the Fed cutting the discount rate? I do not think so. As I have said previously 30 year fixed rates are not correlated with federal reserve rates. But this time the government is actively seeking to reduce mortgage rates.

    U.S. Treasury Secretary Henry Paulson said the Bush administration was looking at ways to lower mortgage rates because it was essential to stem the drop in home prices to foster an economic recovery.

    Mortgage Rate Hits 37-Year Low

    The benchmark 30-year fixed-rate home mortgage in the U.S. fell to a national average of 5.17% this week, the lowest since Freddie Mac began its weekly rate survey in 1971.
    …
    The 15-year fixed-rate mortgage averaged 4.92%, down from last week when it averaged 5.20%. A year ago the 15-year loan averaged 5.79%. The 15-year mortgage hasn’t been lower since April 1, 2004, when it averaged 4.84%.

    Homeowners refinance, put savings under mattress

    This time around, lenders say up to a third of the callers seeking to refinance simply can’t. And if they can, the future savings are headed straight for the piggy bank.

    These rates sure are fantastic if you are in the market. I was not in the market, but I am considering re-financing now. You need to be careful and not just withdraw money because you can. If you can refinance and reduce your payments it may well be a wise move though. One problem can be extending the date you will finally be free of mortgage debt. If you re-finance a current 30 year loan, that you got 5 years ago, you will now be paying 5 more years. One option is to see if you can get a 25 or 20 year loan. Or if you can make a 15 year loan work, do that (15 and 30 year fixed rate mortgages are common).
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  • Financial Planning Made Easy

    Scott Adams does a great job with Dilbert and he presents a simple, sound financial strategy in Dilbert and the Way of the Weasel, page 172, Everything you need to know about financial planning:

    • Make a will.
    • Pay off your credit cards.
    • Get term life insurance if you have a family to support.
    • Fund your 401(k) to the maximum.
    • Fund your IRA to the maximum.
    • Buy a house if you want to live in a house and you can afford it.
    • Put six months’ expenses in a money market fund. [this was wise, given the currently very low money market rates I would use “high yield” bank savings account now, FDIC insured – John]
    • Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker, and never touch it until retirement.
    • If any of this confuses you or you have something special going on (retirement, college planning, tax issues) hire a fee-based financial planner, not one who charges a percentage of your portfolio.

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  • Securities Investor Protection Corporation

    The Securities Investor Protection Corporation restores funds to investors with assets in the hands of bankrupt and otherwise financially troubled brokerage firms. The Securities Investor Protection Corporation was not chartered by Congress to combat fraud, but to return funds (with a $500,000 limit for securities and under that a $100,000 cap on cash) that you held in a covered account.

    With the recent Madoff fraud case some may wonder about SIPC coverage. What SIPC would cover is cash fraudulently withdrawn from covered account (if I owned 100 shares of Google and they took my shares that is covered – as I understand it). What SIPC does not cover is investment losses. From my understanding Madoff funds suffered both these types of losses.

    And I am not sure how the Ponzi scheme aspects would be seen. For example, I can’t imagine false claims from Mandoff about returns that never existed are covered. Therefore if you put in $100,000 10 years ago and were told it was now worth $400,000, I can’t image you would be covered for the $400,000 they told you it was worth – if that had just been a lie. And if your $100,000 from strictly a investing perspective (not counting money they fraudulently took to pay off other investors) was only worth $50,000 (it had actually lost value) then I think that would be the limit of your coverage. So if they had paid your $50,000 to someone else fraudulently you would be owed that. Figuring out what is covered seems like it could be very messy.
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  • Improving Credit Card Regulations

    Fed Could Remake Credit Card Regulations

    The Federal Reserve on Thursday will vote on sweeping reform of the credit card industry that would ban practices such as retroactively increasing interest rates at will and charging late fees when consumers are not given a reasonable amount of time to make payments.
    …
    The proposal would also dictate how credit card companies should apply customers’ payments that exceed the minimum required each month. When different annual percentage rates apply to different balances on the same card, banks would be prohibited from applying the entire amount to the balance with the lowest rate. Many card issuers do that so that debts with the highest interest rates linger the longest, thereby costing the consumer more.

    Industry officials have lobbied against the provisions, particularly the one restricting their ability to raise interest rates. They have warned that the changes would force them to withhold credit or raise interest rates because they won’t be able to manage their risk.

    “If the industry cannot change the pricing for people whose credit deteriorates then they have to treat most credit-worthy customers the same as someone whose credit has deteriorated,” Yingling said. “What that means for most people is they’ll pay a higher interest rate.”

    The government has been far to slow in prohibiting the abusive practices of credit card companies.

    Related: How to Use Your Credit Card Responsibly – Avoid Getting Squeezed by Credit Card Companies – Legislation to Address the Worst Credit Card Fee Abuse – Maybe (Dec 2007) – Sneaky Credit Card Fees – Poor Customer Service: Discover Card