Archive for ‘personal finance’

August 6, 2014

Gloomy outlook on recovery from loss of net worth suffered during Great Recession 

by Grace

Median net worth declined by 36%  and wealth inequality substantially increased over the ten years ending in 2013.  The Great Recession of 2007 and the slow subsequent recovery can be blamed for much of this economic pain.

The inflation-adjusted net worth for the typical household was $87,992 in 2003. Ten years later, it was only $56,335, or a 36 percent decline, according to a study financed by the Russell Sage Foundation. Those are the figures for a household at the median point in the wealth distribution — the level at which there are an equal number of households whose worth is higher and lower. But during the same period, the net worth of wealthy households increased substantially.

 

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These numbers come from a study, “Wealth Levels, Wealth Inequality, and the Great Recession”, released by the Russell Sage Foundation.  According to the authors, the outlook for the “coming years” does not look much brighter for prosperity among the overall population.

Through at least 2013, there are very few signs of significant recovery from the losses in wealth experienced by American families during the great recession. Declines in net worth from 2007 to 2009 one large, and the declines continued through 2013. These wealth losses, however, were not distributed equally. While large absolute amounts of wealth were destroyed at the top of the wealth distribution, households at the bottom of the wealth distribution lost the largest share of their total well. As a result, wealth inequality increased significantly from 2003 through 2013; by some metrics inequality roughly doubled.

The American economy has experienced rising income and wealth inequality for several decades, and there is little evidence that these trends are likely to reverse in the near-term. It is possible that the very slow recovery from the great recession will continue to generate increased wealth inequality in the coming years as those hardest hit may still be drawing down the few assets they have left to cover current consumption and the housing market continues to grow at a modest pace.

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Anna Bernasekjuly, “The Typical Household, Now Worth a Third Less”, New York Times, July 26, 2014.

Fabian T. Pfeffer, Sheldon Danziger, and Robert F. Schoeni, “Wealth Levels, Wealth Inequality, and the Great Recession”, Russell Sage Foundation, June 23, 2014.

July 30, 2014

Sometimes individual bonds are less risky than bond funds

by Grace

Although usually considered safer than stocks, bonds carry their own risks.  In particular, bond funds present specific risks not found in individual bond investments.

Bonds have long been viewed as a port in the storm, a low-risk asset class that creates consistent cash flow and helps to balance equity market mood swings.

But Shelly Schwartz of CNBC wrote about the “top six ways the most benign securities in your asset mix can potentially pack a punch”.

1. Interest-rate risk …
2. Bond fund risk …
3. Credit risk …
4. Liquidity risk …
5. Inflation risk …
6. Reinvestment risk …

Each item is detailed in the CNBC article.  I have a particular aversion to bond fund risk, and strongly prefer individual bonds or Unit Investment Trusts over bond funds in my own portfolio.  I invest in bonds for longer-term stability and consistent yield, two features often missing in bond funds.

Bond fund risk

Unbeknownst to many, bond funds also expose investors to a unique set of risks in a rising rate environment that individual bonds do not. Why?

Individual bonds, like Treasuries, municipals and corporate bonds, are sold with a finite maturity: the date on which you, the investor, get your principal back—if the debt issuer doesn’t default—and the interest payments you’ve been receiving stop.

Interest-rate fluctuations don’t affect investors who hold individual bonds to maturity.

Fixed-income securities held within a bond fund, however, are designed to mature on a staggered basis, creating a perpetual income stream for investors. The fund manager replaces bonds as they mature, when the issuer’s credit is downgraded and when the issuer “calls,” or pays off the bond before the maturity date.

When bond prices fall as interest rates rise, the net asset value (NAV) and return of a bond fund also decline, said Greg Ghodsi, senior vice president of investments at Raymond James.

A $300,000 investment in a fixed-income mutual fund with an average maturity of 20 years (a mix of 10-, 20- and 30-year bonds), for example, would be worth $260,000 if interest rates climb just 1 percent. (Shorter-term bond funds would be less volatile.)

But the pain doesn’t end there. The drop in value makes investors nervous, which prompts more selling. That forces the fund manager to unload some of their holdings to meet redemptions, said Ghodsi.

Depending on how significant the redemptions are, he noted, they may have to sell their highest-yielding bonds and replace them with those offering a lower yield, or assume more risk to obtain the same return, which can drive prices quickly lower.

The investors who didn’t bail get stuck with an investment that may not match their risk profile or income needs—one that is suddenly a lot less liquid on the secondary market. Ouch.

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Shelly Schwartz, “6 ways bonds can bite you”, CNBC, July 14, 2014.

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July 7, 2014

Student debt and net worth

by Grace

College-educated young adults with student loans have a lower net worth than those who did not graduate from college.

Nearly four-in-ten U.S. households headed by an adult younger than 40 currently have student debt and a median net worth of just $8,700.

That’s a stark contrast to the median net worth of $64,700 that young college graduates without student debt have accumulated. Additionally, consumers without a degree and without student debt have a net worth of $10,900, once again greater than that of degree holders with debt.

While student loan debt does play a large role in the low median wealth of college graduates with student loan obligations, Pew found these consumers were more likely to take on other debts that contributed to the wealth gap.

College graduates are making more money.

… College-educated student debtors typically have a household income of $57,941, nearly twice that of homes in which the heads do not have bachelor’s degrees.

And their debt load is greater.

… Among the young and college educated, the typical total indebtedness (including mortgage debt, vehicle debt and credit cards, as well as student debt) of student debtor households ($137,010) is almost twice the overall debt load of similar households with no student debt ($73,250)….

It is reasonable that college-educated young adults, with their higher incomes, are able to take on more debt.

Though student debtor households tend to have larger total debt loads, indebtedness needs to be assessed in the context of the household’s economic resources. In other words, households with greater income and assets may be able to take on more debt. Using the conventional total debt-to-income ratio, where debt is measured as a share of income, college-educated student debtors are by far the most indebted.2 The median college-educated student debtor has total debt equal to about two years’ worth of household income (205%). By comparison, college-educated households without student debt and less educated households with student debt have total debts on the order of one year’s worth of household income (108% and 100%, respectively).

The hope and expectation are that their income will keep pace with inflation, and continue to grow at a rate that will enable them to manage their debt.

These young adults should also start saving for retirement, since the “power of compounding is a reason to start saving for retirement as early as possible”.

Saving “$5,000 per year only from ages 25 to 35 (10 years)” will generate a larger retirement nest egg than saving “$5,000 per year, but from ages 35 to 65 (30 years)”.

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Ashlee Kieler, “College-Educated Consumers With Student Debt Have Median Net Worth Of Just $8,700″, Consumerist, May 14, 2014.

Richard Fry, “Young Adults, Student Debt and Economic Well-Being”, Pew Research Center’s Social & Demographic Trends, May 14, 2014.

June 30, 2014

Advice for getting your first credit card after graduating from college

by Grace

A new college graduate has some questions about getting a credit card.

How do I get a credit card? You can’t qualify for a card unless you can prove you’re worthy by having a credit history, but how can you have a credit history when you don’t have a credit card?

Kerry Hannon, personal finance and work blogger, offers some answers.

First, some advice to pay off your balance each month.

Sure, you typically need a credit card to pay for big expenses from hotels to airline tickets. I get it. But repeat after me: “I will always pay my credit card bill each month when it’s due — and in full.” If you only make the minimum monthly payment, you’ll likely be slammed with a high interest rate.

Twentysomethings these days often pay credit card rates of 22% or higher (!) because they lack a credit history and may have a low credit score. The average credit score for Millennials, according to the Experian credit bureau, is 628; for boomers, it’s 700.

So when you do get a card, pay your balance each month and be happy that you get about 30 days to make the payment (that’s called the “float”).

Do your homework before applying for a credit card.

… if you don’t have a credit history to speak of, you might want to hold off applying for a card until two months or so after you start working. Card issuers want to see an income stream before they’ll approve you, so by waiting a bit you’ll boost your chances of getting plastic.

Before applying for a credit card, get your latest credit report (free from Annualcreditreport.com) and credit score (free from sites like Credit.com, CreditKarma.com, CreditSesame.com and Quizzle.com). These will let you see what a card issuer would find out about your credit history and prepare you for your chances of being approved. If you see a mistake in your credit report, fix it by following the advice in Next Avenue’s article, Why You Must Check Your Credit Reports for Errors.

Piggyback on your parent’s reputation.

An easy way to build a credit history is to ask your parents to add you as an authorized user on one of their cards. The card will then show up on your credit report, and it’ll have your name on it. Your parents must make on-time payments to the account to protect your credit record and theirs. After about six months as an authorized user, you can then apply for a card on your own.

Or check out secured credit cards that do not depend on a credit history, but require a security deposit.

… With a secured card, you’ll get a credit line of generally one to three times the amount of your deposit. Manage your card responsibly and you may earn credit limit increases. After several months, you can apply for a regular card from the same issuer or from another one.

Once you obtain an unsecured credit card, close your secured card account and your deposit will be returned.

Some recommended sites:

… CardHub.com, which just published its 2014 list of the Best Credit Cards for High School and College Graduates … also has a list of cards for people with no credit history.

…Visit Lowcards.com to find the best deal. In general, look for cards with no annual fees.

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Caitlin Bonney, “What New College Grads Need To Know About Money”, Forbes, 6/04/2014.

June 20, 2014

Go online to check the accuracy of your Social Security account

by Grace

Although most millennials “believe they will receive no Social Security money by the time they retire”, it is still a good idea to understand the basics of how this retirement system works.

Social Security benefits are based on your past earnings

First a summary of the earnings you had throughout your career is calculated. This measure is called the Average Indexed Monthly Earnings (AIME). Your wages for prior years are typically indexed, meaning they are adjusted to reflect inflation over the course of your career. For example, if Peggy earned $20,653 in 1990 this figure would be reflected as $43,531 in her calculation today. The higher your AIME is, the larger your benefit.

Second, a benefit formula is applied to the AIME to determine your Primary Insurance Amount (PIA). In 2014 you receive 90% of the first $816 in AIME, and 32% of AIME between $816 and $4,917, and finally 15% of AIME over $4,917.

Third, an adjustment may be made to the amount you are entitled to depending on the age at which you start benefits, the Social Security earnings test, or other factors.

Fourth, benefits for dependents and survivors are based on the worker’s PIA. For example, a spouse may get a spousal benefit of 50 % of the worker’s PIA, and a widow might get 100% of the worker’s PIA generated benefit.

More basic Social Security information is provided by Ken Tacchino at MarketWatch, including this bit that was news to me.

You can monitor your Social Security account online

From 1999 to 2011 the Social Security Administration mailed Social Security Statements to anyone who was 25 or older. In May of 2012 they stopped these automatic mailings and went online to save money. They will resume mailings every five years (ages 25, 30, 35, etc.) starting in September. However, the online statement that’s created by you in the “my Social Security” section of their website might be your best option to track retirement.

One benefit of the online Social Security Statement is that it can determine whether your earnings are accurately posted each year. Assessing this is crucial because the Social Security benefit is based on the amount you earn each year of your career. If there’s an error in posting your annual earnings, the amount of benefits you receive may be compromised. Regardless of whether your statement is online or not, the statement contains an estimate of the monthly retirement benefit you will receive at age 62, full retirement age, and age 70. Keep an eye on it and factor it into your planning.

Bottom Line: Tracking what Social Security will provide will enable you to better prepare for retirement.

I created a “my Social Security” account, and I would advise everyone to do the same as a way of monitoring the details and accuracy of potential future benefits.

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Kenn Tacchino, “8 Social Security basics you need to know”, MarketWatch, June 16, 2014.

June 4, 2014

Home equity loans regain popularity as college costs continue to rise

by Grace

A rebound in house prices and near-record-low interest rates are prompting homeowners to borrow against their properties, marking the return of a practice that was all the rage before the financial crisis.

College costs continue to rise, so home equity loans may rebound in popularity as a tuition-funding vehicle.

Ian Feldberg planned to open a $200,000 Heloc this week with Belmont Savings Bank to help pay his son’s college tuition. The medical-device scientist purchased his home in Sudbury, Mass. for a little over $1 million in 2004, and estimates that its value dipped as low as $800,000 during the financial crisis. However, after applying for the line of credit, he found that its value had completely recovered.

“I’m very pleased about that. My options for tuition fees were either that or to cash in on my pension prematurely,” he said.

A too-big-to-fail bank steps up home equity lending, and Tyler Durden of Zero Hedge expresses some concern.

The Wall Street Journal reported yesterday that home-equity lines of credit (Helocs) had increased at a 8% rate year-over-year in 1Q14. Some banks are more aggressive than others, and perhaps we shouldn’t be surprised to see TBTF government welfare baby Bank of America leading the charge, with $1.98 billion in Helocs in the first quarter, up 77% versus 1Q13.

What could possibly go wrong?

As HELOC delinquencies are off their highs (for now) but remain elevated… (we are sure this renewed ATM usage on the back of created wealth and stagnant wages won’t harm that downward trend at all…) – will we never learn?

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And then there’s this.

Think about that for a minute. A “medical-device scientist” can’t send his kid to college without either a Heloc or cashing in on his pension.

Life goes on.

Related:  “Federal Direct PLUS or home equity loan for college costs?” (Cost of College)

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Tyler Durden, “Home Equity Loans Spike As Americans Scramble For Cash”, Zero Hedge, 05/31/2014.

May 28, 2014

American teens are not interested in summer jobs

by Grace

Fewer teens are working.

… In 1978, nearly three in four teenagers (71.8%) ages 16 to 19 held a summer job, but as of last year, only about four in 10 teens did, according to data from the Bureau of Labor Statistics for the month of July analyzed by outplacement firm Challenger, Gray & Christmas . It’s been a steady decline, seen even during good times: During the dot-com boom in the late 1990s, when national unemployment was only about 4%, roughly six in 10 teens held summer jobs….

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And they are not very interested in getting jobs. Only 8.3% of teens who were not working last summer said they even wanted a job.

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This doesn’t mean that teens are simply tanning by the pool or binge-watching Bravo (though some certainly are). Challenger says that many teens are in summer school (rates of summer school attendance are at one of the highest levels ever, he says), volunteering, doing extracurricular activities to pad their college applications and trying out unpaid internships. And all of these are worthwhile endeavors (well, minus the tanning and Bravo), especially as it becomes more competitive to get into many elite colleges.

Lack of work experience can be a disadvantage.

That said, experts say that paid work has value for a number of reasons — and that teens (even those who plan to go to college) who don’t do it may be at a disadvantage. “It’s critical for teenagers to work, to begin to understand the working world, the value of a paycheck” says Gene Natali, co-author of “The Missing Semester” and a senior vice president at Pittsburgh investment firm C.S. McKee. “Choosing not to work a paid job has consequences.”

The good old days?

One of my older relatives had a job in high school delivering both the morning and afternoon newspapers.  He and a friend would rise early each day to roll up and deliver papers before their first class, and then repeat the routine after school.  He was also in the school band, played varsity tennis, and maintained good grades, clearly demonstrating he was able to manage his time effectively.  A generation or two later, it’s hard to imagine many kids successfully maintaining a similar schedule of activities. Many of them need reminders to take their Adderal in the morning, and think they are too busy for a part-time job.  Maybe my relative was a remarkable young man, but many of his peers also worked during high school.

Times have changed.  Expectations have changed.  Kids have changed.

Related:  “Teens are too busy preparing for college instead of working” (Cost of College)

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Catey Hill, “American teens don’t want to work”, MarketWatch, May 3, 2014.

‘Teen Summer Job Outlook Teen Employment Culd Remain Flat as More Say “Nah” to Summer Jobs’,  Challenger, Gray & Christmas, Inc., April 28, 2014.

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May 27, 2014

What is the maximum 529 plan contribution limit?

by Grace

So you want to contribute the maximum amount to your child’s 529 plan?  Maybe you received a generous inheritance, and want to set aside enough funds to assure your child will be able to attend any college he chooses.

Here’s what the IRS says:

Q. Are there contribution limits?

A. Yes. Contributions can not exceed the amount necessary to provide for the qualified education expenses of the beneficiary. If you contribute to a 529 plan, however, be aware that there may be gift tax consequences if your contributions, plus any other gifts, to a particular beneficiary exceed $14,000 during the year. For information on a special rule that applies to contributions to 529 plans, see the instructions for Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.

In practice, “the amount necessary” varies and is determined by each state-sponsored plan, with amounts ranging from about $335,000 to $400,000.  Check out Savingforcollege.com for a complete list of state maximum amounts.

Here is how the New York 529 Advisor-Guided College Savings Plan explains the maximum contribution.

How much can I contribute to my account?

You can contribute on behalf of a beneficiary until the total balance of all Program accounts held for the same beneficiary reaches an aggregate maximum balance, currently $375,000. If there’s more than one account owner contributing for the beneficiary, this is the total for all accounts. Once this limit is reached, you can no longer make additional contributions, but you can continue to accumulate earnings.

Gift and estate tax implications

Since a 529 contribution is treated as a gift to the beneficiary for tax purposes, another consideration for donors is to understand how amounts greater than $14,000 could trigger tax liabilities.

… your contribution qualifies for the $14,000 annual gift tax exclusion and so most people can make fairly large contributions without incurring the gift tax.

For contributions greater than $14,000, 529 plans offer a unique gift-tax exclusion feature.

… Specifically, you can make a lump-sum contribution to a 529 plan of up to $70,000, elect to spread the gift evenly over five years, and completely avoid federal gift tax, provided no other gifts are made to the same beneficiary during the five-year period. A married couple can gift up to $140,000.

A good explanation of the details on how this works can be found at the Ameriprise website.

Related:  “Most families are not taking advantage of 529 plans for college savings” (Cost of College)

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April 28, 2014

Pay for college every time you gas up the car

by Grace

College rewards programs are used by one in five families to help pay for college.  The dollar amounts may not be huge, but these programs are easy to use.

FinAid gives us an overview of college rewards programs, also known as loyalty programs.

Loyalty programs, also known as affinity programs, provide a rebate to the consumer in exchange for shopping at particular retailers or purchasing particular products or services. This section of FinAid provides information about loyalty programs that provide a reward in the form of tuition benefits, such as credits to a section 529 plan for your children. They are similar in nature to airline frequent flyer programs.

Typically, such programs do not require you to show a membership card to get the rebates. Instead, you register your credit cards with them and they track the purchases you make at participating merchants using the cards. You can also earn rebates by shopping online through the company web sites. This makes the programs a painless way to earn a little extra money for college.

Affinity programs with a college savings emphasis include:

Upromise is probably the most widely used program.

… The Upromise credit card enables people to earn cash back for everyday purchases. With the credit card, members get 5% cash back on all purchases and 10% cash back when they buy things in the Upromise shopping portal, explains Condon. Members can have the cash earned deposited directly in a Upromise 529 college savings account, in a Sallie Mae savings account or request a check whenever they are ready to cash in.

Small amounts can add up.

The amount saved is a small percentage of the amount spent, but with the magic of compound interest, small amounts grow exponentially larger over the years. For instance, if you spend $1,500 a month for 30 years and receive 1 percent back on your purchases, you would have more than $18,000 if you averaged a 7 percent return per year.

“I wouldn’t use this as a substitute for having a good investment strategy, but it might be a substitute for having to transfer $100 to your investment account every month,” says financial adviser Will Ertel, president of Tassel Capital Management in Matthews, N.C. “It can be a way to supplement or create some savings you aren’t otherwise building.”

Cash generated by any rewards program can also be designated to pay for college costs.  It seems like a no-brainer,  unless you rely on credit card reward points to defray the cost of vacations or other purchases.

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Donna Fuscaldo, “Last-Minute College Savings Tips”, FOXBusiness, March 20, 2014.

April 22, 2014

College IDs offer discounts, sometimes indefinitely . . .

by Grace

Apparently some college student IDs can be used long after graduation.

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I’m not endorsing this, but using old IDs may be fairly common.  Sometimes a cashier does not notice expiration dates, or in some cases the college IDs do not even have expiration dates.  Movies, public transportation, museums, clothing stores, and ski resorts are a few examples of places that offer students discounted prices.  Every little bit helps when making those student loan payments.

One Redditor imagines a future where he can enjoy double-dip discounts.

Imagine the savings when you’re in your 70’s. Student AND senior discounts. You can see a movie for only $49,99!

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