Archive for ‘personal finance’

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!

April 15, 2014

‘credit cards have only been around for about 50 years’

by Grace

It seems almost crazy now to think that credit cards were just getting started about half a century ago….

Many of us find it hard to imagine navigating through life without a credit card to pay for things like online purchases, department store shopping sprees, or a latte at the corner coffee shop.  Use cash or checks?  That’s so inconvenient!  (A debit card is handy for some cash purchases, but it does have its drawbacks.)

Some history

Credit cards as we know them — with their Visa V -1.03%  , MasterCard, Discover and American Express logos in the corner — first emerged in 1958, when Bank of America started BankAmericard. That was the first consumer credit card available to middle-class consumers and small- to medium-sized merchants in the U.S., according to Visa’s website — BankAmericard was the first of the global brand of products that became Visa.

MasterCard came along in 1966 (the same year a debit card pilot program began at the Bank of Delaware), but the roots of the credit card go back even further.

Remember Diners Club?

It started in Brooklyn, when the Flatbush National Bank issued cards for local use in 1947. Local merchants could deposit sales slips at the bank and the bank billed the customer who made the purchase. But the big industry breakthrough came in 1950 when the Diners Club card became the first charge card — Diners Club founder Frank McNamara was at dinner and realized his wallet was in another suit, which inspired him to create the card. It allowed restaurant patrons to settle their bill at the end of each month.

First there were “charge” cards, which required payment in full each month.

These were charge cards, which means the cardholder had to pay his or her account in full when billed, unlike credit cards, which allow you to carry a balance. (Credit cards can be helpful in emergencies and for financing large purchases, but the shift from charge to credit cards has enabled overspending, which has contributed to the $856 billion in outstanding U.S. credit card debt. Perhaps we should have stuck with this charge-card thing.)

American Express also started offering charge cards in 1958, but didn’t offer credit cards until 1987.

I vaguely remember knowing the distinction between a “charge” card and a “credit” card.  But I do remember when my American Express card had to be paid off each month.

You can’t earn points by paying for college with a credit card.

It would be nice to be able to get reward points by paying college tuition with a credit card.  Unfortunately (or perhaps fortunately), that’s usually not an option.  Either the schools won’t accept credit card payments, or they charge a processing fee that wipes out any financial benefit.

Related:  College debt levels higher than all other types of consumer loans (Cost of College)

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Christine DiGangi, “Where did credit cards come from?”, MarketWatch, April 8, 2014.

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March 31, 2014

Start saving for retirement in your twenties, if you can

by Grace

The power of compounding is a reason to start saving for retirement as early as possible.

J.P. Morgan offers an illustration of “the importance of saving sooner than later”.

Their example consists of three people who experience the same annual return on their retirement funds:

  • Susan, who invests $5,000 per year only from ages 25 to 35 (10 years)
  • Bill, who also invests $5,000 per year, but from ages 35 to 65 (30 years)
  • And Chris, who also invests $5,000 per year, but from ages 25 to 65 (40 years)

Intuitively, it makes sense that Chris would end up with the most money. But the amount he has saved is astronomically largely than the amounts saved by Susan or Bill.

Interestingly, Susan, who saved for just 10 years, has more wealth than Bill, who saved for 30 years.

That discrepancy is explained by compound interest.

You see, all of the investment returns that Susan earned in her 10 years of saving is snowballing — big time. It’s to the point that Bill can’t catch up, even if he saves for an additional 20 years.

 

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Saving for just 10 years now works out better than saving for 30 years later

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)”.


It’s often hard for 20-somethings to save.

Many young college graduates are unable to start saving in their twenties because they are pursuing graduate degrees.  Others may be woefully underemployed or working in low-paying internships, understandable in light of the fact that we are experiencing worst unemployment rates for college graduates in 50 years.  Some are struggling to support families.  Other 20-somethings may simply be squandering their paychecks by living the high life of frequent traveling and expensive dinners with friends.

ADDED:  Burdensome student loan payments prevent many recent college graduates from putting money away for retirement.

Business Insider recommends that “Every 25-Year-Old In America Should See This Chart”.  Considering that decisions about how they will be spending their twenties are often made at a younger age, I think every 18-year old in America should also see this chart.  Realistically though, all this is much more clear in hindsight.

Sam Ro, “Every 25-Year-Old In America Should See This Chart”, Business Insider, Mar 21, 2014.

Related:  A quick way to calculate how much you’ll need for retirement (Cost of College)

March 18, 2014

A quick way to calculate how much you’ll need for retirement

by Grace

It can be complicated to calculate how much you’ll need to save for retirement.  Here is a method that is relatively simple, and will help most people get a general idea of their needs.

Start with assuming that you will live 20 years in retirement, and then modify that number based on your health, family history, and other factors.

Then use a replacement ratio to determine the annual income you will need during your retirement years.  Use your current income or the income you expect to have during your peak earning years, and apply a percentage according to the following guidelines.

Simple lifestyle versus current; little-to-no-travel; inexpensive hobbies: 80% 
Moderate lifestyle versus current; upgrades to home and car expected; some travel and hobbies planned, but nothing lavish: 90% 
Maintain your current lifestyle: 100% 
Improved lifestyle versus current; increased travel and hobbies: 110%

If you expect to have remaining debt upon entering retirement, add 5 percent to 10 percent to your replacement ratio depending on the amounts you still owe.

Once you know your replacement ratio, use this calculation:

(current income x replacement ratio) x 20 = your retirement savings goal

For example, if you currently earn $100,000 annually and determined your replacement ratio to be 90 percent:

($100,000 x 0.90) x 20 = $1,800,000

Again, this assumes you’ll spend 20 years in retirement, so adjust accordingly if necessary.

This method is streamlined, and excludes Social Security income as well as explicit inflation assumptions.  But it serves to give most people a sense of what their retirement savings goal should be.

ADDED:
This method does not account for families that live well below their means.  For example, a dual-income couple may live on one income and save the rest.  For these frugal families, it would be better to substitute “living expenses” for “current income” in this calculation.

For information about two other approaches, one more simple and another more complicated, go to this article at US News Personal Finance.

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February 5, 2014

Tuition tax credits for 2013 tax returns

by Grace

If you paid college tuition last year, you may be eligible for one of two tax credits on your 2013 federal tax return.

The American Opportunity Credit was created under the American Recovery and Reinvestment Act of 2009 and extended through 2017 with the passage of the American Taxpayer Relief Act of 2012. It gives a tax credit for four years of undergraduate study of up to $2,500 a year. A portion (40 percent/$1,000) of the credit is refundable, which means the credit in excess of taxes due will be refunded.

The Lifetime Learning Credit is a nonrefundable credit of up to $2,000. Unlike the American Opportunity Credit, which may only be used up to four tax years per student, is not limited in the number of years it can be taken.

There are income limits that determine eligibility for these tax credits.

Who qualifies for the American Opportunity credit?

To take this credit, the taxpayer’s Modified Adjusted Gross Income must be $90,000 or less for single, head of household and qualifying widow(er) filing statuses, $180,000 for married filing jointly. Married filing separate taxpayers cannot take the credit….

Who qualifies for the Lifetime Learning Credit?

The maximum Modified Adjusted Gross Income for a single, head of household or widow(er) taxpayer is $63,000. For married filing jointly, the maximum is $127,000. Married filing separate taxpayers are not allowed the credit.

Qualifying families can file IRS Form 8863 to obtain these credits, using information provided by colleges on Form 1098.

Related:  Tax season reminders about education tax benefits (Cost of College)

January 27, 2014

Simple financial advice that works for many investors

by Grace

This 4×6 index card has all the financial advice you’ll ever need

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This summarized financial advice is the result of University of Chicago social scientist Harold Pollack’s interview with personal finance expert Helaine Olen.

Keep it simple and be wary of financial advisors.

… the lesson here is that once you have an income that you can live off of and save a little bit besides, managing your finances shouldn’t be all that hard. The people making it complicated are often trying to make money off of you.

Sometimes it is a little more complicated.

I would agree that most of this card’s advice makes sense for most people.  But buying and selling individual securities can be completely appropriate for higher income investors.  And target funds have their downsides, so they’re not for everyone.  Many of them allocate most of their assets to bond funds during the retirement years, a strategy that could leave older investors with meager income and vulnerable to the volatility caused by shifting interest rates.

Related:  ‘passively managed index funds outperform almost all actively managed funds’ (Cost of College)

January 8, 2014

What forms do you need to complete the FAFSA?

by Grace

Gather the documents and information needed to complete the FAFSA ahead of time.

To complete the Free Application for Federal Student Aid (FAFSA), you will need:

  • Your Social Security Number
  • Your Alien Registration Number (if you are not a U.S. citizen)
  • Your most recent federal income tax returns, W-2s, and other records of money earned. (Note: You may be able to transfer your federal tax return information into your FAFSA using the IRS Data Retrieval Tool.)
  • Bank statements and records of investments (if applicable)
  • Records of untaxed income (if applicable)
  • A Federal Student Aid PIN to sign electronically. (If you do not already have one, visit http://www.pin.ed.gov to obtain one.)

If you are a dependent student, then you will also need most of the above information for your parent(s).

As part of their personal finance education resources, the Federal Reserve Bank of St. Louis offers a “quick run down on some of the most common financial forms and documents that you’re likely to encounter”.

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December 18, 2013

Cash may be the perfect holiday gift for young adults

by Grace

Recent college graduates and young adults still in college may prefer cash as a Christmas gift.

Cash gifts are often written off as too impersonal, or, as in Ms. Starkey’s case, not festive enough. But as you’re scrambling to find the perfect something for a loved one, particularly the students and graduates who collectively hold about $1.2 trillion in student debt, a little financial wiggle room might be exactly what they want and need.

A New York Times article offers specific ways to make the gift of money personal to a recipient’s needs.  Some ideas are to make a loan payment, pay tuition, or contribute to a 529 plan.

A gift of appreciated stock to someone in a lower tax bracket may benefit both parties.

APPRECIATED STOCK Given the stock market’s ascent over the last few years, you may be sitting on stock that has also risen appreciably. If you give those shares to a relative or friend in a lower tax bracket, he can sell them for cash and may pay far less in capital gains taxes than you would. The gift recipient could also use the proceeds to reinvest in broad-based index fund within that new Roth I.R.A. you helped set up.

But parents who give stock to younger children may not achieve the same sort of tax savings: The kiddie tax may apply if the child is under age 19, and in some cases up until age 24 if he is a full-time student and still receiving parental support. In that case, the child would still pay capital gains taxes at the parents’ rate, Mr. Luscombe explained.

Since I lack creative gift-giving ideas and because I believe cash is best, I usually go for the green in gifting to teens and young adults.  This year I decided to present the cash in bright red envelopes, a Chinese tradition used for monetary gifts on New Year’s and other occasions.  I think they will add a festive touch to the boring gift of cash.

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Related:  How college students spend their Christmas break (Cost of College)

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October 29, 2013

Can young college graduates burdened by student loans be convinced to buy health insurance?

by Grace

Young college graduates saddled with student loan debt may find it difficult to comply with new Obamacare mandates.

The success of Obamacare depends on young people buying health insurance.

Experts say that young, healthy people must enroll in ObamaCare’s health exchanges to cover the cost of insuring sicker, older people. It’s a simple math equation: Charge everyone roughly the same rate for access to basically the same product. The people who use it less will subsidize the people who use it more.

It may be hard to convince young adults to buy insurance, as illustrated by the example of Ron Geibel, a young college graduate recently profiled by LoHud.com.  Geibel is considering his options among the New York state health plan marketplace created as part f the Affordable Care Act..

Profile:  Ron Geibel is a 28 year-old artist living in White Plains, New York.

  • Currently has no insurance
  • Income is less than $25,000 a year
  • In good health
  • Student loan has been deferred, but requirement to start paying will soon kick in

Geibel can choose from among seven plans with varying options.

Cost: A bronze plan from Health Republic is $307 a month ($3,000 deductible, pays 60 percent), but Geibel would pay $55. A silver plan from the same company is $387 a month ($2,000 deductible, pays 70 percent); Geibel would pay $135. A catastrophic plan would cost $186 to $418 a month, with a $6,350 deductible. The maximum out-of-pocket he would pay per year is $6,350 for the bronze or catastrophic plan; $5,500 for the silver.

Assuming a student loan balance of $26,600, the average for 2011 graduates, Geibel’s monthly payments would be $306*.  Here’s a hypothetical illustrations of his overall monthly income and expenses if he were to choose the silver plan.

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The illustration shows a very tight budget, with little room for “extras” like health insurance.  Here’s how this young college graduate puts it.

“So for me if I have to prioritize right now it’s feeding myself and living as opposed to worrying about the health insurance.”

Like many young people, he thinks his odds are good enough to run the risk of foregoing health insurance.  The ACA penalty in this case would be $250, so his annual net savings for not buying insurance would be $1370 if he does not get sick.

New York is one of five states where health insurance premiums for millennials are not expected rise, so Geibel might be considered lucky in that respect.  For residents of the other 45 states and for many who do not want the type of coverage mandated by the ACA, it remains to be seen if enough young people will sign up for the new policies.

* Payments will be less if borrower qualifies for the IBR.

Related:  It’s not always possible to avoid college debt, but try anyway (Cost of College)

October 28, 2013

Make sure extra payments on your student loan are allocated correctly

by Grace

Apparently many student loan borrowers are having their extra principal payments allocated improperly.

Difficulties in having payments properly applied to a loan balance are among the most common complaints the Consumer Financial Protection Bureau receives about student loans, according to the bureau’s second annual report on the topic.

Paying extra toward the principal is a common way to save on accrued interest and to shorten the life of a loan.  But without explicit instructions, extra amounts may be allocated incorrectly.

Borrowers sending in extra payments, however, may find that the money is not allocated in the way they intended. Sometimes, borrowers told the bureau, they received a notice putting them into “paid ahead” or “advanced payment” status.

Complicating the problem is the fact that borrowers typically have several loans, with different balances and interest rates, which are bundled together in one “billing group” with a servicer, who collects a single payment and applies it to the individual loans. Just how much benefit a borrower gets from the extra payment depends on how the servicer applies the money. Savings will generally be greater, for instance, if the entire extra payment is applied to the loan with the highest interest rate, rather than being prorated to each loan individually.

The difference in savings can be substantial, as shown in this example where a borrower makes an extra $100 payment every month over the life of her loans.

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What should a borrower do?

Here are some questions to consider when making extra payments to reduce your student loan balance:

■ Is there any penalty to prepaying my student loans?

No. Private lenders are barred from penalizing students who make extra payments or pay off their loans early. (Federal loans do not have prepayment penalties either, Mr. Chopra said,)

■ How can I make sure my extra payment is allocated properly?

Send written instructions to your servicer; otherwise, the servicer may choose how to allocate the extra money. The bureau created a sample instruction letter, directing the servicer to apply extra payments to the loan with the highest interest rate first, which is generally the best option for most borrowers.

When I send in extra money on my mortgage payment, it automatically goes to pay down principal and is never counted as an “advanced payment” on next month’s bill.  I thought that was standard practice, but apparently not.

Pauline Abernathy, vice president of the nonprofit Institute for College Access and Success, said the report suggested there should be a uniform policy, outlining the way payments were applied. “Why force the borrower to specify?” she said.

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