Friends with Benefits

As I mentioned in my first post there are fees, your banking is a service and each account is an insurance liability. I want to make sure you are taking advantage of your banking relationships to maximize your benefits. For example did you know that some major financial institutions offer consumer and business insurance?

Because a bank can broker thousands of customer’s insurance they have contracts for volume discounts. This means that when you purchase your insurance coverage through your bank you are likely to pay less for the exact same coverage you currently have.

Some consumer checking accounts and most credit cards offer spending rewards. What can be better then earning money by spending money? I encourage you to shop around for rewards rates, and please don’t fall for store rewards cards, as I mentioned in a previous post, those are likely not to help your credit score and are more of a liability.

Make certain that you are maximizing the interest you money is earning as it sits in your bank accounts. You have the right to expect  to earn money, ask your banker about promotional additional interest rates or additional rates from linking your accounts together. Linking your accounts may also offer you benefits like reduced loan closing costs and reduced interest on loans.

Lastly, take advantage of brokerage and financial adviser services. Your financial institutions want to see you succeed financially because the more you have the more you use their services. Some accounts offer free or reduces brokerage services, ask for these and unleash your earning potential.

So become a friend of you bank and take advantage of the additional benefits that come with your banking relationship.

Photo Credit.

 

Trust in Death and Taxes

So what do you do with your assets once you’ve reached retirement age or even before and want to make sure your dependents get their fair share? It’s difficult to see a person grieving the death of a loved one while trying to access funds to pay for death expenses. Save your family the trouble of going through probate court or having to file a small estate affidavit. On top of that remember that a will is simply a document that states how you WISH for your assets to be divided, its left to interpretation.

A trust is a great way to ensure your loved ones don’t have to deal with countless legal documents upon your death. A trust is a legal document that takes an identity of its own. This means that a trust usually has a unique tax payer identification number, an employer tax ID. A benefit is that a trust stays in control of assets after you pass, your trustees and beneficiaries then can retain legal access to any assets under the trust.

There are two different types of trusts, a revocable and irrevocable trust. A revocable trust is one that allows you to make changes to the ownership of assets, meaning that if you change your mind you can take the ownership away from the trust. An irrevocable trust as the name states is final, once an asset is placed under ownership of the trust it cannot be changed. I strongly recommend that you speak with a licensed attorney when preparing a trust, stay away form templates available at office equipment stores, your family will be glad you did.

An additional benefit of an irrevocable trust is that since as mentioned before, the assets are permanently held by the trust under an employer identification number, as a result assets held under the Trust are not subject to death taxes. As I mentioned in my previous post about Roth versus Traditional IRA’s make sure you speak with your tax professional about the tax implications of Trusts.

Photo Credit.

 

Credit Worthy

Last time I spoke about responsibilities, in banking, at a young age. Now for those that may have never taken the crash course on how to manage your banking and credit, this one’s for you…

Countless people have hurt their credit from a young age. You get your first credit card and buy all the new seasons collection at Macys or all the latest technology at Best Buy. Six months later you’re still a student barley getting buy with the McDonalds budget and too afraid to tell you parents that you need help paying those credit cards that they told you in the first place not to get. Two years later the resposible you comes out, scared but detremined to fix the damage.

Have no fear the banks are actually their to help. If you sit with the right banker, the bank can be a pool of information on what went wrong and how to fix it. There are many tools out there that you can get from a bank instead of some strange credit reporting agency you may not be too sure about.

I strongly recommend that your first step should be to get a clear understanding of what your credit report looks like and how it may be affected. Several banking institutions offer Identity Theft Protection services for a monthly fee that includes credit monitoring and tools to fix credit issues. Once you know what is going on make sure you correct it, the worst I see are small medical bills that you just forgot but are still laying around. After you’ve paid that debt contact the three major credit bureaus(Equifax, Experian, TransUnion) to let them know its been fixed. Lastly keep monitoring your credit report on a regular basis and report any inconsistencies.

Photo Credit

 

 

Age of Responsibility.

Financial literacy should begin at birth, but when should a person be completely financially independent? I personally say in the mid-teens. Yet by law that has been set to 18, something I can live with. However I have constantly seen that even at 18 some people are simply not ready to make financial decisions.

Many of the people I have helped have have told me something somewhere along the lines of; “I went crazy when I was able to get a credit card, I used it as if it had no consequences and now I’m paying the consequence.”

Who is really responsible? I say the responsibility can be spread in three even parts; parents, educational system and the person. As a parent you should take the responsibility to teach your kids financial responsibility, this means carefully exposing them  to stages of financial responsibility.

Start with a minor savings account, this will help your kids develop a savings habit. As a teen look for a restricted teen account where you can maintain full ownership. After developing a habit of withdrals and deposits, expose them to a debit card.

Educational systems need to put more emphasis on teaching financial literacy. In my personal experience I never heard of banking procedures in school. I wish I had know more about how credit cards work and how use credit.

Remember, don’t waste your efforts to build credit by getting store credit cards, most, don’t report to a credit bureau. Meaning that the credit you build may not be reported.

Photo credit. 

 

Irrational Earnings

In my last post I spoke about my grandparents’ financial hardship as a result of poor retirement planning. This is mostly because they based their finances to preconceived ideas of money management, one of those being saving their money in the mattress. I can understand this given their limited knowledge of the financial industry. But lately I’ve come across an odd mindset that I still don’t fully understand:

An industry trend I’ve been witness to lately is that some savings accounts are offering higher rates and benefits than time accounts (CD’s). Yet time and time again customers chose to put their money in a time account. This baffles me, what is their thinking when they chose to lock up their money with an early withdrawl penalty and lower interest earnings?

The only conclusion I’ve come to so far is that people prefer accounts with early withdrawl penalties as safety mechanism from themselves. I say this because people understand that they may lack the self discipline to save money so if they have money a penalty is their way to keep themselves from spending their savings. Please do not fall into this bizarre method of thinking. Before you set yourself up to get penalties consider a savings account, that will keep your money liquid, has FDIC insurance and can earn you more interest.

Be aware that these especial introductory rates, are for the most part temporary. One of the things I believe you should exercise you right to is information, yet too often I see people walk away with their heads full of assumptions. Make sure that you ask the right questions of your financial adviser, this means fully understanding the terms before you sign the dotted line.

Photo Credit.

 

The age of Re-Retirement

This is one of the hardest situations I come across, an elderly person who has barely enough to get by, sometimes not enough. I see them and I think about my grandparents, living in an age where their bodies are not capable of being productive in the workforce, yet if they take a day off they may not be able to afford their medications or groceries. What do you tell a person in their eighties in this situation? To be honest I haven’t come up with the right answer.

I want to encourage you to think of being in this situation; your late years, your body tired, the years you are supposed to enjoy in some senior community in Florida but instead you are asking for money on an intersection or having to decide between food or medicine. Now that I have your attention I also encourage you to realize that social security income will not be around probably as soon as twenty years  from today.

Now that you have faced this reality lets talk about options you have to secure your retirement. An Individual Retirement Account (IRA) is a savings account that offers tax advantages on retirement savings. IRA accounts include 401k plans, brokerage and standard IRA savings accounts. These accounts come in two major types of tax structures, traditional and Roth plans. Traditional IRA accounts are taxed when the money is withdrawn at retirement age and Roth accounts are taxed as the contributions are made.

An individual came begin withdrawing from their IRA accounts at 59 and a half, a strong factor in choosing either plan depends on your tax bracket now vs at retirement. I highly encourage for you to speak with your tax professional next time you do your taxes to learn more about IRA tax structures.

In the next post we will be discussing other investment options to contribute to your retirement.

Image courtesy of Early Retirement Investing.

 

Should you overdraw?

Overdraft fees are a great evil that should be spoken about… ok, a great evil may be over stating it. Overdrafts are a relatively simple fee, if there are not enough funds to cover charges made to an account then your bank can either decline that transaction or offer you a “service” to allow the transaction to be made and then charges you a fee (around $35 dollars) for the service. That fee was often also accompanied by an additional daily fee for everyday you were overdrawn. These fees accumulated to nearly $38 billion in overdraft fees in 2009 according to Consumer Reports.

There is hope, on August 25th 2010 federal regulation limited the amount a financial institution can charge as an over draft fee, and ended the daily overdrawn fees. This is good news for the few consumers that may overdraw. This does on the other hand limit a financial institution’s fee income, meaning they have to make of for it in other places. In effect this regulation allows account holders to decided to enroll overdraft service or have their transactions declined.

You should however be aware that most financial institutions the over limit blocks put as a result of declining overdraft service do not apply to automatic payments. So if you have automatic payments coming out of your account and you may be running low on funds make sure to accommodate for those automatic payments don’t fall under the assumption that all of your over limit transactions will be declined.

Fee are bad… we know this, but should you really decline your overdraft service? I personally have chosen to allow my transactions to post. Why? Because I don’t want to have a day where if for whatever reason I’m running low on funds in my account and I need an essential purchase like gas I don’t want to be stranded in a gas station. At the end of the day I can’t remember the last time I have overdrawn, and I don’t want to run the risk.

Please feel free to discuss your ideas, and share this information with your friends!

 

Free Fees!

As I mentioned in my first blog, there will be fees, but how do you avoid them? That’s what we are here to learn. Lately there has been much controversy regarding bank fees, some including that from the Wall Street protesters suggests that banks are just greedy and want to nickle and dime you, it’s true. but remember, we’re all greedy, as an economics professor of mine would say, “You call it greed I call it self interest.”

We are all interested in what is best for ourselves, otherwise we would be in a monastery somewhere serving others. Fees are a way of life, but not just because businesses want to make money, but also because businesses need to make up for the costs of offering services. Having the convenience of accessing your money from a network of bank branches, ATM’s, and vendors comes at a costs, most recently that cost was decided to be around $3 or $5 for other institutions. As customers should, they exercised their rights to refute those with their wallets and thereby effectively blocking the hyped debit card service fee. But what about those fess that you can’t avoid?

Like with the debit card fees, it costs money for a financial institution to hold your money, there are calculated costs associated with each bank account. From publications to depositor insurance each account represents a liability. Financial institutions make up for these liabilities by assessing monthly fees. However, as long as you take the time to investigate you will find that there is almost always a way to waive those fees. Take the time to speak with your banker, share your financial picture and you too can be fee free.

Overdraft fees are another post all their own, so I will be discussing those in my next post. Stay tuned!

 

How your deposit works its way through the system.

Let’s start with the basics, we can’t discuss our individual relationships with a bank without learning about the system as a whole. Banks lend to customers using other customer deposits by working with a reserve requirement that is set by law, national banks that are chartered by the Federal Governmental are regulated by the Federal Reserve. As i mentioned before banks are corporations, they are initially set up by individual investors that together form the organizing group.

The organizing group establishes a charter with either state of local authorities depending on their market and valuation. The charter is the agreement that states how the bank operates and how it is regulated. The organizing group then sets up directors that operate the bank, taking in additional capital for its reserve from individual investors that become share holders. As part of the banks charter and to gain customer confidence and protect customers banks enroll in depositor insurance.

There are many forms of insurance for bank depositors, the most popular being the Federal Deposit Insurance Corporation (FDIC), I will talk more about FDIC insurance in the following posts. Other bank depositor insurance providers include the National Credit Union Administration (NCUA). These depositor insurance corporations provide customers the ease to know that their deposits are secure.

When a depositor makes a check deposit to a bank, that bank endorses, encodes and send that check to one of 12 regional Federal Reserve banks or to a private clearing house for the check to be processed. That regional reserve bank or private clearing house then sends that check to the region from where it originated. When that check gets to the right region the check is sent to the check writers bank. When the check is received by the check writers bank the amount is debited from the check writers account and credited to the depositors account.

Stay tuned, tomorrow we will talk about fees and what they mean to you.

Photo Credit

 

Bringing the person back to personal banking.

I often come across people who are mystified by their personal banking, it seems that a general understanding of personal banking involves two steps; money comes in, money comes out. Yes, this simple approach is banking at its core, but there are so many other factors that the in and out approach is like saying a simple internal combustion engine is the equivalent of an engine of a 787 Dreamliner.

There are a few things I’d like to start with, the first may be a hard albeit necessary truth:the age of free died along with the economy. Let’s face it, as a result of the last two decades of prosperity we have been conditioned to think that we deserve just about everything for free, including our banking services. While there are ways to make your banking relationships free you get what you pay for.

Banks are for-profit businesses, they leverage their deposit reserves to lend to borrowers. This is good, this way a person can afford their first home and a business can hire your neighbors. Banks offer a major credit channel that our economy has come to depend on. This credit channel allows our economy to grow and during normal times acts as the invisible hand for the market regulating it against its own demise.

So what’s in it for you directly? Banks offer valuable us services like keeping your money in a secured place, no not the big vault kind of secure but the FDIC type. Say that instead of a bank you kept your money at home, if a person breaks in and takes your money its gone, there are no hopes of getting it back. At a bank if you are a victim of fraud, you are cover for the most part. Lastly, keep in mind that your banking history will help you as you try to qualify for credit products.

Now that we have established the reality that there may be fees, in the next blogs we’ll talk about how you like a bank can leverage your assets (reserves) for profit. Keep in mind that this blog is solely based on my opinions and my knowledge of banking. I will admit that my expertise may be limited, so I invite your ideas, even if they contradict mine. My goal is to share what I know with you in the hopes that I will develop my ideas and learn from yours.

Stay tuned to this blog, have a discussion and grow, and together we can become financially savvy.