Money To Live

October 24, 2013

Compound Interest

Filed under: banks,investments — by moneyconsciously @ 12:40 pm

Compound interest earns you more money than simple interest. With simple interest, you earn interest only on the principal. With compound interest you reinvest the interest, i.e. each cycle your new principal is larger, and so over time you earn more interest.

This may not be news, but it’s the topic of this post because recently I observed someone make a calculation error. Here’s an example for a principle of $1000, rate of 3%, and time of 15 years.

Simple interest case: $1000 x (1 + 0.03 x 15) = $1450
Compound interest case: $1000 x (1.03)^15 = $1560

That’s it.

October 15, 2012

Read the Fine Print

Filed under: banks,investments,savings — by moneyconsciously @ 9:38 am

We all know we should read the fine print. But how many of us actually do read the fine print…and does it make a difference?

After reaching my savings goal, I planned to close a savings account. I wanted to use the funds, and I did not want to be charged the withdrawal fee. Since I was not planning to use the account again within the coming months, closing the entire account seemed a fair solution.

My bank assistant recommended that I simply withdraw the funds instead of closing the account, insisting — even after I expressed doubt about withdrawal fees — that I could do so without penalty.

I went home and checked the account terms and conditions. For my account situation, there was indeed a fee. If I had not read the fine print earlier, I would have followed the advice of the bank assistant and been charged this fee.

Reading the fine print ahead of time saved me money.

August 19, 2009

The Modern Way to Float

Filed under: banks,spending,Uncategorized — by moneytolive @ 5:00 am
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Decades ago, it was common to float a check. For my reader(s?) born after 1990, here are two examples:

  • I go to the grocery store and write a check for $200, even though I know I only have $150 in my bank account. I expect to receive my paycheck tomorrow, so I can count on the paycheck being deposited before the grocery store cashes my check (it used to take several days to a week).
  • Watch the Leonardo DiCaprio movie, Catch Me If You Can.

With the rise of debit cards and check scanning technology, the time between writing a check and the funds being withdrawn has shrunk from a span of days and weeks to a span of seconds and minutes.

The modern way to float a check is to use a credit card.

Credit card users fall into two buckets:

  • “floaters” who use the card for its various perks (rewards, convenience, consumer protection, etc.) and pay the balance in full each month
  • – “debtors” who don’t have the money to pay the balance in full each month

When talking with “debtors,” I have sometimes had trouble explaining how I use my credit card, but now I found a good way to explain it: I use my card the same way people used to float checks. For each transaction, I used to have a grace period of 2-6 weeks to pay for the transaction. With recent legislation (sec. 163), the grace period is now 3-7 weeks!

October 6, 2008

Reader Question: Money Markets

Filed under: banks,savings — by moneytolive @ 5:00 am
Tags: ,

A reader wrote in concerned about having money in a non-FDIC money market.

Money markets at brokerage firms may not (and probably are not) FDIC insured. Historically, only two money market funds have lost money.  In each case, account holders lost small amounts of money (3 cents on the dollar in one case).

If you have money in a non-FDIC insured money market fund and it worries you, go ahead and move it to an insured savings account. I believe you should handle your money in a way that you are comfortable with.

In the past year or two, I opened a Vanguard Money Market fund for my “house, car, or other large expense” account. I decided to go with the Vanguard Money Market instead of opening CDs or chasing rates in FDIC-insured accounts because (1) the rates were good historically and (2) the money is accessible with a short delay. It would take about a week to get cash out, but there is no penalty for an early withdrawal.

Also, I thought that if a Vanguard money market loses money, things must be pretty bad in the world. I am surprised that a money market fund has lost money because I do not yet grasp what is happening in the economy.

September 2, 2008

Reader Question: Finances when studying abroad

Filed under: banks,travel — by moneytolive @ 5:00 am
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A reader, Jenny, asked about managing finances when studying abroad in Spain for a semester. If you have a question, send me an email or use the comment form.

Bank accounts

This is my advice for a college student studying abroad who is not earning income (or is earning a minimal amount) and has saved enough for the trip: take a credit card and a debit card. Before leaving, set the credit card account to be paid with automatic payments. Keep the ATM card at home except when you are using it.

In the event of a stolen card, credit cards generally provide better protection than debit cards (some debit cards offer comparable protection, but you have to check the details). If you notice the credit card or debit card is missing, call the issuer immediately. To make this phone call, you need to know the number. Before leaving, prepare a list of emergency numbers — emergency contacts back home, the study abroad office, and your bank/credit card phone numbers. Keep a copy with your belongings and leave a copy with a fried or family member.

For most students abroad for a semester, a local bank account is probably not necessary. Opening a bank account can be difficult if you do not have the necessary documents (proof of address, proof of a job, and sometimes proof of citizenship or residence). Modern ATM networks are extensive, and they should provide enough access to your cash.

Call your bank to ask about fees at international ATMs. In my experience, the fees cost a few dollars. By making fewer, large withdrawals (as opposed to frequent, small withdrawals), you can pay less in fees. Check with your bank to see if there are some ATMs that you will not be charged for using.

Think about a budget

Jenny said this is her first time to deal with money on a daily basis. At college, she has a full meal plan and only needs money for occasional expenses. In the summers, she took jobs that provided a meal plan and sometimes housing.

There are three basics to a budget abroad: housing, food, and transportation. (Jenny is covered by her university’s health plan, which has international coverage, so she does not need to buy a separate plan). Then there are the fun expenses: traveling, souvenirs, …

Housing – Jenny is taken care of here; her study abroad program hooked her up with a homestay.

Food – One of the best cheap meals in Europe is bread and cheese from a grocery store. With a homestay, breakfast may be provided and sometimes dinner too. Grocery stores can be intimidating in another country, but you can stick to the basics — rice or pasta with vegetables.

Transportation – One of my favorite things about Europe is the extensive public transportation network. In large cities, there are typically subways, trolleys, and buses. In smaller towns, there may only be buses. Check with locals about the best way to travel (you might find a monthly pass with a student discount)

Holidays/vacations – Consider taking some weekend trips to nearby towns (or countries). A great planning resource is the Lonely Planet Guidebook series. Lodging and restaurants are sorted by price with frank descriptions of what you get for the money. Before leaving the country, make sure your visa allows re-entry!

Resources

Whenever traveling abroad, check the State Department website. It has important information (such as if the country is unstable and Americans should not visit) and some silly advice for students (“try not to make a spectacle of yourself”). Though maybe it isn’t so silly in light of the increasing numbers of Britons arrested abroad.

August 11, 2008

Rate Chasing

Filed under: banks,savings — by moneytolive @ 5:00 am
Tags: , ,

If you want the best rate on your savings, bankrate.com tells you the current banks that pay the highest interest rates. Since the listing changes daily, to constantly get the highest rates, you have to transfer your money between banks regularly.

Some people “chase rates” by switching money between any number of savings accounts in order to always get the highest yield. I definitely want my savings earning interest, but I do not want to deal with the hassle of constantly switching between banks. That is why I use ING Direct for my savings (and also my checking account, but that’s another story). ING typically does not offer the highest savings rate, but it is consistently near the top. I have not had a single problem since opening an account (in 2005).

First of all, Why do interest rates change?

  • The Fed changes the discount rate (which is what a bank pays to borrow cash overnight from the Federal Reserve). Your bank’s rates could go up or down and will usually be in the same direction the Fed’s change.
    Why the Fed changes the discount rate is a very complicated question. Generally, the Fed changes the rate to influence the economy, by spurring it on in a recession or taming inflation in times of growth.
  • The bank wants new customers. Rates typically go down.
  • The bank wants to make more money. Rates could go down or stay the same.

My reasons for not chasing rates essentially come down to simplicity (or you could call it laziness).

  • It takes my time to check the current rates, open a new account, and transfer money.
  • The potential gain is small. Let’s say by constantly switching to the highest yielding bank you can stay 0.5% above ING’s rate. Annually, this gives you an extra $5 per $1,000 invested.
  • This results in extra paperwork when filing taxes. Each bank account that yields more than $10 in interest will send you a 1099, and that income needs to be included in your taxes (either entering another form in Turbo Tax or attaching another 1099 if you submit by paper)

I recommend checking your rates about once a year and comparing them to the national averages and the highest paid rates. If you are earning near the top and are otherwise happy with the bank, keep your money where it is.

When do you switch banks for a higher interest rate?

August 7, 2008

The subprime mess

Filed under: banks,credit — by moneytolive @ 5:00 am
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house

Financial markets have been reeling for months after large losses in subprime mortgages. My take on the subprime mess is that too much credit went to too many people too easily.

  • Individuals qualified for more credit by taking out an ARM (adjustable rate mortgage) than they could have borrowed with the more traditional 30-year FRM (fixed rate mortgage).
  • Lending was extended more readily to “subprime” borrowers. A subprime borrower has a lower credit score, which indicates he may not have used credit carefully in the past (many late payment, etc.).
  • Some lending institutions required little or no documentation. Joe Shmoe could walk in off the street and claim an income of $100,000, qualifying him for a larger mortgage than his $60,000 income could actually afford.

Now some of these people cannot pay their monthly mortgage — a larger number than was anticipated by the housing and mortgage experts. ARM interest rates can reset to higher values, and, ahead of time, no one knows quite how high (or low) the rates will reset.

Because a lot of these people’s homes are being foreclosed, more houses are on the market. Also, because banks have made it harder to qualify for a mortgage without a substantial down payment and strong credit history, there are fewer buyers. With more supply than demand, housing prices are heading lower.

With so many bad loans, lenders are being pickier about who gets money, affecting large corporations, small businesses, individuals and families, and students.

August 4, 2008

Too much of a personal touch?

Filed under: banks — by moneytolive @ 5:00 am
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What do you do if your banker hits on you?

This happened to a friend of mine, who requests to go by Lynn.

Lynn went to the bank to open a new account, and a few days later her banker, Mr. Banker, called her up to chat. She blew him off but ran into him at the local farmers’ market the following weekend. Mr. Banker called again, and Lynn told him she was not interested.

Mr. Banker’s behavior is unprofessional and unethical, and he violated his institution’s privacy policy, which restricts access to personal information to those who require it “to provide products and services to you.” If Mr. Banker considers a date to be a service, maybe he should look for work in Nevada.

In medicine, HIPAA (pronounced “hip-uh”) government regulations address security and privacy of patient data (hospital employees were fired after snooping in Britney Spears’s medical file). If a nurse looked up a patient’s information and called her to ask for a date, the nurse could be fired.

I do not know of analogous laws that protect private information outside of medicine, and it could be up to an individual manager’s discretion of how to discipline Mr. Banker.

Lynn has not reported Mr. Banker’s breach of the privacy policy (looking up her phone number).

What would you do? Would you call the bank and report Mr. Banker?

July 31, 2008

Defining Moments: Katy bounces a check

Filed under: banks,defining moments — by moneytolive @ 5:00 am
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Defining Moments is a series about how we remember money and how it has shaped our lives.

At the end of my first year of graduate school, I stayed in the dorm one extra week before leaving for the summer, and for this I owed the housing office $110. I wrote a check to the housing office, withdrew all the cash from my checking account, and hit the road.

When I got back in the fall, there were three important letters in my departmental mailbox:

Credit Union: notice of a bounced check

Housing Office: first notice of unpaid housing bill

Housing Office: second notice of unpaid housing bill

My stomach in knots, tears welling in my eyes, I called the housing office. The receptionist told me not to worry and to pay whenever I had the money. She must have heard the worry in my voice. Or maybe she thought I was a humanities grad student.

Next I called the credit union expecting the worst: a bounced check fee, overdrawn account fee, late repayment fee, etc. The credit union, however, said there was no charge!

This is what I learned:

I was lucky. In college a friend was hit with nearly $100 in fees after overdrawing her checking account. The Federal Reserve estimates that an overdraft of $80 could lead to $75 in fees.

Obviously, be more careful when closing an account. Wait a few months before withdrawing the balance to make sure all outstanding checks have cleared the account.

Credit unions are awesome. Credit unions are not-for-profit, which enables them to offer high interest rates for savings accounts and low interest rates on loans. Also, they are not looking to make a profit off a customer’s mistake. Find one near you.

If you are hit with overdraft fees, there are a few things you can do.

Request that the fees be waived. Though this may or may not work (it often work with credit card fees), it is good practice to ask for extra fees to be reduced or removed.

Consider making a link to a savings account or switching to a bank that allows you to link to a savings account.

Write to your representative in congress asking for support of fair overdraft protection programs.

July 28, 2008

Keep the Change?

Filed under: banks — by moneytolive @ 5:00 am
Tags: , ,

Bank of America offers customers an innovative incentive program Keep The Change — the “change” of each debit transaction is moved to a savings account, and Bank of America matches a percentage of your change.

This sounds like a pretty good deal, but it leaves out part of the story — what is the interest rate in the savings account? While your change earns a great rate of return, the rest of your savings will languish.

Here is my analysis on participating in this program for one year and using the savings account as an emergency fund.

I assume that 30 debit transaction are made each month. The average amount of change is $0.50. Total amount of change generated in one month is $15.

First three months

  • Change generated: $45 total
  • Match from the bank (100%): $45

Last 9 months of the year

  • Change generated: $135
  • Match from the bank (5%): $6.75

Totals for the year:

  • Change generated: $180
  • Match from the bank: $51.75

Those numbers look pretty good.

To enroll in Keep the Change, though, you need to have a qualified account, such as the Regular Savings Account, which has a minimum balance of $300 ($3 monthly fee if below), and only pays 0.2% interest.

Your “change” earns a great 100% return for three months and then a respectable return of 5% for nine months. The rest of your money, however, is earning a paltry 0.20% interest (as of July 2008). With an emergency fund of $6,000, using this account means forgoing more than $100 in interest that could have been earned in an account earning 3% interest.

Bank of America can keep its own change.

If you like the concept, set up an automatic transfer of $20/month to a high-yield, no minimum savings account where you keep your emergency fund

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