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Richard Barrington, CFA, is the primary spokesperson and personal finance expert for MoneyRates. He is a 20-year veteran of the financial industry, including having served for over a dozen years as a member of the Executive Committee of Manning & Napier Advisors, Inc. He earned his Chartered Financial Analyst designation in 1991 with the Association for Investment Management and Research (AIMR). Richard has written extensively on investment topics, including investments, money market accounts, certificates of deposit, and personal finance as it relates to retirement.
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June 28, 2016
Q: What is the best way to pay for stuff online?
A: As commonplace as online commerce has become, it does not pay to get complacent, and you are correct to raise concerns about security. There are also financial differences in the different methods of payment.
Broadly speaking, you have three options: credit cards, debit cards and online payment services like PayPal.
Purchases protected from fraud
From a security standpoint, credit cards offer consumers excellent protection against unauthorized transactions, if they are reported on a timely basis. Financially, credit cards allow people to use the money interest-free until the bill is due, during which time their money could be earning a little extra interest in their savings accounts. Another advantage of credit cards is that many offer rewards programs, so you can get a little something back on your purchases.
Easy to accumulate debt
On the other hand, there are two major problems with credit cards. Credit lines make it easy to spend more than you have, which can lead to racking up an uncontrollable debt balance. And, with credit card interest rates running in excess of 13 percent, that debt costs much more than any potential extra interest on savings accounts. So, use this method only if you are diligent about limiting your spending and paying your balances off in full every month.
Debit cards make it easier to limit your spending to what you have in your checking account, and thereby avoid overspending and onerous credit card interest.
Less protection than credit cards
On the other hand, debit cards provide less protection against fraudulent purchases. This is a particular concern because they provide direct access to your checking account. Also, whether the transaction is legitimate or not, directly drawing on your checking account can result in expensive overdraft fees. Finally, while debit cards rewards programs once were commonplace, they have largely disappeared in recent years.
Online payment services
Reduce security risks
Using an online payment service like PayPal can allow you to create a buffer between various online vendors and your actual accounts, so this can limit your security exposure.
Unable to earn interest
At the same time, balances kept with these services do not earn interest, nor are they protected by FDIC insurance. So, be sure to transfer just what you need into these payment accounts, and make your purchases with that money shortly after it is available.
Credit, debit or online payments: Which will you choose?
Face it - all e-commerce is a trade-off between security and convenience. Each vendor you deal with, and each transaction you enter into, is a potential security risk. To the extent you can limit how many vendors you transact with online and consolidate purchases into fewer transactions, you can help rein in the risk you are taking.
Ultimately though, if technology is the source of this security problem, it is also part of the solution. Use technology, such as transaction alerts and online account monitoring, to keep closer track of all activity in your accounts. No approach is completely safe from cyber threats, but vigilance can help you monitor the size of any potential problem.
Comment: How do you prefer to pay for your online shopping purchases?
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June 22, 2016
Q: Do you have any tips for buying a home on a low income?
A: Often, being able to afford a home is not so much a question of income as of expenses. If you are good at managing your expenses and can find the right property, you may well be able to afford a home on a modest income. In fact, the low level of current mortgage rates makes homeownership unusually accessible.
To take advantage of this opportunity, here are three steps to consider:
Master your household budget
Not getting in over your head with a home purchase depends greatly on being able to predict your income and expenses. The income side of this comes down to the stability and security of your job. You should not contemplate homeownership unless you are confident that you have a steady job, and marketable skills in case you need to change jobs.
On the expense side, you can only know what you are getting into with a mortgage if you learn to predict expenses reliably. This means laying out a budget that accurately captures all your upcoming expenses, and then having the discipline to stick to that budget. Saving for a down payment in a savings account can be a great exercise in implementing this kind of strict budget discipline, and the money you save up should also help with your home purchase.
Concentrate on home values, not price
While you are working on your budget and saving for a down payment, get to know the area real estate markets. This will give you an idea of where the best values might be found, and give you enough of a sense of local prices that you will know a good deal when you see it.
The key word here is value, rather than price. The cheapest home might not be the best buy, if it is in a bad neighborhood or not in sound condition. You should be looking for something you can live with long-term that is reasonably priced.
Secure an FHA or VA loan
With a limited income, a possibility you should look into is a mortgage through the U.S. Federal Housing Administration (FHA). The FHA is a department of the federal government that arranges mortgage insurance in order to give lenders confidence to make loans to homebuyers with relatively low incomes or minimal credit histories. They also provide loans with low down payments, though saving up for a larger down payment should earn you better terms on your loan.
If you are a U.S. military veteran or service member, you should also look into a loan with the U.S. Department of Veteran Affairs. This is another federally-backed program, with even more favorable terms than FHA loans.
If you choose an FHA or VA mortgage, keep in mind that while these are government programs, they are offered by private lenders. Even though the level of current mortgage rates is generally low, actual rates will vary from lender to lender. So, shopping around for the best rate will help your income go farther toward affording a house.
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June 16, 2016
Q: My husband is 34. He is debating whether to use an old 401(k) from a previous employer to pay off the house. He has a new 401(k) that has about $15,000 in it and plans to leave it alone and continue to contribute to it. The 401(k) in question has about $130,000 in it. We owe $81,000 on the house and have 24 years left on the mortgage. So, after early withdrawal penalties and taxes, we'll have enough to pay off the house, which will save us like $62,000 in interest over the life of the loan and free up about $600 a month. But is the cost of cashing that out worth it? Any advice would be greatly appreciated.
A: Saving $62,000 in interest over the life of your mortgage sounds tempting. However, the other side of the equation is what you would have to give up to obtain those savings. When it comes to early withdrawals from a 401(k) plan, the price is generally not worth it. This may be especially true in your case because there may be alternatives to withdrawing from this fund that could save you a substantial amount of interest expense on your mortgage without causing you to take a hit to your 401(k) retirement savings.
Tax penalties vs. mortgage interest savings
Since your husband is younger than 59½, taking money out of his 401(k) to pay off your mortgage will mean first having to pay a 10 percent tax penalty for the early withdrawal, plus whatever tax rate you normally pay on income since the income tax was deferred when the money went into the plan.
Future investment earnings in danger
As a result, you are going to have to take out considerably more than $81,000 in order to have $81,000 left over after taxes to pay off your mortgage. Now think about the future investment earnings you will miss on the amount you take out. Even at a very modest rate of return, these earnings could very easily exceed the interest you would save on your mortgage. To find out how much your retirement fund will be worth in the future, use a retirement savings calculator to better inform your financial decisions.
Alternative to early withdrawals: Refinancing mortgage
Since you are six years into your mortgage, there is a good chance that the original loan was at a substantially higher interest rate than current mortgage rates. In this case, refinancing could save you a fair amount of interest, without you having to pay the tax penalty or give up future earnings on your current 401(k) balance.
Better yet, with six years of your loan paid off and refinance rates much lower these days, you could consider refinancing to a 15-year loan. In the long run, this would save you money in two ways. Rates on shorter mortgages are much lower than on 30-year home loans, plus you would save by paying interest over fewer years. In the near term, you would probably have to cope with a higher monthly payment, but you might find that the lower interest rate means this is affordable and well worth the long-term savings.
Got a financial question about saving, investing or banking? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature by emailing ask@Moneyrates.com.
May 9, 2016
Q: Why are oil and gold and so many other commodities priced in U.S. dollars, regardless of where they come from? Is this an advantage or a disadvantage for U.S. investors?
A: The U.S. dollar is the world's trading and reserve currency of choice, and while that is a sign of strength, it also has its drawbacks.
Why is the dollar so dominant?
The U.S. has the world's largest economy, and while the U.S. has had its share of ups and downs, you would be hard-pressed to find a major economy that has had such consistent growth since World War II. The combination of size and stability makes a very compelling argument for using the dollar as, in effect, the international language of finance.
Is the dollar's popularity a blessing or curse?
You ask if that is good or bad for U.S. investors, and the answer depends on your perspective.
Being used so ubiquitously creates demand for the U.S. dollar, which helps support its value. That is good for U.S. consumers who pay less for imports than they would if the dollar were weak.
It is not so good for U.S. companies trying to compete with foreign companies whose cheaper currencies can give them a pricing advantage.
Similarly, the impact of the dollar's popularity on interest rates is a mixed blessing. Demand for the dollar and dollar-denominated securities helps keep U.S. interest rates low, despite the massive amount of debt racked up by the U.S. government (and individual consumers). You would appreciate the low interest rates if you had recently taken out a mortgage, but you would not be so wild about them if you have a lot of money in savings accounts earning practically nothing in interest.
It can also be argued that cheap borrowing is a form of hazard because it encourages the accumulation of large debts which might become unmanageable, especially if interest rates do eventually rise.
Overall though, most financial people would argue that being the world's trading currency is a positive: It lets investors focus on the supply-and-demand fundamentals of the commodities they are buying, rather than having to also account for currency as an unstable variable.
Will other currencies topple the dollar?
Of course, it is not a given that the dominance of the dollar will last forever. Various currencies have played a similar role in the past, and just as the dollar took over from the English pound in the last century, another currency might someday eclipse the dollar.
After all, there have been challengers. The euro was formed in part to create a multi-national currency with enough critical mass to rival the dollar. More recently, China's yuan currency has gained credibility as its economy has grown, and the country's plan to launch an energy futures exchange this year shows a clear intention to play a role as a trading currency. However, euro countries and now China will have to solve their own economic problems before their currencies are a serious threat to the dollar.
So, for better or worse, the dollar remains on the top of the heap.
Comment: Do you think the dollar will still stay on top in the future?
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May 5, 2016
Q: If you have $500,000 in a Trust Account (owned by one Trustee) but left to 2 adult children, is that account covered for $500,000 by FDIC?
A: The key to this question about Federal Deposit Insurance Corporation insurance is whether the trust is revocable or irrevocable. More than anything else, that determines the extent of FDIC insurance coverage for multi-beneficiary trust accounts.
Revocable vs. irrevocable trusts
Trusts can be revocable or irrevocable.
A revocable trust is one that designates beneficiaries who will receive the proceeds of the trust upon the owner's death, but in the meantime the trust can be terminated or have its terms changed by the owner. One way to think of this is that owners of revocable trusts have prescribed what will happen to the money after they die, but reserve the right to change their minds.
A revocable trust may become an irrevocable trust once the owner dies because effectively there is no longer an option to cancel or change the trust.
An irrevocable trust also has designated beneficiaries, but is not subject to change. Once money is contributed to an irrevocable trust, the owner gives up all rights to cancel or change the terms of the trust.
FDIC insurance limits for trusts
Coverage for revocable and irrevocable trusts is based on FDIC insurance limits of up to $250,000. What varies is how many people that limit applies to.
Revocable trust and FDIC insurance coverage
In a revocable trust, the owner is considered the depositor and the account is only eligible for $250,000 of FDIC insurance coverage. However, if a bank fails after a trust owner has died but before the trust has been paid out or deemed to be an irrevocable trust, the beneficiaries are considered the depositors and each is entitled to $250,000 in coverage.
Irrevocable trust and coverage
In an irrevocable trust, the beneficiaries are considered to be the depositors even before the owner dies, as long as there are no conditions the beneficiaries have to meet to remain eligible for trust proceeds. If that is the case, each beneficiary would be eligible for $250,000 in FDIC insurance coverage. However, trusts are often based on contingent interests, which means that there are conditions the beneficiary has to meet in order to be eligible for trust proceeds. In that case, FDIC insurance is based on the trust as a whole, with a maximum of $250,000.
In effect, the insurance coverage in each case is allocated according to how many people have a right to the proceeds of the account. The living owner of an revocable trust still has control over the account and so is only eligible for $250,000 in coverage regardless of how many beneficiaries there are. Once a trust becomes irrevocable, as long as there are no conditions, the beneficiaries have the rights to the proceeds of the account and so each is eligible for $250,000 in coverage.
There is a useful reference on the FDIC website that will help you trace through how all this applies to your situation. Naturally, any insurance coverage depends on the trust being deposited in an eligible account at an FDIC-participant institution.
Comment: Do you have trust accounts for your children?
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