Ask The Expert
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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April 27, 2016
Q: I just interviewed for a job and it went well. The potential employer said the next step is to check my references and my credit report. Why my credit report? Is that even fair? I had some credit problems a few years ago, and though I've worked to improve it, I'm sure there are still some issues there. Why should that count against me getting a job?
A: Checking a credit report is a fairly common, though still somewhat controversial, part of the hiring process for many companies. Whether you agree with it or not, here are three reasons why a company might want to review the credit history of prospective employees:
- To see what it says about how you handle responsibility. Companies that extend credit, such as credit cards, rely on people to pay it back. What is an employer to think if they see someone has consistently blown off that responsibility?
- To anticipate a potential source of distraction. People in serious credit trouble spend a great deal of time fending off people they owe and trying to solve their financial problems. If you were an employer, is that what you would want to be foremost in an employee's mind?
- To flag potential security risks. If a job involves financial responsibility, an employer is going to want to know whether an employee is under pressures that would make them especially vulnerable to temptation.
In this case, you know that this potential employer intends to look at your credit report. In general, anyone looking for a job should consider it a possibility.
4 things job seekers should do with credit reports
Here are four steps to take for your job search to better deal with credit issues you may have:
1. Check a recent copy of your credit report
If interviewers are going to be looking at your credit report, you should at least see what they are seeing. You mention having had problems in the past. You need to know which of these are still reflected on the report. In the process of discussing your credit history, you don't want to resurrect issues that have already dropped off your credit report.
2. Fix any credit errors
Errors happen, so get them cleaned up before anyone gets the wrong impression.
3. Submit an explanation of negative marks on credit history
If there are legitimate negative issues on your credit report, you have the right to attach a 100-word explanation of them. Don't try making excuses for everything though. Just point out things that occurred because of unusual circumstances that are not likely to be repeated. Also mention steps you have taken to rectify the problem.
4. Meet the credit issue head on
Whatever credit mistakes you may have made in the past, you should address them openly with any potential employer who asks for permission to view your credit report. You need to demonstrate that you have taken responsibility for your mistakes and have changed your ways.
Chances are, the credit report is not a primary determinant of whether someone gets hired or not. Instead, it is just a piece in the mosaic of things employers consider when evaluating talent.
Comment: How do you feel about employers checking job applicants' credit reports?
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April 5, 2016
Q: Are money market accounts insured by the FDIC?
A: That depends on what you mean by "money market accounts." It is important to distinguish between money market savings and money market funds when determining FDIC insurance coverage.
Money market savings accounts vs. money market funds
The two names are very similar: money market deposit accounts, and money market funds. They are both liquid assets offering similar (generally relatively low) interest rates. However, for all the similarities, there is a critical difference.
Money market savings accounts held at participating FDIC-insured institutions are covered. Money market funds, on the other hand, are a form of mutual fund and as such they are not covered by FDIC insurance.
Why money market funds have restrictions
This lack of insurance for money market funds does more than open up the possibility of losses in those investments. A couple years ago the U.S. Security and Exchange Commission adopted reforms (inspired by the 2008 financial crisis) that could restrict the liquidity of money market funds.
Rules for money market funds
For one thing, the SEC changed accounting rules for money market funds so that their market values can now vary. Therefore, if a fund is trading below what you paid for it, you cannot count on getting all of your original value back when you need it. Also, to prevent runs on money market funds in times of financial stress, the SEC also now allows fund companies to restrict withdrawals under certain circumstances, or impose a fee for those withdrawals. Either of these could impact the availability of your money.
So, generally speaking, both money market deposit accounts and money market funds provide stability and liquidity. However, if you want absolute stability and liquidity, you should look at money market deposit accounts.
FDIC insurance limits for money market accounts
When discussing FDIC insurance coverage, it is always wise to review coverage limits.
For one thing, the insurance only applies to participating institutions, and to certain deposits products. You can find out if a certain institution is has FDIC insurance coverage by using the "bank find" feature on the FDIC website. Banks that are covered by FDIC insurance may offer products that are not covered, so it is important to make sure you are signing up for a type of account which is covered.
Understanding limits for individual, joint accounts
Even in covered accounts, FDIC insurance is not unlimited. Generally speaking, FDIC insurance limits go up to $250,000 for individual accounts, and $500,000 for joint accounts. Even if an individual has multiple accounts at an institution, only $250,000 in total is covered at that institution. You can obtain more coverage by spreading your deposits around to multiple banks.
Other accounts with FDIC insurance coverage
Along with money market accounts, FDIC insurance also covers the following at participating institutions:
- Checking accounts
- Negotiable Order of Withdrawal (NOW) accounts
- Savings accounts
- Time deposits such as certificates of deposits (CDs)
- Cashier's checks and money orders issued by a bank
FDIC insurance is one of those things people take for granted until times when the financial system is under duress. You are wise to check on it now, so you don't have to worry about it when it matters most.
Comment: Do believe FDIC insurance limits for money market accounts are enough for your deposits?
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March 2, 2016
Q: Please tell me where I can get the tax-free account with safe maximum interest rates?
A: As simple as that question may seem, it actually breaks down into three components:
- Setting up a tax-advantaged vehicle
- Defining safety
- Finding the highest interest rates
Here are these three components in depth:
1. Set up an investment vehicle with tax advantages
The best way to approach the tax question is to set up a tax-advantaged vehicle like an individual retirement account (IRA). These allow for a variety of investment products to be used within them, giving you the latitude to choose the product that suits your risk profile and has competitive rates.
Traditional or Roth IRA for tax-free savings?
Within IRAs, you can choose between a traditional and a Roth IRA. The principle difference between the two is that a traditional IRA allows you to defer taxes until you start taking money out of the plan. A Roth IRA requires that you pay taxes up front, but then all your investment earnings and distributions from the account are tax-free.
A major factor in deciding which IRA is right for you is whether you think your tax bracket is likely to be higher now or when you are in retirement. When you are in a relatively low bracket, you can pick the type of IRA that will require you to pay taxes.
As you might gather, these plans are not completely tax free, but they do offer you the opportunity to defer taxes or avoid taxes on investment earnings.
2. Determine which investments are 'safe'
Though several investment products and instruments offer guarantees of principal and interest, the key is to determine who is backing that guarantee. For example, an insurance annuity product may only be as safe as the creditworthiness of the company issuing it.
Are government-backed deposits safe?
Generally, to be completely safe, people opt for investments backed by the U.S. government. This includes Treasury bonds and FDIC-insured deposit accounts.
However, time frame is also a factor. Treasury bonds can fluctuate in value up until the time they mature, so if you have a shorter time frame, this may represent some risk.
Certificates of deposit (CDs) don't fluctuate in value, but if you need to access your money before maturity you may face a penalty. Again, time frame is a factor in determining what "risk-free" means.
3. Locate the highest interest rates
Once you have determined the risk profile and the time frame that suit you, you can compare rates among products with similar characteristics.
How can you compare interest rates?
For Treasury bonds, this is pretty straightforward - Treasuries with similar maturity dates should have similar yields. For deposit products, you have a wide range of choices and bank rates for savings accounts and CDs vary widely.
As you can probably guess, it helps to get the question of how you want to define safe investments out of the way before you start comparing interest rates. That definition will narrow down the field, and allow you to make apples-to-apples comparisons of rates among vehicles with essentially the same risk profile.
Find the best offers and make it easy to find the right low-risk investments for you via the deposits listings provided by MoneyRates.
Comment: Are you looking for low-risk investments? Why are you adopting this investing strategy?
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February 9, 2016
Q: My mother passed away in 2004. Back in 2000, she had two CDs and a checking account with the Farmers Bank of Lynchburg, with balances of $50,000 and $21,000. The bank failed in 2012. Is there any way I can locate those missing deposits? I tried contacting the bank and the Treasury Department, with no luck.
A: This is a tricky situation, and not just because the bank where you believe your mother's deposits to have been has failed. What further complicates things are the gaps in time: The time between when your mother passed away and when the bank failed, and going back even further, the four-year gap between the last balance amounts you have (2000) and your mother's passing (2004).
Those gaps make it difficult to ascertain whether there really was any money left in these accounts by the time the Farmers Bank failed, and if so, how much. So, perhaps a good place to start would be by trying to address those gaps in time.
Here are ways to find more information about old bank accounts:
1. Speak to the executor of your relative's will
One logical step would be to speak to whoever was the executor of your mother's will. This person may already have researched whatever assets your mother had at the time of death, and should be able to account for how they were disposed of after she passed away.
2. Comb through previous financial records
If that avenue does not lead you anywhere, you might try looking through any old financial records and correspondence of your mother's, if any of that is still available. The purpose of this would be to try to find more up-to-date records of her bank accounts than four years before her death.
Keep in mind that people often draw down their savings in the latter years of their lives. Between medical bills and other costs associated with care, along with the limits of Social Security and other retirement income, in many cases this depletion of assets is inevitable.
It is entirely possible that your mother had to spend down those bank accounts between 2000 and when she passed away. Unless you can find more of a continuous paper trail demonstrating that there was still money left when she died, it will be difficult for you to conclude that this was not the case.
3. Contact the FDIC and see if other banks took over assets
There are a couple other leads you can try, though these may be a long shot with the gaps in information. The best place to research old bank accounts is not the Treasury Department but the Federal Deposit Insurance Corporation (FDIC). According to the FDIC, when the Farmers Bank of Lynchburg failed, the assets were taken over by the Clayton Bank and Trust of Knoxville, so you might try contacting them.
4. Use the FDIC's online search tool
Alternatively, the FDIC has a search tool that can help you try to locate any unclaimed funds that may be in your mother's name.
Good luck with your search. For other readers, this is a good reminder to encourage your older relatives to keep orderly financial records can be easily located if something happens to them. Come to think of it, that's good policy for everyone, young and old.
Comment: Have you had trouble locating old bank accounts? Have you found success in finding them with the steps described above?
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January 27, 2016
Q: With gold getting so beat up, do you think silver is a good investment for retirement savings?
A: Though they don't always perform the same way, gold and silver have similar problems as retirement investments. That does not necessarily mean you should rule them out entirely, but if you invest in them you should view them only as a small part of a very broadly-diversified portfolio.
Both gold and silver prices peaked around 2011, and since have been in a long descent. That may not be such a bad thing - buying on the way down is certainly better than buying at the peak. Still, the bear market in these metals that lasted for several years illustrates some of the problem with these kind of commodities.
Problems with investing in commodities
There may be certain issues with investing in commodities like gold, including:
Investing in commodities, whether it be metals like gold and silver, foods like grains or energy sources like oil, is very different from investing in savings accounts, bonds or stocks. They produce no regular income like savings accounts, bonds and dividend stocks, nor do they produce regular earnings like stocks to form a basis for future prices. They simply represent an asset that can be bought or sold. Depending on whether or not the price goes up, you will either profit, break even or lose money.
Volatility in value
This makes them highly speculative, and thus subject to large swings in value. Between their volatility and lack of income production, they are often not very suitable for retirement investment portfolios in which the owner needs to count on redeeming value from the assets at regular intervals.
May be hard to predict in market
Again, commodities in general tend to by highly speculative, but metals like gold or silver may be especially prone to speculation, because unlike grains or oil, they are not completely consumed when used. Metals, especially in the form of jewelry, can largely be recycled, so supply and demand is less subject to normal market dynamics.
Commodities as an inflation hedge
A popular reason for investing in commodities is as a hedge against inflation. However, keep in mind that at any given time, inflation might be driven by a particular part of the commodities market. Thus, an investment in silver or any other particular commodity may not mirror the general move in inflation. This is why, if you want to invest in commodities as an inflation hedge, it is advisable to do so via a well-diversified basket of commodities. Even so, if inflation turns out to be driven by wage pressure rather than commodities prices, your inflation hedge might not work out.
Unless you have some particular knowledge of the gold and silver markets, there seems no particular reason to favor silver over gold. Both are already well into a sustained price slump, but given the history of these commodities, those slumps can last a long time. To be fair, the low inflation environment has not favored investments that are often viewed as inflation hedges. However, keep in mind that there is no guarantee that they will respond as expected if inflation heats up.