Personal Finance Blog By MoneyRates - July 2011

Managing checking and savings accounts: It's a family affair

July 28, 2011

| MoneyRates.com Senior Financial Analyst, CFA

Marriage is based on sharing, and yet there are aspects of your household finances that are better off kept separate.

To be sure, participation and openness by both partners in a marriage are important aspects of a successful financial plan. Still, both division of labor and personal space suggest there is also room for not merging every aspect of personal finances. The following are some suggestions on what aspect of personal finances a couple should share - and what they shouldn't.

What to share: vision and savings accounts

Different people can have widely different attitudes towards money and financial responsibility, and compatibility in this regard is an important part of a good marriage. Therefore, you really should have in-depth conversations about finances before you get married. Goals you should be working towards by the time you tie the knot include these three things:

  1. Full disclosure. Get any problems on the table up front, so you can deal with them constructively.
  2. Long-term vision. Agreement on long-term goals well help shape how you work and how you save.
  3. Joint savings accounts. Long-term savings accounts should be the tangible result of your shared vision, so both the legal ownership and regular information about those accounts should be shared by both partners in a marriage.

What to keep separate: checking accounts

For all the positives of sharing, there is one area of household finances you should consider keeping separate: checking accounts. There are two good reasons for this:

  1. Record keeping. Especially in the age of debit cards, it is difficult to keep up-to-date on an account's balance if you are both drawing from the same account.
  2. Individual choice. Even in the best of marriages, you should have the freedom to make personal decisions that aren't subject to minute scrutiny. Not all your purchases will seem necessary, and neither will your spouse's. However, if you each stay within a budget, you should not have to justify each individual purchase.

To put it simply, if you allow yourselves individual checking accounts while building shared savings accounts, it will help you achieve the right balance between individuality and union.

Posted in: Checking Accounts

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The wow factor in current mortgage rates

July 25, 2011

| MoneyRates.com Senior Financial Analyst, CFA

30-year mortgage rates have fallen for eight straight weeks now, and are now at the extremely low level of 4.49 percent. Still, the real wow factor in current mortgage rates can be found in 15-year mortgages.

15-year mortgage rates are at 3.68 percent, which is close to an all-time low. What's striking is that this is 0.81 percent below the level of 30-year mortgage rates.

Over the eleven previous years so far in this century, the spread between 15-year and 30-year mortgage rates has ranged between 0.31 percent and 0.66 percent, so the 0.81 percent spread between current mortgage rates is very unusual territory.

Making the most of current mortgage rates

Even though the more compressed repayment schedule of a 15-year mortgage would result in significantly higher monthly payments than a 30-year mortgage, current mortgage rates indicate the anyone buying a house or refinancing a mortgage should at least consider the shorter option.

Over the long run, of course, the amount of principal involved in a 15-year and 30-year mortgage would be the same. However, the interest you would pay on a 15-year mortgage is considerably less. This is true in general because you would be repaying the loan in half the time, but it is especially true now because of that unusually wide spread between 15-year and 30-year mortgage rates.

While this is an opportunity for new home buyers to save a great deal of money over the course of a mortgage, the opportunity represented by 15-year mortgage rates should be especially compelling for anyone who is refinancing.

If you are several years into paying down a 30-year mortgage, you effectively no longer have a 30-year loan. Your remaining principal is spread over however many years you have left on the mortgage. For example, if you are ten years into a 30-year mortgage, you effectively have 20-year loan remaining. At that point, it might not be too big a stretch to refinance into a 15-year loan. The exceptionally low level of 15-year mortgage rates may mean the increase in your monthly payments is manageable, and in the long run your interest savings will be substantial.

Posted in: Mortgage

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Unhappy birthday: The Dodd-Frank Law reaches the 1-year mark

July 21, 2011

| MoneyRates.com Senior Financial Analyst, CFA

The Dodd-Frank financial reform act reached its one-year anniversary, but the date was marked less by a celebration than by a struggle for survival.

According to the White House, lobbyists have spent $50 million trying to undo aspects of the law. If you have bank deposits, you have a stake in this fight, so it's worth knowing what Dodd-Frank entails.

Flawed, but not fatally

Dodd-Frank is far from a perfect piece of legislation. Perhaps its primary flaw is its complexity. Regulators are still trying to process its requirements, meaning that actual enforcement work isn't yet being done.

More specifically, one of the most egregious aspects of the bill is the Durbin Amendment, which requires the Federal Reserve to cap what banks charge for interchange fees. These are the charges banks make to retailers in exchange for processing debit card transactions. The argument is that capping these fees would benefit consumers, but since the charges are unseen to consumers and come out of the pockets of retailers, chances are it is retailers who will benefit from having these charges capped. Meanwhile, consumers will suffer as banks try to make up for the lost revenue with higher fees, most likely on checking accounts.

What's in it for savings accounts?

Despite those flaws, much of Dodd-Frank is clearly in the corner of depositors. For example, it made permanent the increase in Federal Deposit Insurance Corporation (FDIC) insurance coverage on savings accounts and other deposits, from $100,000 to $250,000. Also, provisions of the so-called Volcker Rule have the potential to limit how banks speculate with deposit money.

The Volcker Rule gets to the heart of why Dodd-Frank was necessary in the first place. If properly enacted, it could restore some of the protections of the Glass-Steagall Act. Glass-Steagall was Depression-era legislation which subsequently helped keep the banking system safe for over 60 years; it took less than ten years after its repeal, in 1999, for the banking system to reach the brink of a meltdown.

Greater deposit protection, and safeguards against banks speculating with your money, are examples of how Dodd-Frank stands behind depositors - and why depositors should stand behind Dodd-Frank.

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More Americans choosing retirement investments over paying their child's college tuition

July 20, 2011

| Money Rates Columnist

The rising cost of a college education is putting many of us in an uncomfortable situation: Should we put our retirement savings accounts ahead of paying for our child's college?

A new study from Country Financial found that an increasing number of Americans are choosing the retirement savings accounts.

Choosing to fund retirement

The study found that 46 percent of us say it's more important to save for retirement than to pay for our child's college education. That percentage is up from 43 percent in 2010 and 42 percent the year before.

While that may sound cold-hearted to some parents, the truth is that many financial advisers agree with that approach. You won't be helping your kids out much if you run out of retirement savings and need to ask them to help support you down the road.

Another reason why an increasing percentage of parents are choosing retirement savings accounts over college tuition bills: 26 percent of them feel a college education is not a good investment anymore, up from 19 percent who felt this way in 2010. While money market rates aren't that great and even the best savings accounts have historically low returns, they look lucrative to the return some parents see their child getting from an expensive college education.

Country Financial reported that the average student loan debt now approaches $30,000, and with uncertain employment prospects, the return on that expenditure may be a long time coming. Some may feel it's smarter to put the money in an online savings account or into a money market account.

Bridging the gap in college funding

Parents faced with the difficult tuition vs. retirement savings question have some options, however.

You can ask your kid to shoulder the responsibility for now, and if later in life you have the financial wherewithal to help out, you can help pay down those student loans.

Your child can also find a cheaper school to go to. Sure there are advantages to going far away for college, but chances are an in-state school is just as good and a lot cheaper.

Finally, you can have your child take on a part-time job to help pay the tuition bill. This is life, and working to help for their degree will heighten their appreciation of what they've accomplished.

Posted in: Personal Finance

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Hitting the roof: Debt ceiling stalemate puts savings accounts at risk

July 19, 2011

| MoneyRates.com Senior Financial Analyst, CFA

Economists warn that interest rates will soar if the stalemate over the federal budget results in a default on Treasury bonds. So why have interest rates declined as the deadline has approached?

Maybe the financial markets have faith that the country's political leaders will stop playing chicken with the global economy, and will find a responsible solution. A more realistic explanation might be that falling interest rates represent investors going into duck-and-cover mode.

Interest rates hang in the balance

A default by the U.S. government, or even an impaired ability to pay its debts, would theoretically lead to higher interest rates because lenders would demand more reward for investing in bonds, since receiving interest and principal payments on those bonds would no longer be viewed as a sure thing. Anyone who has ever had credit problems can understand that - the shakier your history of paying your debts, the higher your credit card rate will go.

U.S. Treasury bonds are, effectively, the government's credit card. That's how the government routinely borrows the money it needs to operate. Curiously, though, as the risk of default has mounted, Treasury bond rates have fallen, not risen.

The reason is that when faced with uncertainty, investors instinctively reach for conservative investments, such as Treasury bonds. In the short-run, this may have increased demand for those bonds, causing rates to fall. However, if default forces investors to realize that Treasury bonds are no longer low-risk investments, interest rates could quickly spike upward.

No-win situation for savings accounts

If you think that higher CD, savings, and money market rates could be the silver lining to the budget stalemate, think again. Yes, if the government defaults, it is possible that CD, savings, and money market rates could rise. However, the federal insurance that backs those accounts would no longer be such a sure thing if the government defaults.

So, the possible outcomes seem to be that either budget cuts will slow the economy and depress interest rates, or a budget crisis will make savings accounts riskier. In short, a no-win situation for savings accounts.

Posted in: Savings Accounts

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