Personal Finance Blog By MoneyRates - August 2011
August 30, 2011
Even before your college student steps foot in the lecture hall, it may be time for him or her to take a crash course on something that will pose a test for the rest of his or her life: finances.
While your student's spending and budgeting skills can have a profound effect on your own checking account and might tempt you to keep their financial activities under your wing, it's important for young adults to build a credit history of their own.
That record will be important when they graduate and need to rent an apartment, buy a car or even get a job--since many employers now check credit histories when making hires.
Having students acquire their own checking accounts, money market accounts or online savings accounts has a number of advantages. For instance:
- They learn to shop around, finding out that while some banks are charging monthly fees for a checking account, others are still offering them for free.
- They learn how to balance a check book, making automatic deposits into savings accounts and the value of direct deposits from that part-time campus job.
- You'll have a chance to talk through the advantages and disadvantages of having overdraft protection, which can prevent the embarrassment of a declined purchase but can ultimately cost a great deal in late penalties and fees.
We've all heard a lot about the dangers of credit cards for college students, but the Wall Street Journal notes that getting a student credit card with a low credit limit can help a student build a good credit rating, as well as providing funds in emergencies.
Students can also use their cards to build up rewards, although there is the obvious danger of overuse. The Credit Card Act of 2009 restricts campus-based promotions on student credit cards, and students younger than 21 now have to have a co-signer.
If you're reluctant to co-sign, you can also add your son or daughter to be an authorized user on one of your cards. This may give you a few "teaching moments" as you see how your child is using the card, and it will help him or her build a good credit rating.
Posted in: Personal Finance
August 30, 2011
"The only thing we have to fear is fear itself."
In the midst of the Great Depression, Franklin D. Roosevelt signaled the tone he would set in his presidency with that statement during his first inaugural address. Can President Obama summon a similarly stirring message when he addresses a joint session of Congress on jobs Thursday night?
A matter of confidence
Confidence is the key to the current situation. Overall, corporations and consumers are in better financial health than they were three years ago, but the economy is caught in a catch-22. As long as no one believes the recovery will last, consumers won't spend and business executives won't hire. If those things don't happen, the recovery really is doomed.
A shot of confidence would go a long way towards addressing this problem. President Obama's address is an opportunity to start rebuilding confidence, but unfortunately, the government's role so far has been to destroy confidence rather than inspire it.
Both the debt ceiling negotiation and the budget deal that followed it created serious doubts about the ability of this President and this Congress to govern together. Both parties need a better performance on job initiatives.
Are they capable of that? So far the signs are mixed. Some Republican leaders are identifying areas of common ground with the President, but other members of their party are already abdicating the responsibility to govern by announcing plans to skip tomorrow night's address.
CD, savings, and money market rates reflect bank confidence
Savings accounts and other deposits also have a stake in the jobs discussion. Low CD, savings and money market rates reflect low levels of confidence by banking executives. They are not confident they can lend profitably or find attractive investment opportunities in the current economic environment. Absent the need for capital, they are not willing to pay higher interest rates for deposits.
A great deal is riding on the discussion that tomorrow's address will initiate. It may turn out that the only thing we have to fear is partisan bickering; unfortunately, that has turned into a pretty scary force in American politics.
Posted in: The economy, the Fed, and interest rates
August 29, 2011
What's the relationship between health and savings accounts?
People often talk about their financial condition being healthy or unhealthy, and in that sense it's just a metaphor. However, there actually is a relationship between a person's physical health and their financial needs, and that relationship is not what you might think.
While getting sick can be costly, it turns out that being healthy may be even more expensive.
Good health puts a strain on savings accounts
A reporter from CBS MoneyWatch recently tested a new tool which projects lifetime medical expenses according to a person's health. For example, a smoker can expect to pay $85,294 in lifetime medical expenses. A hefty medical bill probably comes as no surprise in that case, since it's well known that smoking can cause a variety of medical problems. What is surprising is that the projected lifetime medical expenses for a healthy person are considerably higher, at $121,862.
You may have guessed what's going on here. Unhealthy people live shorter lifespans, which limits their lifetime medical spending. For example, a 65-year-old man who is in good health can expect to live 23 more years. However, if that man is a smoker, he should only expect to live 16 more years. Those seven fewer years of life expectancy account for the lower projected lifetime medical expenses.
Healthy fiscal and physical lifestyles
In one sense, then, physical health and fiscal health are at odds--the healthier you are, the longer you'll live, so the more money you'll need in retirement. In another way, though, healthy fiscal and physical lifestyles go hand in hand.
After all, good health and sound finances depend primarily on a lifetime of consistent habits. You can't make much of a long-term change in your physical condition with a short-lived health kick, just as a brief period of economizing won't do much for your long-term savings needs. If you develop good physical and financial habits day in and day out, you should find you develop both the good health to live a long life, and the retirement savings to afford it.
Posted in: Retirement
August 25, 2011
Maybe it was perfectly in keeping with this "expect the unexpected" financial environment. Even so, last week's inflation report was a cruel blow to savings accounts and other deposits, which have already taken more than their fair share of lumps.
The latest twist from inflation
Last week's release of the Consumer Price Index from the Bureau of Labor Statistics indicated that inflation rose by 0.5 percent in July. This is a fairly high rate of inflation--it brought year-over-year inflation to 3.6 percent, and if continued a 0.5 percent monthly rate would translate to annual inflation of over 6 percent.
This high inflation number was a bit like an actor going off script. Inflation in recent months had been weakening, which was consistent with the slowing economy. The rate of inflation slowed in April, May, and June, with June's number slipping into negative territory. However, July's 0.5 percent inflation marked a return to the highest readings of the year.
The source of this surge of inflation is a little curious. Oil prices perked up a little in July, but this shouldn't be an ongoing problem as they have resumed their downward course in August. Apparel costs rose by 1.2 percent in July, which was their third consecutive monthly increase of more than 1 percent. That seems odd given weak consumer spending, and will remain a key area to watch.
Impact on savings accounts
Interest rates on savings accounts, like CD and money market rates, are so close to zero that they provide virtually no cushion against inflation. With the economy appearing to weaken, no rise in these rates was on the horizon, but the silver lining was that inflation seemed to be weakening along with the economy. This latest flare-up of inflation increases the burden on savers, robbing them of purchasing power because interest rates aren't close to keeping up with this level of price increases.
Savers will have to watch the next inflation report anxiously. Monthly numbers can be erratic, and indeed, the last two inflation reports have sent conflicting signals. The next one might be an indication of which way the trend is developing.
Posted in: Savings Accounts
August 24, 2011
Investors who stayed with the stock market through its harrowing 2008 decline and continued to hold equities in their 401(k) savings accounts through this year had an average account balance increase of 50 percent, according to Fidelity Investments.
In a press release, Fidelity, which makes money managing workplace retirement savings accounts, said that investors who hang in there during a volatile market and maintain a diversified portfolio can make some serious loot when the market comes back.
Fidelity didn't make the detailed findings of its analysis publicly available. But the company was clearly trying to keep people from bailing out of the stock market during the current turmoil--in which stocks have plunged and soared and plunged again in reaction to disheartening economic news, including the recent reduction in the United States' debt rating.
During this time, even the best savings accounts and the best CD rates have remained at historic lows, which means that investors looking for a safe place to park their money during the stock market gyrations have fewer options. Many investors, expecting a drop in the stock market during Washington's debate over the debt ceiling, simply moved stock market investments into a checking account, money market account or online savings account to ride out any turbulence.
According to the Fidelity release:
- 401(k) savings account participants who moved out of stocks between October 1, 2008 and March 31, 2009 and stayed out until June 30 of this year saw their savings account balances increase only 2 percent.
- Those who dropped out but returned to stocks had balances increase 25 percent.
- Those who stopped contributing during 2008-2009 increased their account balances by 26 percent.
- Those who kept making regular contributions increased their balance by 64 percent.
In all, the company examined 7.1 million 401(k) savings accounts. It also noted that more than half of the participants are using Fidelity's target date funds, which offer diversified portfolios based on your projected retirement age, reducing risk as you get closer to leaving the workforce.
Posted in: Personal Finance