Tired of Fed-watching, saver? Watch these banks instead

September 17, 2014

| Money Rates Columnist

Since the Great Recession, the U.S. economy has seemed to change direction as often as the wind. But at least one trend has stood throughout this period, much to the dismay of savers everywhere: historically low deposit rates.

After recent speculation that the Federal Reserve may raise rates – or at least signal new intentions to raise rates soon – the Fed today reiterated its commitment to low rates in the statement from its latest meeting.

For depositors, these words confirmed that the era of abysmally low rates on savings accounts, money market accounts and certificates of deposit will remain for the foreseeable future.

“The Fed’s low-interest-rate policy has been a boon to borrowers, but devastating to people who have seen the interest on their savings wiped out,” says Richard Barrington, CFA, senior financial analyst for MoneyRates.com.

Yet not all hope is lost for savers. One unique feature of today’s interest rate landscape is that the range of deposit rates, in a way, has never been wider.

How so? While the average savings account is paying a dismal 0.06 percent annually, the top accounts in that category are offering rates near 1 percent. That means you can find rates roughly 15 times the national average if you’re willing to shop around today – something that’s not usually possible in a normal interest rate environment.

In more concrete terms, that means a $100,000 nest egg can today either earn about $60 annually in a savings account with an average rate – or nearly $1,000 in an account that pays a leading rate.

“It’s easy to look at these small percentages and dismiss the differences as trivial,” says Barrington. “However, when you look at it in dollar terms, it’s clear that shopping for rates is still worth the time.”

Yeah but still …

OK, so fraction-of-a-percent advantages still may not be enticing enough for you to switch banks, particularly if your current balance is below $100,000. But ignoring the trends in banking today may cost you more dearly once rates finally reverse course and begin to rise.

While rates remain low overall, a number of banks – many of them online-only institutions – have led the pack for competitive rates for some time now. This apparent eagerness for deposits makes them some of the best institutions to watch when rates finally start climbing – and the discrepancies between bank rates take the shape of percentage points instead of basis points.

To help acquaint you with some of the current deposit-rate frontrunners, here are some of the top-paying banks, in no particular order, as revealed by recent MoneyRates.com research.

1.  Barclays

This UK-based financial giant took a bold step into the U.S. retail banking space in 2012 with the introduction of a line of online-only accounts. Its savings account rate has stood at highly competitive levels ever since, earning that account a top-three finish in the MoneyRates.com America’s Best Rates survey – a quarterly study that examines the savings and money market rates offered by top banks – in each of the last four quarters.

2. Synchrony Bank

Like Barclays’ vehicles, Synchrony’s Optimizer Plus accounts are based online. Also like Barclays, Synchrony has signaled an aggressive desire for consumer deposits through its industry-leading rates in recent months. Its savings account topped that category in the second-quarter installment of America’s Best Rates, posting an average annual percentage yield of 0.95 percent over that period.

3.  Doral Bank

Not sure about the online-banking thing? As the top branch-based institution for savings accounts in the latest America Best Rates survey, Doral Bank may have what you’re looking for. The only caveat? The award-winning Doral rates were offered through its New York-based branches, so if you want high rates and branch-based service, you’ll need to be positioned accordingly. (Doral also has U.S. branches in Florida, but as of this writing, its rates there were well below that of its New York-based offerings).

4. Ally Bank

Despite slipping slightly in the last America’s Best Rates survey – it finished sixth place in the savings account category and tied for third in the money market account bracket – Ally can still claim a certain consistency in its rates: Its savings account topped the rankings in MoneyRates.com’s Best Savings Account 2014 feature, a study that averaged four quarters of rate data to identify the top-performing accounts for the year. Thus if you’re looking for a bank that has a strong history of competitive savings account rates, you could certainly do worse than Ally.

5. Your local midsized bank  

The America’s Best Rates data also measures how well specific categories of banks are paying on their accounts. (In case you couldn’t guess from the list above, online banks are the foremost standout category, offering average rates several times that of those at brick-and-mortar banks.) But if you’d like to stay local and branch-based in your banking, you may do best to skip both the behemoths and the micro-banks: Midsized banks, or those with between $5 billion and $10 billion in deposits, offered average rates more than 10 basis points higher than their smaller and larger counterparts – though their average of 0.28 percent is still well below all of the banks noted above.

While the Fed’s inaction may be yet another disappointment to depositors, it might also be seen as a call-to-arms for them to reject today’s average deposit rates. As a bonus, when the Fed finally does nudge rates upward, having an account that offered decent rates throughout the hard times may suddenly pay off in a much bigger way.   

5 reasons retirement planning is tougher for women

September 11, 2014

| Money Rates Columnist

The gender pay gap has garnered all sorts of media and legislative attention, prompting marches, committee hearings and petitions to Washington. There is even an Equal Pay Day (it was April 8 this year) to mark how far into the new year females must work to earn as much as men did the previous year.

While the gender pay gap is a real phenomenon, it has overshadowed another inequality that has the same potential to threaten the long-term financial stability of women: the glaring gender gap in retirement savings.

A 2013 report from the Employee Benefit Research Institute, based on 2011 numbers, found the average IRA owned by a man had a balance of $114,745 while the average balance for a woman was $66,529. At age 70, median balances were $72,971 for men and $42,926 for women.

While this gap is troubling on its face, financial advisers say there are also several reasons why women need to save more aggressively than their male counterparts. Here are five of them.

1. Women often have fewer years in the workforce

"Many women don't earn as much as men and often end up working less because they take time off to have children at some point during their careers," says Douglas Goldstein, a certified financial planner and author of "Rich as a King: How the Wisdom of Chess Can Make You the Grandmaster of Investing."

In fact, a 2013 Pew Research Center study found 27 percent of mothers say they have quit a job to care for a child or family member, compared to 10 percent of fathers. In addition, 49 percent of mothers have reduced their work hours to provide care and 39 percent have taken a significant amount of time off work. Meanwhile, only 28 percent and 24 percent of fathers said the same.

"Many women who take off time to be home with their kids don't think long term and don't fund a private retirement account, such as an IRA," says Goldstein. "This can be a big mistake later on, as their contributions to Social Security are lower, and they may not benefit from the more generous retirement plans offered by full-time employers."

2. Women may be more conservative in their investments

"Women have a tendency to be more conservative, sometimes to their determent," says Keith Klein, a certified financial planner and owner of Turning Pointe Wealth Management in Phoenix.

While conservative investing can keep money safe, it may also mean women don't earn high enough returns to build a comfortable nest egg. However, it's not all bad news for women. Klein says the conservative approach also means women tend to ask more questions and be more likely to stick with their investment decisions, which can be a good thing in a tumultuous market environment.

"Once women make a decision, they stick with it," says Klein. "They understand the ups and downs of the market and are less likely to react emotionally."

3. Women don't necessarily plan for themselves

Whether it be letting a man make their investment decisions or thinking a husband's Social Security or pension will sustain them, many women make the mistake of not being in charge of their own retirement plans.

"It surprises me that even today, after all of the changes in traditional roles, the men still dominate the financial decision-making in most couples I meet," says Goldstein.

Klein suggests part of the problem may lie with advisers who assume men are the decision makers. He says women shouldn't be afraid to speak up during investment discussions and that women are involved in more than 60 percent of the decisions made by his clients.

"Women shouldn't feel like a burden asking questions," he says. "If they do, they should look for a new adviser."

4. Women outlive men on average

Part of the reason women shouldn't leave all the decisions to the men in their life is that those men may not be around as long as them. Longevity doesn't necessarily contribute to the gender gap in retirement savings, but it is a reason women should be very concerned about it.

"About 50 to 60 percent of women will be single (at some point) in retirement," says Klein.

Those women might be divorced, widowed or single by choice. Regardless of the reason, they need to be prepared to care for themselves during their final years. Goldstein says women, even divorced women, should check for the availability of spouse's benefits from Social Security and pension plans, but that money may only go so far and help may not be available from other sources.

"In the past, the children and grandchildren looked after Grandma, but today and also in the future, that's no longer necessarily the case," says Goldstein.

5. Women may place others' needs ahead of their own

It's unfortunate that children and grandchildren may not feel an obligation to help their mothers and grandmothers because, in some cases, those older women may not have retirement savings since they prioritized their families above themselves.

"They overlook themselves," says Klein when asked to name a common mistake women make. "They worry about everyone else."

That means college funds get money before retirement plans, and family needs are placed before savings.

"Widows may be concerned about how much they will leave to their children when the first thing they need to do is protect themselves," says Klein.

Goldstein agrees. "A woman should always be financially independent and aware, doing the best that she can to plan her finances," he says.

If enough women take control in these ways, today's gender gap in retirement savings could become a thing of past.

More from MoneyRates.com:

Bribing your kids? Experts say think twice

August 28, 2014

| Money Rates Columnist

A study released last month indicates that U.S. children receive from parents an average of $1,360 each year in the form of allowances, rewards and incentives. The study, which was conducted by coupon brand Vouchercloud, found that 71 percent of the parents of 5- to 10-year-olds give their children money regularly.

More strikingly, 55 percent of the group who give money to their children said that they have paid their children “bribes” to get them to be good.

What’s wrong with giving children a financial incentive to behave well? Ingrid Higgins, a marriage and family therapist at Campbell Teen and Family Therapy in Campbell, California, says that paying children this way can send the wrong message about good behavior.

“I do not believe that children should have money as an incentive for good behavior,” writes Higgins in an email to MoneyRates.com. “Good behavior is expected in a household and not something you get paid for.”

Higgins’ response echoes the views of numerous child psychologists who have said that bribes are a flawed means of influencing children’s behavior. Perhaps the most often cited problem with this approach is that it can lead children to believe that money is the only worthwhile reason to behave.

A too-simple fix for behavior problems

It’s easy to see how parents could be tempted into offering their children money for behaving: It’s simple to do and it may be effective in the short term. But the lessons people take from childhood can affect how they see money – and the value of good behavior – throughout their lives. Thus parents may wish to explore options for changing behavior that won’t lead their offspring to expect money simply for being good.

Dr. Marilee Ruebsamen, a psychologist in San Jose, California, says that there are numerous ways to help children develop better behavioral habits, but the best ones depend on parents knowing their children and the rewards that matter most to them.  

“It's not about paying off kids for good behavior,” writes Ruebsamen in an email to MoneyRates.com. “It's about assisting them in areas they find difficult. Sometimes it's about working with them to co-create some incentives they'd find helpful to work for in order to increase better habits.”

When it comes to alternatives to bribes, Higgins says she favors a philosophy that emerged decades ago.

“I like the techniques from Love and Logic,” Higgins says, referring to the approach developed in 1977 by Jim Fay, a former school principal, and Foster Cline, a child psychiatrist. “A short summary: Have logical consequences for misbehavior.”  

According to the Love and Logic website, Children learn the best lessons when they're given a task and allowed to make their own choices (and fail) when the cost of failure is still small.

Thus it’s simple to see how bribery – in effect, incentivizing children to stop their bad behavior before consequences can materialize – runs counter to this approach.

Examining allowances

Higgins says this philosophy can extend to allowances and payments for chores as well. The Vouchercloud survey found that 77 percent of parents who give money provide their children a monthly allowance, and that 44 percent pay their children in exchange for chores. A 2013 study by MoneyRates.com also found that 87 percent of parents who pay their children an allowance expect them to earn it through chores.

“My view on money for children is that an allowance is to teach children how to manage money,” Higgins says. “I don't think it should be tied to chores. Chores are the children's contribution to a household, not something paid. However, I am OK with kids earning extra money by doing extra things.”

Higgins adds that it’s also OK to provide rewards when kids behave well – so long as the kids don’t come to expect them.

“Sometimes a parent is so happy when their kids are behaving well that they do special things,” Higgins says. “However, this is the parent’s choice and not to be expected by the child.”

While finding alternatives to bribery may prove challenging for some parents – particularly those who have used it in the past – the long-term consequences of bribery may ultimately cause them more heartache.

“Paying children for good behavior seems to create a sense of entitlement and an expectation they will always get money for good behavior,” says Higgins.

And, as most adults can attest, good behavior alone is no way to earn a dollar.

What your college freshman should know about money

August 22, 2014

By Dan Rafter | Money Rates Columnist

The National Foundation for Credit Counseling's 2014 Financial Literacy Survey suggests that many American adults know little about the basics of personal finance. If you're a parent of an incoming college freshmen -- an adult who is likely just beginning his or her financial journey -- these findings should worry you.

"Parents put a lot of time and money into preparing their child to leave home, but often neglect the basic life skills associated with personal finance," says Gail Cunningham, spokesperson for the NFCC.

Because financial education is often lacking in schools, it's typically up to parents to teach soon-to-be freshmen how to manage their finances. They need to teach them how to track their purchases, practice responsible debt habits and create a budget that keeps them from spending their monthly meal money in just three days.

"It can be a free-for-all for kids just starting college," says Kimberly Foss, founder and president of Roseville, California.-based Empyrion Wealth Management. "It's like sending a kid into a candy store with unlimited funds."

Sobering numbers

The NFCC survey found that most adults say they learned their personal finance habits from their parents. Unfortunately, parents are not always the best teachers. More than four in 10 respondents to the survey gave themselves a grade of either C, D or F for their mastery of personal finance.

Cunningham says it should not be surprising then that so many young people enter their freshmen year of college with little knowledge of how to manage their money.

There is good news though: Parents can help by giving their incoming college freshmen a crash course on smart financial behavior.

Foss says that the most important step parents can take is to teach their future college students how to create a simple budget. Freshmen can then learn how to track the money they have coming in each month against the money they are spending on pizza, movies, food plans and other expenses. Parents should check in with their sons and daughters once a month to track how closely their children are sticking to the budget.

And if their sons and daughters have already spent all of their month's entertainment dollars by the 15th? Then these freshmen have to realize that there won't be any extra money coming for movies or shopping trips until the new month starts.

"They have to be accountable," Foss says. "If they're not accountable, then there's no point to them even having a budget."

Some parents might choose to follow Foss' jar method. When Foss' older daughter went to college, Foss says she told her to withdraw her spending money at the start of the week. Foss' daughter then put half of this into a jar dedicated to the week's core expenses, the items she absolutely had to spend money on, items like food and gas.

The rest of the money went into a jar for discretionary spending, the money she would spend on entertainment. This helped Foss' daughter avoid spending all of her food or gas money on trips to the mall.

It's also important to teach college students how to become savers, Foss says. Parents should teach those college students who have jobs to set aside a portion of every paycheck -- even if it's just $20 -- into a savings account.

This habit can have a positive impact on the rest of the student's life, Foss says.

"The idea is to create lifelong savers," she says. "If you can save during the starving times of being a college student, you should be able to save even more once you are out in the real world with a real job."

Lessons on credit cards and checking accounts

Foss says that parents should also help their new college students open a checking account. They then need to teach their children how to write a check and how to balance a checkbook.

These are more simple of the financial skills that can stick with students for their entire lives, Foss says.

Many parents worry that their children will apply for scads of credit cards once they arrive on a college campus. And once they get these cards, parents fear, they'll run up huge amounts of credit card debt.

Thomas Racca, manager of personal finance at Navy Federal Credit Union in Merrifield, Virginia., says that parents can help their children avoid such a financial disaster by teaching their freshmen how to handle credit cards effectively.

This includes teaching these students the importance of only charging what they can afford to pay back in full at the end of the month, Racca says.

Parents can start their freshmen with a secured credit card with a small spending limit, say $250. As freshmen learn how to use this credit -- and learn the importance of paying their credit-card balance off each month -- they will begin building a credit history. A strong credit history can help them after they graduate from college, Racca says.

"A lot of parents worry about giving their children credit cards. But learning how to use credit is an important lesson for young people," Racca says. "The good news is that the days of college students signing up for credit cards just to get free T-shirts are largely a thing of the past."

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Landed your first job? Make these money moves now

August 8, 2014

| Money Rates Columnist

While students are gearing up to head back to campus this month, many from the Class of 2014 are taking on a new challenge: their first full-time jobs.

If you've landed your first job, congratulations! In addition to your new title, new workplace and new lifestyle, your job also gives you a golden opportunity to start your adult life on firm financial ground. Here's a checklist of five smart money moves to put into practice now if you want to make the most of your income.

Smart move No. 1: Get a firm grip on your wallet

"One of the biggest financial mistakes people make when starting a new job is overspending, especially if it is their first (job)," says David Bakke, contributor to the personal finance site MoneyCrashers.com. "It can be very tempting to spend money on items you probably don't need when you have a significant paycheck coming in for the first time."

Avoid the impulse to run out and buy a new flat-screen TV, tablet or smart phone. In addition, new workers should be careful not to fall into the trap of immediately buying a new car or even a house simply because their income now makes them eligible for a loan. A better option is to wait until you have accumulated some savings before making a major purchase or going on a spending spree.

It's also much easier to live within your means if you implement smart money move No. 2.

Smart move No. 2: Break out your calculator

They're not sexy or necessarily much fun, but a budget is your best friend when it comes to being financially successful. Matthew Boersen, a certified financial planner with Straight Path Wealth Management in Grand Rapids, Michigan, says he prefers a method of money management that relies on ratios.

"There are numerous budgeting plans out there, but one of my favorites is the 50/20/30 method due to its simplicity and flexibility," says Boersen. "Fifty percent of take-home pay should go to fixed expenses like rent, mortgage and utilities -- with the exception of cable TV. Then 20 percent goes toward planning and saving for your future -- things like 401(k) contributions, emergency account build-up and saving for a down payment for a home. Lastly, 30 percent goes toward discretionary spending like cable TV, car payments, dinners out and entertainment."

While you don't have to use Boersen's system, you should have a monthly plan -- in writing -- that outlines how much money you expect to make and how you plan to spend it each month.

Smart move No. 3: Look ahead ... way ahead

Regardless of which method you choose, your budget should include saving for retirement.

"Enroll in your employer's 401(k) or comparable retirement plan and take full advantage of any match they offer," says Boersen.

Don't assume it's fine to wait before beginning your retirement savings. Compound interest rewards those who start early.

According to the MoneyRates.com retirement calculator, if you begin investing $200 a month at age 25, you'll have $398,298 at age 65, assuming a 6 percent annual rate of return. If you wait until age 35 to start saving that same amount of money, you only end up with roughly half that amount, $200,903, when you hit retirement age. By waiting until age 45, that amount dwindles even further to $92,408. Also note that inflation is likely to significantly diminish the purchasing power of these amounts by the time you reach retirement.

If your employer doesn't offer a 401(k), don't stress. You have other options.

"Start a Roth or traditional IRA," advises Bakke. "You should be able to set up automatic contributions through your bank."

Smart move No. 4: Prepare for the inevitable

Along with retirement, your other savings priority at this point should be to create an emergency fund.

"This account should not be used for anything except bona fide emergencies, and a vacation with friends or a bigger TV for the Superbowl does not count," says Boersen.

Even if you can't afford much to start, having a line item in your budget for an emergency fund is essential. It's only a matter of time before an unforeseen expense requiring some immediate cash pops up.

"Even if it's only $100 per month, you'll be off to a good start," says Bakke. "Your ultimate goal should be roughly six months worth of living expenses."

Smart move No. 5: Insure what matters

Finally, you can minimize your need for emergency cash by having the right types of insurance coverage.

For example, you may want to consider comprehensive coverage on your vehicle if you don't have cash on hand to buy a new one in the event of an accident. Homeowners or renters insurance is a must too. While you can remain on your parents' health insurance plan until you are 26, after that, you will need your own coverage. Finally, if you're married or have children, invest in some inexpensive term life insurance to protect them in the event the unspeakable occurs.

If you don't think you can possibly afford all that insurance, don't overlook your employer as a source for coverage. Many workplaces have voluntary benefits that allow you buy reduced-rate life, disability and other insurance products, sometimes for only a few dollars per month. In addition, some large employers have worked out affinity agreements with insurers that provide discounts on auto and homeowners policies.

Your new job offers you a tremendous opportunity to start your adult financial life on the right foot. Even if you've racked up credit card and student loan debt in college, you can use your job as a fresh chance to pay off your debt and start building savings. From there, you can enjoy knowing you're financially prepared to face whatever your new life brings.

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