The Road to Financial Heckie-Fire

Here's one of my favorite picks taken a few years ago with the "Pastor to Presidents," Billy Graham. He's an amazing man of integrity and in the business of keeping people out of hell.

They say that the road to hell is paved with good intentions. When it comes to your finances, some of these well meaning money moves can actually become major slip-ups that only compound existing financial difficulties. While parts of the economy are looking better, unemployment remains at a rate of 9.7% and this means that many families are dealing with weeks of unpaid leave. Still others are trying to recover what they lost in their investments, home equity and in the stock market. Recently on ABC NEWS NOW, I shared with the host, Tanya Rivero, some advice on how to stay out of the bad place. Here are some things to avoid:

Q. Ellie, one of the primary money sources that some families are using to avoid bankruptcy is to raid their 401 (k), which, you say is a major misstep. Why is this so problematic?

ELLIE: Our parents’ generation tended to work for someone who gave them a pension check for the rest of their lives. This means that current workers may not have been raised with the mindset that they control their own pensions and need to make funding their own retirements a priority. There’s an alarming trend that involves looking at 401(k) accounts as “now” money when it’s really “later” money, that really must be saved for later. While raiding an IRA to avoid bankruptcy is a well intentioned money move, it’s also foolish because if you end up in bankruptcy anyway, then you’ve passed up the benefit you have in the fact that retirement accounts are protected under bankruptcy laws in most states.

Q. For twelve million Americans, their homes are worth less than they owe, which leads us to the next major money misstep that has become more common in the past two years and that is walking out on a mortgage. What are some other options available to families that feel this is their only option?

ELLIE: I would say that half of the people who walked away from mortgages didn’t have to take that path and probably didn’t consider all their options. Providing you still have some income to pay on a house where you owe more than it is worth, the first step homeowners should take is to decide whether their mortgage issue is a short term or longer term problem. For example, if you just got laid off and have no savings or small savings, but the job market in your town is such that you can probably get some part time or full time work to keep money coming in, then you have a short term problem. On the other hand, a long-term problem means you’ve been unemployed, you’ve wiped out your savings and you don’t see a way back into the job market.
The sooner you recognize the fact that it’s a long term problem, the sooner you can put your best food forward to sell your home in a short sale and move into a smaller, less expensive place. That way, you can preserve your capital for a better time.
If it’s a short term problem, then talk with your mortgage lenders and see if they will suspend or lower your payments over the next three to six months until you are employed again. You can go to MakingHomeAffordable.gov, which is a federal government website with the goal of helping families by providing free HUD-approved counselors who can help you modify your mortgage.

Q. In every newspaper and on television, we see advertisements for credit counseling agencies that will eliminate your debt. But you say that debt wipeout scams are a major problem. How can we tell the scam from the real deal?

ELLIE: It can really be confusing because they sometimes advertise as debt consolidation companies, but you need to be extremely cautious because I would say the majority of those advertisements are misleading at best and a scam at worst. If it sounds too good to be true, it usually is. Instead, go to the NFCC.org with is the National Foundation for Credit Counseling. This is a non-profit and free service that you can trust.


Q. An alarming number of Americans, some 19 million of them, have also resorted to payday loans in order to make ends meet. How do these loans work and are they ever a good idea?

ELLIE: These are high interest loans that have an average interest rate of between 390% and 520%. They are marketed as short-term cash advances to help meet emergency expenses between paychecks. But the problem, besides, the interest rate, is that it becomes a repeated pattern and consumers become trapped in this kind of borrowing. Avoid these at all costs, and if you have young adult children, especially those in the military, educate them on the dangers of payday loans since these companies tend to flourish near military bases.

Q. Credit card usage has dipped more than 13% in February and yet almost 15% of American families still owe more than 40% of their income in consumer debt, according to the Federal Reserve. Ellie, you say that another major misstep is ignoring the card balance.

ELLIE: Yes, Tanya, while it’s commendable that credit card usage has declined, it’s still an issue when the credit card is used as a means to spend more than you can afford. This is a strategic error that can lead to financial hell as consumers ignore the balance. The new government mandated box on your credit card bill will show you how long it will take to pay off your balance if you pay only the minimum and how much interest you pay to carry a balance. Pay attention to these numbers, instead of ignoring them, and ask yourself if you can afford that item before you put it on your credit card. Behavior modification doesn’t happen overnight, but eventually, you can begin the climb toward getting out of debt.

Q. One final area that we’ll look at today has to do with trying to fool Uncle Sam. Ellie, you say that this money misstep can cost taxpayers big bucks if they are caught and that there is a difference between mistakes and intent—what is the difference?

ELLIE: It’s really pretty simple. Everyone will make a mistake here and there can be accidental errors on the tax returns of the most honest kind of people. But some folks are looking to save money by “accidentally” misrepresenting large amounts of money. We see them in the news—whether you’re a celebrity or a politician, you still have to pay your taxes. By signing the box on your tax form that you believe everything to be accurate and true on your form, you open yourself up to significant liability. If you’re audited and they can prove that the misrepresentation is intentional, then not only are there penalties involved, but you could also be charged with federal fraud. So pay those taxes, even if you have an extension and call the IRS to set up payments if you cannot pay all you owe.

Ellie Kay
America's Family Financial Expert (R)
http://www.elliekay.com/

Your Questions about Paying Bills, Credit & More

Here are some Q&A that Ellie recently answered on ABC NEWS, Good Money Show.

Q. I’m single and my landlord recently raised my rent, plus the costs of others things are rising while my income stays the same. I’m having a harder and harder time paying bills and I don’t’ have a mortgage to refinance, would it be worth it to refinance my car? Joellen - WA

Ellie: Yes, most people don’t realize that you can refi an auto loan, but you need to be prudent! First, go check out some of the best rates that are being offered and that your credit score would allow you to qualify for by going to monitorBankRates.com or bankrate.com where rates vary from 3.99% to over 12%. Take the best rate and plug it into my auto loan calculator at elliekay.com to see how much you would save with a refinance. Sometimes, you’re offered a longer loan at a higher interest rate but the monthly payments are lower because you’re paying longer. I’ve also noticed that Wells Fargo will finance a car for 125% of its value—run from that deal as you’re guaranteed to owe lots more than the car is worth as soon as you sign the paperwork and your car will only continue to decrease in value. This is not a good deal for you as you’ll pay more over the long run.

Q. Should I pay my department store credit card first or my Visa credit card bill first—I don’t think I can pay the minimums on both of these this month because I just got my hours cut in half at work! Robin Hilldale, Tehachapi, CA

Ellie: Generally speaking bank cards such as American Express, Visa, Mastercard or Discover are the accounts that carry more weight on your credit report. A department store credit card does little to improve your credit rating, but that’s not to say that you can let this debt go bad because it will be turned over to collections and it will hurt your credit score. But if you can only pay one on time and have to pay the other late, then go with the Visa and even if you pay less than the minimum, try to pay something on the department store card.

Q. My husband was injured in an automobile accident and not only do we have a mountain of medical bills, he can’t work until he’s recovered from his accident. We can’t really afford to pay for financial counseling, is there some place we could go for help? Justine - Ohio

Ellie: Justine, I’m sorry to hear of your situation, it must be very difficult. But I do have some good news, you are a prime candidate for Consumer Credit Counseling Services. Go to nfcc.org to find a credit counselor in your area who will work with you for free. In some cases they are able to get some of your medical debt forgiven and in many other cases, they are able to get interest rates lowered. But beware, there are a lot of “for profit” counseling services out there that masquerade as “non profit” and you need to be sure to only go to nfcc.org .


Q. I was laid off from work last year, but I’m really happy to report they called me back to work this past month. However, our bills took a hit as we were trying to make ends meet. My credit score is now a paltry 590. What can I do to try and repair it? Heidi Rothenberg, New York

Ellie: Communication with creditors is the key when it comes to going through the rough patch that you just survived. If they know you are trying to be responsible and pay off your bills, they can, in some cases, lower the minimum payment or extend the loan (depending on the kind of debt you have). The three quickest ways to improve your credit are: 1) pay more than the minimum payment due on your credit cards—even if it’s just $5 over the minimum, it shows up on paper as you paying down debt 2) make payments on time – better a day early rather than a day late and 3) pay attention to the proportionality on your credit card accounts and make sure that you only have 50% or less of the available credit charged on any one card. Go to annualcreditreport.com to get a free copy of your credit report and you can see which accounts need the most attention.

Q. My problem isn’t that I’m not paying my bills, it’s that my estranged husband isn’t paying the credit card that is in both of our names. What can I do to protect myself in the case of his unpaid bills that also impact my credit? Stephanie, AZ

Ellie: Any joint accounts set up in both your names will continue to impact your credit score, even after a divorce. So it’s important, no it’s critical, to your financial health that you separate these accounts by setting up new account numbers. For example, you could ask your spouse to get a loan from your credit union to pay off the balance of the joint account. Or, you could propose that he could go to bankrate.com and find a card offering better rates, including transferred balances. In that case, it’s a win/win situation because he gets a lower interest rate through an introductory offer and once the balance is transferred, you can both shut down the joint account.

Q. Ellie, I’ve read all your books and they have really changed our lives! We ran into some trouble when our credit card company suddenly changed the due date on us and we were late on our payment. I thought they weren’t suppose to do that anymore because of the Credit Card ACT reform. Should I watch out for this with my other credit card companies in the future? Chris from New Mexico

Ellie: Yes, you and millions of others had the same problem with changed due dates that suddenly made you late on a credit card bill. But those days are suppose to be a thing of the pass with the Credit Card Accountability, Responsibility and Disclosure Act or the CARD act that has been implemented throughout the latter part of 2009 and into 2010. Now, credit card companies are suppose to give you 45 days notice for any significant changes on your account, including your due dates as well as increased fees and higher APRS

Q. Our problem is that we seem to be perpetually late on paying our bills—because we’re so busy that the bills creep up on us before we can send the check in on time. Is there something you can suggest to help us avoid being late on our bills? Hannah Ortega, Texas

Ellie: Yes, this is a problem isn’t it? In our house, I’ve asked my husband to be in charge of the bills because even though I'm the "financial expert," I felt it was important for him to be keenly aware of how much we’re spending and where it goes. But that meant that I had to oftentimes deal with the frustration of seeing bills paid late until technology came to our rescue and the advent of online bill paying came into existence. We pay all our bills online including the mortgage, credit cards, electric bill, etc and we’ve set these up for an automatic draft on our checking account on the day they are due. The only bill we haven’t been able to pay online is our water bill because our city is a little behind the times and doesn’t allow that for now. However, since we’ve set up automatic pay online, we’ve never been late on a bill again!

Ellie Kay

America's Family Financial Expert (R)

www.elliekay.com

Prioritize Your Debt - What to do With Unpaid Bills

Recently, on ABC NEWS, I talked about the fact that some parts of the country still have unemployment in the double digits while other employees are facing cutbacks in hours and salaries. More and more people are having a hard time paying their bills in these economically challenging times. If you only have a certain amount of money available and you know you won’t be able to pay all the bills, you need to know that not all bills are created equal. There are certain bills that have greater penalties than others. Today, I want to help you look at how to tackle those unpaid bills as well as grace periods and the variable consequences for not paying bills on time.
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Q. Are people still having a harder time paying their bills? I mean, we hear about new jobs being created and the recession is officially over. Why are some families susceptible to continued financial difficulty?

ELLIE: Obviously, unemployment is a big issue as well as the fact that many workers have had to accept pay cuts or work fewer hours to keep their jobs. With these come a contagion effect in that if you are unemployed or you go part time, there’s additional costs involved such as purchasing health insurance. Even if these workers find new jobs, they still have the residual effect of having less income for many months. In other cases, some may have had homes foreclosed upon and it’s cost them a lot to get established in another place of residence, plus these individuals has tanked their credit ratings—which means that rental property will require a larger down payment. A poor credit score also means these renters have to pay more down to even get basic utilities hooked up to their rental property. All these expenses start to add up and eventually, families are finding that they don’t have enough to pay all the bills.

Q. So if someone is between jobs or had some unexpected expenses such as medical bills, then what bill should they pay first?

ELLIE: When it comes to paying the bills there are always consequences for not paying. However, it’s the severity of the consequences that people need to consider when they are rank ordering which bills they should pay first, second, and so forth. The rule of thumb is to look at how fast your creditors will be likely to move against you. Which brings us to the most important bill and first bill you should always pay—your mortgage. If you fail to pay, the bank can begin foreclosure in as little as three months. Plus, this is the most significant debt you have when it comes to influencing your credit score. And with a poor credit score, the bills will just stack up even more quickly as we know that those who have bad credit have to pay more for deposits, for auto insurance some times and a poor score can even influence whether you get a new job or a job promotion at your existing place of employment. So protect your score and your financial future by paying the mortgage first.

Q. OK, so we understand that the mortgage is the most important bill, what would come second?

ELLIE: The next most important bill to pay is your car loan. Not only because you need a car to go to and from work, but also because as the second most significant loan you have, it will also impact your credit score in a more significant way than a department store charge card or a utility bill will. As for the consequences of not paying, a lender can begin repossess your vehicle if you’re a day late, but in all actuality, most will wait about sixty days. If you are serving in the military in a combat zone, there’s a little more leeway for vehicle repossession, you should contact your base’s financial office if you’re in danger of repossession while on active duty. But for the rest of us, not paying this important bill will cripple your ability to remain gainfully employed as having a vehicle is essential in most cases.

Q. So we’ve paid the mortgage and the car loan, now we pay credit cards, right?

ELLIE: Yes, that’s right. As you know, credit cards payment are very important because if you don’t pay on time, you’ll get hit with late fees. But there are more consequences than just a late fee. You might be faced with a hike in your APR if you’re tardy and then it could spread to other cards as well. You might find your average APR going from 9% on your credit cards to 24% or more in just a month. After about six months of missed payments, credit card companies start to send your account to collections and then you have an entirely new set of headaches to contend with. Concentrate on paying bank cards first such as Visa, Mastercard and American Express. You can even go to www.bankrate.com and look for lower interest rate cards that offer a promotional for transferred balances which can help your overall liability on credit cards. A final option is to go to your local credit union to see about a consolidation loan.

Q. Let’s say you have a little bit of money left, what’s one of the lower priority bills that you can tackle?

ELLIE: The next bill to concentrate on just happened yesterday—taxes. While technically, there is no “grace period” you can ask about an installment plan. The IRS can eventually garnish your wages and seize property or bank accounts. The old saying, “death and taxes are inevitable” exists, it’s because you WILL have to pay that tax bill some day—whether you’re a celebrity dishing on talk shows and making 25 million dollars a picture or whether you dish up ice cream part time at Coldstone making $25 a day!

Q. Thus far, we haven’t mentioned student loan debt, isn’t that an essential bill as well?

ELLIE: Yes, it does seem kind of crazy that student loans haven’t made it into our priority list yet, but I think that it illustrates the fact of how quickly the money goes for more “essential” bills and how there’s often more month left at the end of the paycheck Lenders for student loans will wait about nine months before placing a federal loan in default. As of last July, graduates can opt for a loan program that bases payments on up to 15% of your annual gross income. If you have these kinds of bills, then you can go to www.IBRinfo.org for help in how to pay your student loans more efficiently.

Ellie Kay
America's Family Financial Expert (R)
www.elliekay.com

How to Save $160,000 on Groceries!

According to the Consumer Price Index (CPI) food prices rose 4% in 2007 and 5.5% in 2008. This year, according to the USDA Economic Research Service (ERS), prices are predicted to rise as high as 3.5%. This means that shoppers will continue to look for ways to cut corners while still feeding their families and purchasing household goods. Our family has saved an average of $8,000 per year for the last twenty years (according to the USDA cost of food at home chart) or a total of $160,000!

Here's how we did it as seen on ABC NEWS NOW - Good Money Show.

Q. So you’re saying that saving money on the food budget can make a significant impact on a family’s financial situation. Where does “food” generally rank in terms of expenses in a family’s budget?

Ellie: The greatest expense for most families is the mortgage and insurance, then there’s transportation and food ranks third. So if you can save money on the third largest bill you have in your family, then it can make a significant difference in your overall financial health. In fact, I fed our family of seven for only $200 per month during that first decade. According to the USDA’s “Cost of Food at Home” chart, I saved an average of $8000 per year. Since I’ve been doing this for 20 years, that’s a twenty year savings of $160,000. So it really adds up!

Q. That’s a lot of money you’ve saved, Ellie. We’re ready to hear about how your plan works. You say that “layering the savings” is the way to save 50% or more on grocery items. What are some of the savings layers?

Ellie: A lot of people think they are saving money by buying store brands or shopping the sales. While they may save a little here and there, I’ve found that the biggest savings are found when you combine or layer the savings factors. Here are some of the layers:

1. Shop the Sales
2. Use manufacturer’s coupons on brand name items
3. Shop at a double coupon store
4. Use a store coupon
5. Look for Value items - Items that donate to worthy causes such as Dawn's Everyday Wildlife Champions
6. Get rebates
7. Get Cash off Your Next Shopping Order


Q. OK, let’s get a little more information on these different layers. I understand shopping the sales and using manufacturer’s coupons. But you lost me at combining a manufacturer’s coupon with a store coupon. How can you use two coupons on one item?

Ellie: In today’s example, I found a store coupon that made this $2.59 bottle of Dawn cost only .99. That is a store coupon. Then I used a manufacturer’s coupon for .25 off the same bottle. So this bottle of soap only cost me .74. And because it’s a higher end brand name, it lasts longer than a store brand (which has mostly water). Which makes it a “value” layer in our savings factors.
If you follow the funding source, then you’ll know which coupons can be combined. A “true” store coupon is one that is funded by the store’s advertising or marketing department. It is usually evident by the store name on the coupon and/or the store’s mailing address. If it has a manufacturer’s address on it, then it’s not a true store coupon. A manufacturer’s coupon is reimbursed by the manufacturer, not the store, so it can be combined with a store coupon.

Q. The other layer that can be a bit confusing is the “Cash Off Your Next Shopping Order” how do you earn that coupon, can you give me an example?

Ellie: In my example, I went to Albertson’s last week and found Post cereals, that were usually $2.89 on sale for only $1.69. I had a coupon for $1.00 off each box of cereal, which made them cost only .69 each. Post was running a promotional with Albertson’s and offered a $4.00 off your next shopping trip coupon for the purchase of 5 or more boxes of cereal. So, with sales and coupons, I paid $3.45 for five boxes of cereal and received the $4 off coupon for a net gain of five free boxes of cereal and .55.


Q. What about double coupons and even triple coupons, how does this work and what are some of the limitations that consumers should be aware of when double couponing?

Ellie: If you go to my website, and click onto the “resources” at the bottom of the home page, you’ll find a link to a list of double coupon stores across America. These are stores that will take the face value of a coupon and double (or even triple) it for the customer. So if you buy that Dawn soap, we talking about earlier, the .25 manufacturer’s coupon would now be worth .50. You need to check with the customer service desk because some of the limitations that might be included are: up to a limited amount, you might only be able to get one item doubled on any one particular product. So the first Dawn coupon would be doubled to .50 but the second one would be worth only the face value of .25. Another limitation might be on a “Buy one/Get one free” even though you are getting two products, they may only accept double coupons on the first product. If, however, the product will ring in at half price, then you could use two coupons.

Q. Are there any websites that can help me organize all these savings layers and let me know what deals are available in my area?

Ellie: Couponing can not only be time consuming and confusing, but you might not understand each store’s “rules” either. Thankfully, there are some outstanding websites that can help as they do a lot of the legwork for you. All you have to do is enter your zip code and they’ll let you know what is on sale in your area, what kind of manufacturer’s coupons should be out there on the product, what stores offer double coupons and even which stores might offer a store coupon in addition to the other sales. You can go to www.couponmom.com (free membership) or www.thegrocerygame.com (paid membership).

Q. What about saving money on food outside of the grocery store? Volunteer food programs have sprung up across the country, how do some of these work and are they cost effective for the consumer?

Ellie: There are a few different programs out there such as S.H.A.R.E that have been out there for quite a few years. SHARE is an acronym for Self-Help and Resource Exchange – is a program where people get a break on their grocery bills by exchanging volunteer time for the opportunity to buy affordable food. For each package of food purchased, we simply ask for two (2) hours of “good deed” time, whether at SHARE, other institutions in your community, or your own neighborhood. Food packages (worth up to $45) offer meats, fresh fruits and vegetables and grocery items. The price you pay is based on what you select from the menu but you can generally save about 50%. SHARE purchases the food from growers, brokers and packaging plants and is never donated, government surplus, or salvage.
For those who may not have access to a SHARE program in their area, there are other non-profits that have sprung up in response to the economic needs of families and they also offer boxes of food at bargain prices. Angel Food ministries offers $70 worth of food for $30 if you order it ahead of time and go pick it up at a central location. You can order online and it’s also a great organization to volunteer with as they have locations all across America. There are no income requirements and anyone can participate.


Happy Savings!
Ellie Kay
America's Family Financial Expert (R)
www.elliekay.com

Double Your Returns on Investments - Viewer Q & A

I had a very nice response from my ABC NEWS NOW show last week and wanted to share my favorite questions from viewers, along with some answers you might find helpful!




Q. Should I buy gold? If so, how do I buy it?
Thomas, Sante Fe, NM
Submitted via Facebook


Ellie: Today’s discussion has been about investments that double your returns, and we’re talking about small returns to begin with. Consequently, gold doesn’t qualify as a risk free way to double your returns. But you could keep gold in your portfolio for safety and protection as a hedge against inflation. As always, keep your portfolio diversified and don’t overstock on gold. If the dollar stays weak, as it is suppose to do until interest rates are rising again, then the price of gold is expected to rise in the second half of the year. You can buy gold in one of two ways: you can buy a gold based ETF (exchange traded fund), which is traded like stock. Or, you can buy gold coins such as the American Eagles. Go to money.org, to find a gold coin dealer. Store these coins in a safety deposit box at a bank.



Q. If a high interest bearing checking account has so many hoops that I have to jump through, then is it worth the effort it to park my extra $20,000 in that account?
Rosha, New York
Submitted via blog

Ellie: Yes, high interest bearing checking accounts can earn as much as 4.3% and they are complicated and require a certain number of debit transactions because they make their money from merchant fees from those transactions. They also can require direct deposits or automatic payments. But if you took your $20,000 and parked it there, instead of making nothing (which is what you would do in an average checking account, when adjusted for inflation), you could, instead, make $860 in interest.


Q. Do high interest checking accounts have the same protections that regular checking accounts have? I’m concerned because most of these are found in small banks and we all know how many banks have failed in the last couple of years—plus, they aren’t local to me and I’m a bit squeamish about banking long distance.
Victoria, Spokane, WA
Submitted via email

Ellie: Yes, most of the high interest checking accounts you’ll find at www.checkingfinder.com are held with small to medium sized banks because it’s a new stream of revenue that is working for these smaller financial institutions. Not all of these accounts are created equal, so you need to do your research before you sign up. Some of these have an automatic reimbursement of up to $25 monthly for ATM fees, because they understand there will be a charge for their customers who don’t bank with a mainstream banker. In terms of your money being secure, have no fear! They have the same FDIC protection offered by any local or big named bank, which among other benefits is up to $250,000 per person per bank.


Q. I’m interested in investing for double my return at less risk and was thinking about investing in bonds because some of my more savvy investing friends have found success with their bond investments. What, would you say, are the least risky bond mutual funds?
Jill from Chicago, IL
Submitted via online contact form

Ellie: Even though bond mutual funds are less risky than stock mutual funds there is still some risk involved, unlike non traditional CDs and high interest bearing checking accounts. Short term bonds tend to be less risky than intermediate and long-term bond funds. But understand that you can lose money as the bond market goes up and down. Do your homework by going to Morningstar.com to research how the bond mutual fund performs. Granted, it’s rare that you would lose money over the course of a year. In fact, the greatest kind of disappointment you might have, if anything, is that they just don’t make as much money as you hoped they would make. But that is a price worth paying for a 4% to 5% return on this kind of short term investment.

Q. If I want to concentrate on de-leveraging, should I pay off consumer debt before I build up an emergency fund? If the most I can get on a high interest checking account is a 4% then wouldn’t paying off a credit card that is at 16% make better financial sense?
Lee Green from Colorado Springs, CO
Submitted via Facebook

Ellie: On paper, it makes more sense to use that saved money to pay down a 16% rate than it would be to get a 4% (max) rate on the high interest checking account. However, there’s a hidden factor here and that is the uncertainty of what your economic future holds. With unemployment in double digits in many parts of the country and employers offering paycuts to keep employees gainfully employed, there are no guarantees. That’s why you need an ample emergency fund—around 9 months of living expenses if you are a dual income family and 12 months if you are a single paycheck income. I’d recommend you put a portion of your savings toward consumer debt and a portion toward building your emergency fund in order to build one up while you’re paying the other down.

Ellie Kay
America's Family Financial Expert (R)
www.elliekay.com

Earn 4.3% on Your Checking Account? You Can Double the Returns on Short Term Investments

The return on your savings account, money market account or certificate of deposit is probably hovering at 1.7% (see below), but what if you could boost that return to 3.4% or more? You would double the returns on your short term investment!

In the spring of 2008, consumers were saving less than 1% of their income. But then the economy headed south and savings headed north to where Americans were saving over 6% a year later. In fact, as a nation, we saved 5.6 trillion dollars last year. But wait! That’s not all the good news—there’s more! Inflation is projected to remain relatively low for the next five years, hovering around 2.5%. This means that all those people who have been saving money have a legitimate question to ask—what should we do with our savings? If you put it in your basic checking account, you will lose money due to inflation, but how do you make it grow without risk? I was recently on ABC NEWS NOW to discuss this problem and here are some of the highlights:

Q. Ellie, many of the people who are putting away 6% of their income are saving for a time in the near future when they feel comfortable enough to spend again. What are some of the things that these savers should not do with their money?


Ellie: I think it’s just as important to know what not to do with your money as it is to know what to do with that savings. If you are like most of those savers, you’re saving for the short term—at least temporarily. So that means you should not tie up your investments in stocks. If in the next three to five years, you plan on starting a business, buying a home, sending a child to college or buying a car—you should look at short term investing and not long term. There is a difference between funding long term investments, such as retirement and saving cash that you might need in the next three to five years. Second, you should not put these short term investments into money market accounts or traditional CDs because the money sitting in these low yield accounts, when weighed against inflation are basically making you nothing. When you do the math, you’ll see that a basic account making around 1.7 % interest, after you pay taxes on the growth and then adjust for a 2.5% inflation rate, is losing you money. In fact, that $100 you now have will be worth $98.60 next year.


Q. Then where do we start and if you are advising savers to avoid putting their short term savings into a savings account, then where do they put it to protect the principle and make the money grow?

Ellie: High Interest Bearing Checking accounts are a good place to start. In the past, these kinds of checking accounts haven’t been worth the effort. But recently, some financial companies have responded to the economic situation and they have found a way to still make money by allowing you to earn money as well. These kinds of high interest bearing checking accounts can usually be found in small to medium sized banks and some of them are paying 4% interest, which is 30 times what you could make in an average checking account or money market account. You can go to http://www.checkingfinder.com/ to find one of these kinds of accounts. An example of this is Royal Banks of Missouri, that pays 4.3% on balances up to $24,999 and 1.4% on balances over that maximum. There is a catch, however, you must use your debit card at least 10 times during the statement cycle, make at least one direct deposit or an automatic payment per month and then receive your statements online. If you don’t meet ALL this criteria, the hit is a big one because you’ll only earn .15% on the entire balance for the month.



Q. So a High Interest Bearing Checking account is one way to double your return. If we’re not having much luck in average money market funds and traditional CDs, then is there another kind of CD out there that might help those who want to double their return?

Ellie: As a matter of fact, you can look at some of the nontraditional certificates of deposits to get a better rate. First, look for the introductory teaser rate which are found at bankrate.com or ratebrain.com. I found some for 4.3%. You’ve seen the teaser rates for credit cards and these are basically the same kind of offer—they have limitations and stipulations and if you want them to work for you, then you’d better know what those boundaries are. Most of these introductory CD rates are from banks who want to boost their deposits by offering a drop dead gorgeous interest rates. As long as they are FDIC insured, you don’t have to worry.

Q. In the past, it’s been wise to ladder your CDs, is that still true, even with the nontraditional certificate of deposit?

Ellie: Yes, the laddering concept is still the same. Basically, you’ll divide your CD money into four or five pots of money, then invest the portions into CDs that will come due over the next five years. That way, when interest rates rise (and they will) then you won’t have to wait five years to take advantage of the higher rate; you’ll be able to roll over the CD that matures next. This strategy also gives you more access to cash, should need it.

Q. One of the new nontraditional CDs that can give you twice the return at no risk is called a STEP-UP product. How does this work?

Ellie: This is a new kind of product that offers longer maturing CDs at a higher rate for each year that you hold the certificate. The first year, it may offer a 1% return, but in years two and three, you could see it rise to 2% and in the fourth and fifth years it would be 4%. They are FDIC insured and you will need to buy them through your brokerage firm. But the good news is that you do not pay the commission, the issuing bank will cover that amount. However, if you want out of the CD early, you could go back to your broker and they could try to find someone to buy them from you, but in that case you would be the one paying the broker’s commission.

Q. A second kind of non-traditional CD is called a “Structured” CD, how does it work and are they a better option than a traditional CD?

Ellie: The returns on a structured CD are tied to an index (such as the S&P 500) or they could be tied to currency movements or inflation. You are guaranteed not to lose money should the index decline, which is nice but if it goes up, you’ll only get to take advantage of a part of that gain. So if the S&P goes up 10%, you may only get 6%. While some of these are FDIC insured, others are insured by the bank. I recommend the FDIC insured variety.


Q. Most of those who saved a part of that 5.6 trillion dollars last year, are short term investors who are saving to buy a car, house, or pay for college. While some aspects of the bond market have been attractive in recent months, is there a short term bond investment that will still allow savers to double their returns with no risk?

Ellie: There is a group of short term bonds that invest in municipal and corporate bonds and these can earn up to 4% and 5% in returns! Like our nontraditional CDs, these are also purchased through a brokerage firm, but as with any kind of a mutual fund it is a good idea to check the fund’s rating at Morningstar.com. Not all of these funds are created equal and some are better than others. Of all of the returns we’ve talked about so far, this investment option is the riskiest. Sometimes the bond market performs well and sometimes it doesn't, that's the risk you are taking for the higher return in this case.

Ellie Kay
America's Family Financial Expert (R)
http://www.elliekay.com/

When Free Credit Reports Aren't Free

When A “Free” Credit Report is not Free

Ellie was on ABC News Now this past week talking about this critical topic. Since 2004, consumers have had the right to request a free credit report every 12 months from each of the three credit-reporting agencies. But almost from the beginning there’s been confusion about how to get a free credit report. There are thousands of people who respond to TV ads offering “free” credit reports or they order a credit report online only to later discover that they have signed up for a monthly credit-monitoring service that was definitely not free.
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Q. Let’s start with the obvious question, Ellie, when is a free credit report really free?


Ellie: There’s basically one primary way to get a no-strings-attached free credit report and that is to go to AnnualCreditReport.com or call 1-877-322-8228. You can also write into Annual Credit Report Request Service at PO Box 105281, Atlanta, GA 30348-5281. While there are many look-a-likes sites, there is basically one government site and that is AnnualCreditReport.com .

Q. What is the difference between a credit report and a credit score and are they both free?

Ellie: A credit report is your credit history and that is free as outlined above. However, you are not entitled to a free credit score. The credit score is your FICO (Fair Isaac Credit Score) and it indicates your credit worthiness and will impact a variety of financial areas including what kind of Annual Percentage Rate you will pay for your mortgage loan.

Q. How often can you get a free credit report and from what credit reporting agencies?

Ellie: You are allowed one free report, per year, from each of the three major reporting agencies: TransUnion, Experian and Equifax. You don’t have to get all of them at the same time. In fact, I recommend that you spread out each of the reports every four months. That way you can track, for free, whether there have been any major changes in your credit history on a regular basis.


Q. Should I order a copy of my kids’ credit report to see if someone stole their ID?

Ellie: Child identity theft is on the rise and it is important for you to order a copy of your child’s credit report at least once a year to make sure it has not been compromised. You should also go to Social Security Administration website and order a copy of your child’s social security earnings to make sure someone isn’t using their number in order to obtain work.

Ellie Kay

America's Family Financial Expert (R)

http://www.elliekay.com/