Survey about Financial Tip

First, we wish you and your family a happy holiday season from all of us at the University of Missouri.

 

Second, we are looking for some feedback from you, our readers. We have put together a small survey that asks some simple questions. All feedback is a gift; we would like to know what you want to read more about, what format you would like the information in, and, finally, anything else you would like to pass on to us.

 

Here is the survey: http://goo.gl/PcZ8I

 

Thank you for reading our tips this year, and we look forward to offering even more in the New Year based on your feedback.

 

Personal Financial Planning Department

University of Missouri

Safe Holiday Shopping Online

By Ryan Law

 

Black Friday and Cyber Monday have come and gone and according to the stats, it appears it was (another) record-breaking weekend:

 

·         The National Retail Federation reports that we spent about $52 billion on Black Friday.[i]

·         IBM, who tracks online transaction sales, reported that we spent between $1.5 and $2 billion on Cyber Monday.[ii]

I personally am not a big fan of Black Friday, especially now that it is creeping onto Thanksgiving. I went through the ads and nothing really jumped out at me (except a ShopVac that I bought from Lowe’s, on Black Friday, but I purchased it online and they shipped it for free to my house), and I am not a fan of standing in line for hours in the cold or being trampled or assaulted by people fighting over a phone, but that’s beside the point.

 

Today’s Tip is about the remaining shopping that you will be doing. A lot of people will shop online for gifts, and I want to make sure you do so safely.

 

Here are five tips for sale holiday online shopping:

 

1.       Be sure the website’s purchase page is secure. It doesn’t matter if the rest of the site is secure or not, but be sure the page where you enter your credit card is secure. Here’s how you can tell – the browser should say https instead of http, and you should see a lock icon somewhere on the page. Here is what the Amazon.com sales page looks like:

 

 

You can see both the https and the lock icon, which means it is a secure page.

2.       Don’t purchase items from e-mails unless you can verify where they came from. I get deals in my inbox from Walmart, Target, Amazon and many other reputable companies. E-mail marketing is cheap and effective. However, I also get deals like this one:

“Get the New 32GB iPad Sold for $31.08!”

This is from an e-mail send by “Adison Greg” from some website that no one has ever heard of. When you get those emails don’t click any links in them, including the “unsubscribe” link. Delete them immediately! They are Spam and many have some kind of virus. If you don’t click on them you will be safe.

3.       Use your credit card to purchase online. Never trust a website that doesn’t accept credit cards, or that encourages you to pay using Western Union or something like that. Your credit card has protection built in, as do websites like PayPal. If you never receive the item, you can file a dispute and your credit card company won’t charge you for the item.

4.       This is a tip I almost learned the hard way – I got an email saying that my purchase of 2 Nexus 7 tablets being sent to California from Walmart had been cancelled because they couldn’t verify the shipping address.  Concerned, I logged into my Walmart account and sure enough, there was an order for two Nexus 7 tablets that were scheduled to be sent to some random address in California. After doing some research I found that this isn’t uncommon – hackers get into the databases of these websites and can try to order things using your account. This only works if your credit card is stored on the website. Walmart.com, for example, stores your card without asking if you want it stored – they do it automatically.

I immediately changed my password and deleted my credit card from their system. I no longer store credit cards on any websites – it only takes a minute to enter the card number and I feel more secure that way. Each time I purchase on Walmart.com now I immediately go to my account and delete the credit card number.

5.       Consider purchasing pre-paid shopping cards to purchase online. I know some people don’t like to use their personal credit card online, so they purchase pre-paid shopping cards and use that for all their Holiday shopping. A bonus is that you can set your limit and not spend any more than that.

Like many of you I do quite a bit of online shopping and will continue to do so. If you will follow today’s tips (especially tips 1-4) you can shop online with confidence.

 

Ryan H. Law, M.S., CFP®, AFC®

 

Personal Financial Planning Department

Office for Financial Success Director

University of Missouri Center on Economic Education Director

 

162 Stanley Hall

University of Missouri

Columbia, MO 65211

 

573.882.9211 (office)

573.884.8389 (fax)

 

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[i] http://www.nrf.com/modules.php?name=News&op=viewlive&sp_id=1260

[ii] http://www.pfsweb.com/blog/cyber-monday-2012-the-results/

Is the Fiscal Cliff a Double-Black Diamond?

In my younger years, I did not ski.  In my mid-forties, I finally learned to ski and loved it - before my knees began to whine.  When you ski, you begin on the easiest slopes; those marked with a green circle, progress to blue squared, intermediate slopes and then to those marked with a black diamond.  Only the very accomplished skiers, however, ski the double-black diamond trails.  I recall looking down these trails and thinking that they looked like a cliff, going straight down.   I marveled, however, at how exceptionally talented skiers could traverse the mountain on these trails and succeed in making it to the bottom.  The United States, I believe, is like the experienced skier, when dealing with fiscal challenges.

 

We face what the media is calling a “fiscal cliff”.  While the “cliff” is a formidable challenge with a FY 2012 federal budget deficit of $1.1 trillion (7.3% of gross domestic product (GDP)) and total public debt of 72.8% of GDP.  Projected growth in costs, under current benefits, in Medicare, Social Security, and Medicaid is projected by the Congressional Budget Office to create a federal budget deficit that grows from 7.3% to 12% of gross domestic product by 2022 – adding to total federal public debt^*.  Does this mean we will soon be thrust off the fiscal cliff or will we learn to traverse the steep and dangerous trail in front of us?  I believe we will do the latter.  Why?

 

If last year’s Budget Control Act takes effect, federal discretionary spending will drop from 8.3% in 2012 to a post World War II low of 5.6% in 2022.  Regardless, total federal outlays will continue to grow, as a result of entitlements, and reach 21.3% of GDP in 2018-19.  If this is addressed with tax increases, the entitlement squeeze will be deferred but not eliminated.  Moreover, total federal revenue will approach 20% of GDP, compared to 15.5%, currently.  Budget deficits will shrink and federal debt will fall, until the growth in Medicare and Medicaid expenditures overtakes the tax increases.  Thus, we have not averted disaster.  We have simply passed it on to our children.  We turn our skis….

 

Alternatively, we defer all spending cuts, let discretionary spending grow with GDP, and watch total federal outlays approach 25% of GDP by 2022.  If this is coupled with no tax increases for those making less than $250,000 with upper-income and investment income tax rates rising, as is currently scheduled to occur in 2013, we would see federal revenues rise.  Under this scenario, total federal debt will continue to grow at a rate faster than the economy, although the annual budget deficit would decrease due to the growth in revenues.  As we’ve seen in our European cousins, the rising overall debt burden will cripple the economy, especially if interest rates begin to increase with a strengthening economy.  Thus, we must turn our skis….

 

The way before us is steep, if we accept the inference that our federal budget is on a dangerous path.  There are wide differences of opinion with respect to answers.  The population voted with President Obama to increase taxes on the high income but revenues need to increase to over 20% of GDP in the early 2020s to avert disaster.  The population will likely not accept this scenario, if they think others are benefiting at their expense.  Thus, compromise must follow.

 

Taxes will be increased and the growth in entitlement spending will be slowed.  Benefits for expenditures such as Medicare, Medicaid, and Social Security, will be slowed.  This will be done, regardless of the effect on the electability of our representatives.  Eventually, leadership will arise in our “leaders” and hard decisions made.  Areas of discretionary expenditures, such as the military, education, basic research, agriculture, among others will be forced to experience slower levels of growth, while some entitlement spending is reduced or, perhaps eliminated – such as increasing the age for Medicare and Social Security eligibility.  This approach – to combine the “left” leg (tax increases) with a parallel move by the “right” leg (spending decreases) will allow our nation to safely negotiate this slippery slope.  We will safely descend the mountain and avert financial and political disaster.

 

We have no choice.

 

^* Much of these data came from Alan Levenson, Chief Economist at T. Rowe Price.  It is contained in the T. Rowe Price Report Number 117, from fall 2012.

"Coming together is a beginning. Keeping together is progress.
Working together is success." — Henry Ford

Buying a home? Consider homebuyer assistance programs

Graham McCaulley, Extension Associate, MU Personal Financial Planning Extension

You’ve examined your monthly budget and determined how much home you can afford. You’ve been house hunting and have an idea of what you’re looking for. You’ve even begun to shop mortgages. All these are necessary steps that most people take before buying a home, but not everyone checks into homebuyer assistance programs. For certain people, such as first-time homebuyers, those with low- to moderate incomes, veterans, or those living in rural areas, these programs can make getting into a home a little less costly.

Overall, the main benefit most homebuyer assistance programs provide for homebuyers are lower down payments, lower interest rates, and lower mortgage insurance costs than some may encounter with traditional mortgages. For example, with traditional financing (e.g., bank or credit union not participating in a homebuyer assistance program) you will usually have to come up with a minimum of 3% of a home’s value for a down payment as well as various closing costs ranging from about 1-4% of a home’s price. Also, if your down payment is less than 20%, you will have to pay for private mortgage insurance (PMI). The PMI premium is paid monthly as part of your mortgage payment and will be more expensive the smaller your down payment is.

The chart below outlines some homebuyer assistance programs that help cut down on the costs associated with buying a home:

Program	Backed By	Benefits	Who’s Eligible?	Down Payment Requirement	General Requirements
Good Neighbor Next Door Program	US Department of Housing and Urban Development (HUD)	HUD owned homes in revitalization areas may be purchased for only 50% of their appraised value.	Law enforcement officers, teachers (pre-Kindergarten through 12th grade) firefighters/emergency medical technicians.	If you qualify for any FHA-insured mortgage program, your down payment is only $100 and you may finance closing costs.	You must commit to living in the home as your sole residence for 3 years. During this time, you must have a second mortgage and note for the discount (i.e., 50% of the home’s value), although no interest or payments are required.  After 36 months the second mortgage is released.
First Place Homebuyer Program (Missouri)	Missouri Housing Development Commission	Two types of loans offered: 1) Cash Assistance: 3% of house price to use towards down payment or closing costs 2)  Non-Cash Assistance: no cash assistance, but loan offers a lower interest rate (currently 3% on 30-yr fixed loan).	First-time homebuyers and qualifying veterans who meet household income limits and have qualifying credit.	None for cash assistance loan.	Must live in home for 5 years. Cash assistance will be in the form of a 0% interest second mortgage that requires no payments and will be forgiven after 5 years of occupancy.
Rural Development Loans	US Department of Agriculture (USDA)	Low- and moderate-income individuals purchasing homes in rural areas.	100% financing, lower interest rates, and low cost PMI. The USDA offers guaranteed loans (for more moderate-income borrowers) as well as direct loans (for lower-income borrowers).	No down payment requirement. Loan amount can include 100% of purchase price as well as closing costs	Home must be in an eligible rural area, as determined by the USDA. It’s important to note that many areas just outside major metropolitan areas will still qualify as rural. You will have to pay a one-time USDA fee of 3.5% of the loan amount, which can be added to the loan.
HomePath	Fannie Mae	Available to those who will live in the homes as well as investors (occupiers have the chance to purchase homes before investors).	HomePath mortgages are available on homes owned by Fannie Mae (usually foreclosed homes). These loans offer a low down payment, no lender-requested appraisal and no mortgage insurance	3%	If buying the home as an owner-occupier (i.e., buying before investors are allowed to), you must live in the home as your primary residence for 1 year.
VA Home Loan Program	US Department of Veterans Affairs (VA)	Veterans, active duty personnel, certain reservists and National Guard members, surviving spouses of persons who die on active duty or die as a result of service-connected disabilities, and certain spouses of active duty personnel	100% financing and no PMI required. VA rules also limit the amount you can be charged for closing costs.	No down payment requirement.	You will be charged a VA funding fee that will range from .5 to 3.3%. This fee can be included in your loan amount. If you receive service-connected disability payments each month, you're exempt from the fee. You must live in the home as your primary residence.
FHA 203(b) Mortgage Insurance	Federal Housing Administration (FHA)	Provides mortgage insurance for those purchasing or refinancing a principal residence. The mortgage loan is funded by a lending institution, and the mortgage is insured by the FHA (which is part of HUD) so your lender can offer you a better deal.	Wide availability- You don't have to have a perfect credit score to get an FHA mortgage. In fact, even if you have had credit problems, such as a bankruptcy, it's easier for you to qualify for an FHA loan than a conventional loan.	3.5% of purchase price.	FHA does not provide direct financing nor does it set the interest rates on the mortgages it insures. For more information find an FHA approved lender in your area by going to: http://www.hud.gov/ll/code/llslcrit.html

 

The above chart is not an exhaustive list of homebuyer assistance programs. Home loan and down payment assistance programs vary by state, as many are sponsored by state/local governments or other organizations. For a list of specific programs by state, visit http://www.hud.gov/buying/localbuying.cfm.

No matter where you are in the home buying process, it’s a good idea to familiarize yourself with common buying and financing procedures as well as to think critically about how much home you can afford. You can find articles on these issues in the housing section of MU HES Extension’s Money Matters website (http://missourifamilies.org/features/financearticles/housing.htm).

For more information on the assistance programs outlined above, including how to apply for the programs, visit the following links:

HUD “Good Neighbor Next Door” Program: http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/reo/goodn/gnndabot

MHDC “First Place Homebuyer Program: http://www.mhdc.com/homes/firstplaceloans/index.htm

Federal Housing Administration (FHA) Mortgage Insurance:

http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/ins/sfh203b

USDA Rural Development Loans: http://www.rurdev.usda.gov/hsf_sfh.html

VA Loans: http://www.benefits.va.gov/homeloans/lp.asp

Fannie Mae HomePath Mortgage: http://www.homepath.com

 

The Fiscal Cliff

by Ryan Law

 

With President Obama’s re-election a number of news articles are saying one of his first challenges is to deal with the upcoming “fiscal cliff”. Today’s article will attempt to explain what that means in simple terms and what it can mean in your life.

 

The “Fiscal Cliff” will begin on January 1, 2012 and means $7 trillion in tax increases and spending cuts over the next ten years. On the front-end that may not sound like a bad thing, but it could be crippling to the economy the way it is set up.

 

Spending Cuts

 

In 2011 the Budget Control Act was passed that increased the debt ceiling and called for a bipartisan debt-reduction deal or there would be automatic spending cuts. No deal was reached, so the following spending cuts begin in 2013:

 

·         Defense - $50 billion is cut from discretionary defense spending each year for the next ten years. Some military officials have said these cuts would be “devastating”[i]

·         Non-defense – a similar amount would be cut each year from non-defense spending. Some programs, like Medicaid, Social Security, civil and military employee pay and veterans benefits, are protected, but everything else, including education and air traffic safety, will be affected.

Tax Increases

 

The Bush Tax cuts would be eliminated, which means specifically:

 

·         Marginal tax rates will increase – they will go from current levels of 10, 15, 28, 33 and 35% to 15, 28, 31, 36 and 39.6%, respectively.

·         Capital gains rates will increase from 15% to 20%

·         Child tax credit will decrease from $1000 per child down to $500

·         The marriage penalty relief will expire

·         The estate tax exemption will go from $5 million to $1 million

In addition, the payroll tax holiday will expire, taking your payroll taxes from 4.2% to 6.2%, which means someone earning $30,000 will pay an extra $50 per month in payroll taxes

 

The Challenges

 

Experts have commented that there are two big challenges Congress and the President face:

 

1. If all tax cuts stay where they are and no cuts are made in federal spending we will continue to face a mounting deficit of $1 trillion per year, which is unsustainable.

 

2. If all the cuts go into effect the economy could be thrown back into a recession (cuts often mean job elimination or pay cuts and those with jobs will pay higher taxes).

Neither option is a good one – obviously Congress and the President need to work together to figure out the best path. Both parties have expressed that they plan to work together to come up with a solution.

 

While the country faces difficult economic challenges and has a long road ahead to get on solid financial ground, you can take steps to stabilize your own financial situation. As we always preach, learn to live on a budget, get out of debt and set up an emergency fund. These three steps can lead to financial peace of mind.

 

 

Ryan H. Law, M.S., CFP®, AFC®

 

Personal Financial Planning Department

Office for Financial Success Director

University of Missouri Center on Economic Education Director

 

162 Stanley Hall

University of Missouri

Columbia, MO 65211

 

573.882.9211 (office)

573.884.8389 (fax)

 

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[i] http://www.defense.gov/news/newsarticle.aspx?id=118450

Be Prepared

NOTE: This article was originally written by Dr. Weagley and published as a Financial Tip in May 2011 after the tornado in Joplin, Missouri. With the recent devastation in the Eastern United States with Superstorm Sandy and the tragic loss of life and destruction of property we felt it was appropriate to re-emphasize it this week.

 

Our thoughts and prayers continue to go out to those affected by the storm and those who are working to continue to search for survivors and beginning clean-up. If you feel so inclined a lot of help is needed and can best be achieved through financial donations made directly to the Red Cross:

 

http://www.redcross.org/charitable-donations

 

With that – here is this week’s Tip:

 

The Boy Scouts' motto is "Be Prepared". Once, Baden Powell, the founder of Boy Scouts, was asked the question, "Be prepared for what?"

 

He answered, "Be prepared for any old thing".

 

With a focus on financial success, how do we financially prepare for cataclysmic events? With all due respect to the author of an educational guide sheet on the subject (which can be found here<http://www.extension.org/pages/26397/money-management-in-times-of-disaster:-preparation>), a summary of ideas follows.

 

1) Household inventory – For insurance claims you must have proof of your loss. It is easy to take a digital recording of the contents of your house, while narrating descriptions about the contents. (Try to stay focused on the contents and not the life history of the items, though that might be interesting to your grandchildren.) Keep a list of what you own and keep it in a safety deposit box. If you have antiques, jewelry, or artwork, it is a good idea to have an appraisal of their actual value. Useful tools may be found at http://knowyourstuff.org.  

 

2) Insurance - Make sure you have the right amount of insurance on your home and your personal possessions. (Step 1 will help with determining the value of your possessions.) Make sure you understand the difference between standard coverage and replacement coverage. The former values your items at their current, used value, while the latter values your items at what it would cost to replace the possession. When you remodel, review your insurance coverage. Consider earthquake and flood insurance if you find these to be necessary and cost effective. Flood insurance must be purchased from the Federal Emergency Management Administration, although your insurance agent can provide access to FEMA coverage.

 

3) Emergency fund - I don't want to be too redundant but make sure you have three to six months living expenses in your emergency fund. Cash is king during a disaster and electronic access to sources cash may not be available. Some people keep an open line of credit on a credit card, just in case of an emergency – if they cannot learn to save money!

 

4) Documents – If something is not able to be replaced, keep it in your safety deposit box – with your household inventory. All stocks, bonds, birth certificates, discharge papers, wills, deeds of trust, trusts documents, special photos, passports, marriage certificates, and whatever you deem to be irreplaceable should be kept secure.

 

5) Of course, keep your smoke and carbon monoxide detectors in good working order. Keep dead limbs trimmed from your trees. Keep dried grasses from your home. Know where you are going to meet your family outside, in case of a fire, and where you need to take shelter, in case of a storm or earthquake. Practice these steps with your children. Do NOT just talk about it – do it with them. Then, when the siren blows or the earth shakes, you will all know what to do. Make sure your family knows how to turn off the gas line, water line, and electrical service.

 

6) Disaster Kit – At a minimum, your disaster kit should contain:

a. A supply of water that is less than six months old. Old, clean unbreakable containers can be recycled for this purpose.

b. Non-perishable food, such as canned goods or freeze-dried backcountry foods. If you use canned goods, please keep a non-electric can opener in your pantry.

c. Clothing, particularly rain gear and layers to keep warm.

d. Sleeping bags and blankets. If you camp, your tent could be quite handy, as well as cozy and warm.

e. A first aid kit with essential first aid items, mostly to prevent infections and treat mild sprains – including prescription medicines. Know enough first aid (e.g., Boy Scout training!) to be a resource to others.

f. A battery powered radio, flashlight with plenty of extra batteries.

g. Cash and credit cards.

h. Keys to your cars, house, garage, sheds, or other structures or vehicles.

i. Special items that might exist in your family for special people, such as mobility aids, feeding aids, and other items.

 

Finally, nothing can prepare us for the aftermath of a disaster the caliber of Superstorm Sandy, the tornado that hit Joplin, New Orleans and Katrina, or Japan's recent earthquake and tsunami. I, however, do know something about the human spirit. If we are faced with disaster, we will be challenged but we will prevail. It is what we do. We survive to grow and to love, yet again. Being prepared just makes it easier for that human spirit to blossom anew.

Installment Loans Revistied

Have you been considering buying a car?  How do you plan to pay your tuition? Do you have many credit cards with a balance and you are looking for a way to consolidate your credit card bills into one payment? If any of these, among a myriad of other options that entice you to borrow money, are true, you are likely considering an installment loan for the money you owe. Installment loans can be an “upside down” liability or they can be a rational way to help you manage obligations where credit is your choice.  Credit is not always bad.

 

A common example of credit being good is credit cards.  Credit cards can be a convenient way to pay for purchases and they can provide you with many consumer protections.  They can also be expensive.  If you have positive balances on multiple credit cards and you are sincere in wanting to move to a life of less debt, one might consolidate these loans into an installment loan.  As credit cards generally carry a relatively high interest rate, a consolidation loan at a lower rate of interest might be optimal.  An installment loan can consolidate multiple loans into lower, manageable payments with a lower interest rate.  If you make the same (or greater) payment as the sum of your prior monthly payments, you will amortize the loan faster with less of a finance charge.  

 

These loans can also be used to pay for the expenses related to education, or sudden expenses for which you have inadequate emergency funds. Loans can, after all, be a helpful tool for anyone in a financial bind. Banks are in the business of providing qualified loans to their customers – loans that are lent to bank customer for legitimate reasons, pending credit approval by a loan officer. People borrow money to pay for school, new appliances, car maintenance, to help cash flow a new business, among many other reasons. While, in general, it is foolish to borrow money for any purpose other than an investment, the risk they entail is often difficult to avoid.  Moreover, if you have something you can pledge as collateral to repay the bank, should you default on the loan, you can reduce this risk and, often, the interest charged on the loan.

 

It is quite common for installment loans to be used to buy vehicles, a depreciating asset. This function is very common, regardless of the fact that new cars lose value as soon as they are driven off the lot. This causes the value of the loan to be greater than the value of the car, or a loan-to-value ratio exceeding 100% of the car’s value, making the loan “upside down”.  Moreover, borrowing to purchase a depreciating asset can be a choice that helps move you further from your financial success.  Consider the following.

 

Assume you want to purchase an $18,000 car and borrow the price at an interest rate of 8% for 48 months.  Your monthly payment would be $439.43 and, after 48 months, you will have paid a total of $21,093 and have a depreciated car worth, if you are lucky, $11,000.  On the other hand, if you drive your existing car for four years and wait to purchase the car, that $18,000 car will cost $20,260 at a 3% rate of inflation.  If you save $413.87 per month in an account that only pays 1% per year, you will be able to purchase your new car.  That car will be worth $20,260 – not $11,000.  As such, your “automobile” assets are $9,260 greater and you have established yourself as a saver.

 

For an appreciating asset, like your education, borrowing money may have a substantial payoff.  We know that, on average, a family with a head who has graduated from college, in 2007, had a family income of $105,219.  On the other hand, the average family with a high school educated head had an average family income of only $51,369.  Borrowing money for a higher income can be a good use of money.

 

So, what should you do when you are thinking about taking out a loan?

1)      Save for the purchase, if you can. Avoid taking out a loan if at all possible but, if you must, make sure it is for an asset that will pay you back.

2)      If you must take out a loan, make a large down payment, in order to reduce financing costs.  

3)      Check your credit score yearly to make sure it is accurate.  Manage it to maintain its quality.

4)      Shop around! Banks and lenders compete for your business, so the more you shop around, the best loan conditions and rate of interest are more likely to be yours.

Financial success is yours to choose.  Choosing to overuse credit or using credit for items, which depreciate in value or which may altogether lose their value (like the prom dress for the date that turns out to be a dud) is foolish.  Foolish lives next door to her cousin, Failure.  Success is on a different street.

 

-          Ryan Buttrey, PFP Student, with Robert Weagley, Chair

 

Prepaid Cards: Know Your Fees

Prepaid debit cards are the latest fee-generating vehicles for financial institutions looking to replace revenue lost when credit card fee regulation started in 2010. Prepaid cards have no fee restrictions and can charge for everything from using an ATM to calling customer service.  The Consumer Financial Protection Bureau predicts that consumers will load $167 billion onto prepaid cards by 2014. That's a lot of dollars loaded onto a wide variety of cards. With so much choice, smart consumers will look for a card that offers the benefits they need without excessive fees.

If you shop around for the card, you can find one that fits your situation the best, depending on your spending habits, how frequently you buy things and what you want to do with the card. Out-of-pocket expenses can add up quickly when you consider the long list of potential fees for prepaid cards:

·         Purchase fee – what you pay to buy the card itself

·         Activation fee – another fee to activate the card so that you can access the funds that are loaded onto it

·         Monthly “maintenance” fee – a common fee that may be tied to the balance you keep on the card or other conditions

·         Reloading fee – a fee paid to put more money on the card; you may also incur a fee with a third party who converts your money to electronic form for loading purposes

·         Funds transfer fee – a fee that you must pay when funds get transferred from one card to another or from a specific account

·         Purchase transaction fee – a charge for using the card to buy something; these fees vary and may be waived on a limited number of purchases

·         Denied transaction fee – a fee that may be added if you try to make a purchase without sufficient funds

·         Overdraft (or shortage) fee – a few cards will cover a transaction if you have insufficient funds and they cover the purchase anyway

·         ATM withdrawal fee – some cards will permit a few free ATM withdrawals in network but out-of-network or additional withdrawals may involve added fees

·         Balance inquiry fee – a fee that you must pay just to check the balance on the card

·         Foreign currency conversion fee – a fee you incur just for using your card outside the U.S.

·         Inactivity fee – a fee that gets added if you don’t use your card within a specific period of time (e.g., 60-90 days)

·         Card replacement/reissue fee – a fee you must pay if your card is lost, destroyed or stolen

·         Paper statement fee – charged for requesting a paper statement rather than viewing it online

·         Customer service fee – a fee that gets charged if you call customer service and ask to talk to a person rather than using an automated system; even some automated systems charge a small fee

·         Closure fee – a fee you must pay just to stop using the card

Fees and benefits can vary widely from card to card. For example, many prepaid cards don’t have protection for unauthorized charges or lost or stolen cards.  Some cards do have those protections, so you need to do some comparison shopping. Don’t just run to a discount store and buy the first prepaid card you see. If you do, it’s pretty likely you won’t get the best deal you could.  Prepaid cards can be an option for someone who can’t open a checking account, or as a means for providing funds for a teen, college student or an elderly parent.  Just make sure that the card doesn’t have future fees that they’ll incur because they don’t understand what happens when they use the card.

Prepaid cards might be a way to teach money skills to a teen or college student.  If they run out of money the third week of the month, they’ll learn that you can’t have everything you want, and there are limits to what you can spend.  It’s a lesson they can learn without going over a credit limit or running up a balance that they can’t realistically pay.

Prepaid cards can be beneficial, but as with so many other financial instruments, it depends – on what you use your card for, how often you use your card, where you use your card and many other factors.  Do your homework, think about how you will use a card, and fully investigate the terms and conditions of several cards so you can make the decision that is best for you and your situation.

 

By Brenda Procter, M.S., Extension Associate Professor, MU Personal Financial Planning Department and Debbie Johnson, Audio Producer/Director, MU Cooperative Media Group

Source:  Howard, Alegra.  Consumer Action News, Prepaid Card Survey: Convenience at a cost, April 2012

 

 

 

Something for Nothing

An article was forwarded to me by a colleague about a company going bankrupt.  The company, Rich Global LLC, was the publisher of the book Rich Dad, Poor Dad a popular book written by Robert Kiyosaki.   In the book Kiyosaki shared, in the words of Fortune magazine, the

“secret money-making strategies of the wealthy with his wage slave readers. The tips ran the gamut from ridiculous to illegal and downright hurtful and included advocating for insider trading, arguing for the purchase of multiple real estate properties with little or no money down and telling followers they could purchase stocks on margin via unfunded brokerage accounts.”

 

The Tip for this week is that many people bought into the hype and questionable practices included in the book.  Most importantly, the book almost idolizes “passive income” – income you receive for owning things and doing nothing productive to increase the wealth of the nation.  Well, please excuse my old fashioned values where I believe that the greatest asset we own is our human capital.  Moreover, our human capital is the only capital that we can control. By making investments in our human capital, we can earn greater incomes.  That income does allow us to save and invest but it is the wise man who continues to work, to make a positive contribution to society, and to increase the national product of our country.  When we all do this, we are all better off.

 

This episode in my life reminds me of a song entitled Something for Nothing by Rush.  The words of the song are below and you may read more about the bankruptcy of a modern day seller of blue sky here: http://www.forbes.com/sites/helaineolen/2012/10/10/rich-dad-poor-dad-bankrupt-dad/ .

Something for Nothing

by Rush

 

Waiting for the winds of change
To sweep the clouds away
Waiting for the rainbow's end
To cast its gold your way
Countless ways
You pass the days

Waiting for someone to call
And turn your world around
Looking for an answer
To the question you have found
Looking for
An open door

You don't get something for nothing
You can't have freedom for free
You won't get wise
With the sleep still in your eyes
No matter what your dreams might be

What you own is your own kingdom
What you do is your own glory
What you love is your own power
What you live is your own story
In your head is the answer
Let it guide you along
Let your heart be the anchor
And the beat of your own song

You don't get something for nothing
You can't have freedom for free
You won't get wise
With the sleep still in your eyes
No matter what your dreams might be

 

Credit Report Basics

Do you ever wonder how lenders decide who gets a loan and who doesn't?  Ponder why you were turned down for that credit card? Think that you might file for bankruptcy and hope no one will ever know?  If so, you need to know more about your credit report, how it works, and how it can affect your financial future. The following information gives basic information about what a credit report is, who uses it, how to obtain a copy of your own, and correcting a mistake if you find one.

What is my credit report?

Your credit report is a compilation of financial data about you. Credit bureaus across the country compile credit information from banks, finance companies, merchants, credit card companies, and other creditors and enter it into a centralized computer system. Your report contains personal information such as your address, social security number, and birth date. It may also contain information about your employment and income, spouse’s information, former addresses, etc. More importantly, your credit report file details information about credit transactions and balances due, payment history, suits, judgments and tax liens. Your record also shows if you have declared bankruptcy. This is especially important to note, because this information will not be removed from your file for seven to ten years!

Who uses my credit report?

A potential creditor will usually check your credit report when you apply for a loan or credit card or rent an apartment. The lender or company will request a copy of your report and make their lending decision after reviewing your history. The lending company, not the credit bureau, makes the decision about whether you are approved or not. Although the credit reporting industry claims they do not sell credit scores to employers, there is nothing in the law to prohibit employers from obtaining a credit score if you give them written permission.  There are no reliable sources of information with respect to how often potential employees are asked to grant permission. Your report cannot be used by just anyone who wants information about you (such as friends). Anyone requesting a copy of your report must want it for an approved purpose and must be able to provide proof that they are a legitimate company with the right to view your report.

Can I see a copy of my credit report?

Yes, and in fact, it is a good idea to periodically check your credit reports to be sure that the information is correct. Congress created the 1971 Fair Credit Reporting Act, which gives you the right to see a copy of your re- port. As of March 1, 2005, you can order a free credit re- port one time each year. The three largest credit reporting bureaus are using one central address to provide this information. Do not contact the credit bureaus directly to obtain your free annual credit report.

 

To order your free credit report:

 

·         Visit www.annualcreditreport.com;

·         Call 1-877-322-8228; OR

·         Print the form at http://www.ftc.gov/bcp/conline/edcams/credit/ docs/fact_act_request_form.pdf and mail it to:        Annual Credit Report Request Service

PO Box 105281

Atlanta, GA 30348-5281

 

Be cautious about companies offering “free credit reports” on slick TV commercials, on websites or in magazine advertisements. Many of them have a snag such as having to pay a hidden fee for some other service they offer or requiring a subscription of some kind. You do not need a company to obtain a free

credit report for you; can you do it yourself. The contact information listed directly above is the official place to go to get your free credit report.

You can contact the three large credit reporting bureaus directly to request a free credit report every twelve months if:

·         you have been turned down for credit, employment or insurance within the last thirty days due to something in your credit report;

·         you are unemployed and plan to seek employment within 60 days;

·         you are on welfare; or

·         your report is inaccurate due to fraud. Otherwise, you usually have to pay a small fee to obtain

a copy of your report.

 

The three largest credit bureaus are:

•             Equifax

P.O. Box 740241

Atlanta, GA 30374

1-800-685-1111

 

•             Trans Union

2 Baldwin Place, P.O. Box 2000

Chester, PA 19022

1-800-888-4213

 

•             Experian

P.O. Box 2002

Allen, TX 75013

1-888-397-3742

 

There is also another large credit bureau called Innovis Data Solutions. This bureau differs from the other three main ones, however, because it sells your credit information to companies that compile mailings for unsolicited mail, including credit cards. You can also look under “Credit Bureaus” in your local yellow pages.

There is a mistake on my credit report. Now what? If you find an error on your credit report, contact the credit bureau. If the information is very old (more than seven to ten years), you should ask to have the information deleted. If it is a more recent error, provide as much information as you can about the situation. The bureau must investigate the problem. You also may try contacting the reporting party to see if they can help you resolve the situation. If you cannot resolve the issue, you can file a written statement of up to 100 words with the credit bureau telling your side of the story.

Note:

Beware of “credit repair” scams that promise to erase your bad credit history. You can take the same steps they will take to remove incorrect information without having to pay a high fee. Information that is legitimate, however, cannot be magically erased--by anyone!