Smart On Money

Personal finance topics including budgeting, debt reduction, investing, income creation and saving.

Main Menu

Archives for 2011

Prepaid Debit Cards Often Cost More Than Checking accounts

By 5 Comments

Checking accounts and debit cards have something in common: hidden fees that are meant to catch you off guard. If you are trying to figure out the option that has fewer fees, you will probably find that a checking account is cheaper. There are several reasons why.

The Overdraft Factor

Generally speaking, a normal user will find that prepaid debit cards are more costly than checking accounts. At Nerdwallet.com we’ve conducted a small experiment: comparing the fees for a checking account at the ten largest checking account providers against the fees associated with ten prepaid debit cards, including America’s most popular, the WalMart MoneyCard.

On average, a prepaid debit card will cost you more than $19 per month, while the average checking account will only cost $6. In the appendix, you can find more details on how we got these numbers.

The major variable, though, is if or when a checking account holder decides to use overdraft protection, the mechanism banks use to make money on checking accounts. Usually, the overdraft charges assessed on a checking account-connected debit card are incurred by mistake. These mistakes are expensive though, as overdraft charges can be up to $35 per transaction. This can be especially damaging if you get hit with the fee without realizing your account is empty.

How much can overdraft fees end up costing you? A study conducted by the FDIC reports that Americans who overdraw their accounts more than twenty times a year stood to lose more than $1,600 for doing so.

Ultimately, you would have to overdraft your checking account five times a year in order to spend more on a checking account than with a prepaid debit card.

On average, the overdraft fee assessed by America’s 10 largest checking account providers is $33.75, which can certainly push users past the $229.67 in yearly fees that accrue to a prepaid debit card, when added the $81.80 in fees that are paid on the average checking account without overdrafts. But those with the discipline to avoid overdrafts will be best served by getting a checking account at a bank.

In addition, as of August 2010 the FDIC has prevented banks from opting customers in to overdraft programs without consent. So now you don’t even need to be disciplined to avoid overdrafts – just don’t opt in to them.

Rather than a prepaid card, get a secured credit card and a checking account

The state of your wallet will probably benefit from avoiding prepaid debit cards. Getting a secured credit card in combination with a checking account is the best option, for the following reasons:

  • A secured card can build your credit, something a prepaid debit card can’t do.
  • Since you need to pay upfront either way, why not pay for the service that improves your credit as well?
  • The woes of consumers expressed through internet forums also provide a grave warning about the potential of getting scammed by a prepaid debit card. Prepaid debit cards do not have the same level of protection for fraud, disputes, or travel-related incidents that most credit cards do.
  • Many secured cards also allow you to move up to a standard card after a period of proven trustworthiness. So, going with a secured credit card now could end up getting you access to more premium rewards credit cards in the future.

All this goes to show that you are probably better off with a checking account connected to a secured credit card than with a prepaid debit card. According to the FDIC, the number one reason why people opt not to open a checking account is that there is “not enough money” to make use of one. Since having a checking account is so much cheaper than a prepaid debit card, perhaps you should consider whether you can afford not to use one.

Appendix

In order to calculate the numbers above, we assumed that prepaid debit card holders would have 1.5 withdrawals from ATMs, eight purchases, two card reloads, and only one balance inquiry each month. Using these values, we evaluated cards from ACE Cash Express (NetSpend), Green Dot, RushCard, Emerald Card, Net Spend Visa, Vision Premier, Western Union MoneyWise, Walmart MoneyCard, AccountNow, and Pay Power.

For the banks in the comparison, we made the assumption that a checking account will start with a $100 balance, and that account holders would use an ATM that is out-of-network once per month. With these values, we looked at checking accounts from Citi, HSBC, PNC, Capital One, Sun Trust, US Bank, Wells Fargo, Chase, Bank of America, and TD Bank.

This post comes from the NerdWallet.com team, personal finance bloggers and experts in helping consumers find the best low APR credit cards.

Social Security Changes For 2011

By 3 Comments

We  had a  tax package passed in December that extended the current tax rates, in addition to making other changes to the estate tax, extending certain tax credits,  and other changes.  One area that saw several changes was the Social Security program.

Social Security benefits are received by nine out of ten individuals age 65 and older, so it's an important piece of the puzzle for many people.  (Whether it should be is up for debate)

The Social Security changes for 2011 will give workers a temporary 1 year tax break on the amount they pay into the entitlement program, in addition to several options for retirees being eliminated. Here's a look at how the Social Security program will change this year.

Lower Social Security Taxes:  2% Payroll Tax Holiday

As was mentioned a while back, the Making Work Pay tax credit expired at the end of 2010.   The expiring credit, which you can claim on your 2010 taxes, amounted to about $400 for singles and $800 for married couples.  Since that credit was expiring, the Obama administration wanted to pass something to replace it to a degree.  Because of that they passed the 2% payroll tax holiday.

So how does the 2% cut work?   The amount we pay into Social Security will drop this year from 6.2% of your income (up to $106,800 annually) to 4.2 % in 2011 only.  The employer portion of that will remain at at 6.2%.

For those who are self-employed, the Social Security tax rate will drop from 12.4 percent to 10.4 percent next year, due to provisions of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which was signed by President Obama on December 17th of 2010.

While this move has been criticized by many because the Social Security pr0gram already is having predictions of running out of money in the near future, others say the program's finances won't be harmed because the trust fund will be reimbursed for the tax cut funds from the general fund of the Treasury.    In any event, the program's much publicized problems will still be an issue – even if this tax cut doesn't directly affect the program.

Interest Free Loan Option Removed

In the past retirees were able to start claiming social security payments at the age of 62, and then pay back all the benefits received at age 70, so that they could reclaim social security at the higher delayed claiming rate.  In effect this gives those retirees an interest free loan.

New rules only allow beneficiaries to withdraw their application for retirement benefits within the first 12 months of receiving their first payment.  They may only withdraw once per lifetime.

According to The Center for Retirement Research at Boston College if enough people were to use this claiming strategy it could cost the system between $5.5 billion and $11 billion.   The benefit would go primarily to high-income households who had enough money to take the interest free loan without worries of having to pay it back later.

No Retroactive Benefit Suspensions

In the past retirees were able to temporarily suspend their benefits, and then restart them later – resulting in a bigger social security check based off of the time in which the payment wasn't received. This is still allowed under the new rules, however, social security recipients won't be able to retroactively suspend their benefits, and pay back money already received in exchange for higher payments going forward.

Much like the “no interest free loan” rule, beneficiaries can't pay back money already received. They can only suspend benefits for months when they didn't receive payments or for future payments, the month after the request is made.

No More Paper Checks For Retirees

Social Security recipients will no longer have the option of receiving a paper check if they apply for benefits after May 1st, 2011.    Going forward new retirees will only have their choice of having a direct deposit or having their funds loaded onto a debit Mastercard.

Sending out paper checks to retirees every year has quite a large cost associated with it.  It costs the federal government over $120 million dollars to send out checks.  Making this change going forward will save Social Security $1 billion over the next 10 years, according to the Treasury.

Retirees who are already receiving paper checks can continue receiving them for now.  In the end though they will need to switch to direct deposit or the prepaid debit card by March 1, 2013.

How You Can Pay Less For Insurance

By 3 Comments

When people are trying to save money the first step they usually take is to eliminate anything they feel is an unnecessary expense. Unfortunately insurance policies, like renter’s insurance and life insurance, are the first to go when push comes to shove. Even if you understand the importance of your insurance policy and the premium is 50 dollars a month, if you don’t have that extra 50 dollars you have to make a cut.

However, most people simply let policies lapse out of financial frustration instead of looking at ways that they can save on their monthly premiums and keep the piece of mind that their policy provides.

But don’t think this is only for people who are facing dire straits. Anyone who is looking to save a bit of money each month should consider the following tips to see which ones can help them keep more money in their pocket.

How To Save On Insurance

  • Shop around: It sounds simple but how many times do we buy something without comparison shopping first? Not to mention the fact that things may have changed since you last looked at the different policies competing agencies may have to offer.
  • Pay your premiums all at once: It may be tough to do on a strict budget but if you can pay a year’s worth of premiums at once, or even at six month intervals, your insurance company will most likely give you a nice discount. Plus, that’s one less thing to include in your monthly budget.
  • Be low risk: Insurance is all about risk. Ask your insurance company what you can do to put yourself in the lowest risk category available. Simply adding a deadbolt lock or keeping up to date fire extinguishers in your home may help you save some extra cash.
  • Higher deductibles = lower premiums: By increasing the amount you are responsible for in the event of a claim will lower your monthly premiums but be careful. Don’t increase the deductible to a point that you will never be able to meet it on your budget.
  • Reduce your insurance: Sometimes, less is better. Assess what you really need and make sure those items are covered leaving out the stuff that you can really get by without.

By doing a little extra homework when it comes to your insurance policies you can save a little extra money each month and avoid putting your back up against the wall and having to make tough decisions.

This is a guest post by Jeff Orloff.  Jeff writes for the Renter’s Insurance Blog

15 Simple Tips For Cheaper Car Insurance Rates

By 6 Comments

Saving money on car insurance is easier than you think… with a little bit of self education. Here are 15 simple things you can do that will save you money, while better protecting your car and its occupants.

So have at it – become a confident, educated consumer and make sure you pay the lowest possible price for your car insurance!

15 Tips To Get Better Insurance Rates

  1. Understand insurance companies – The auto insurance industry is divided into three types of businesses: Direct Agents, Independent Agents who sell the insurance of various companies, and Exclusive Agents who work on commission and can only sell one brand of insurance. If you have a good driving record, it’s likely you’ll get the best deal from a direct agent because they remove the middle man.
  2. Shop around – This is easily one of the most important factors to consider. Don’t take quotes from just a couple auto insurance companies. Instead, really look into what each has to offer and which discounts they can give you.
  3. Ask for insurance advice at your body shop – Your local body shop works with insurance companies and their adjustors nearly every day. Ask them which companies they prefer and which have the smoothest claims process.
  4. Check with your state’s insurance department – Depending on which state you’re in, many publish consumer complaint data and complaint ratios that show how many consumer complaints have been made against each company. Make sure you choose a company that you’re comfortable with and has gotten good reviews.
  5. Slow down – If you’ve had several speeding tickets, you’re much less likely to get discounts for safe driving.
  6. Etch your VIN – Studies have shown that cars with an etched-in VIN are much less likely to get stolen. By avoiding a stolen car, you’ll avoid a claim.
  7. Verify the accuracy of your policy – If you haven’t done so, take a minute to browse through your policy to make sure everything is correct. You’d be surprised at how quickly small charges can add up.
  8. Avoid lapses in coverage – Even a few weeks’ lapse in coverage can make you ineligible for discounts. If you’re in the process of switching carriers, make sure you don’t quit your previous carrier until the new coverage takes effect.
  9. Don’t claim small amounts – If you often make small claims (less than $500), you may have to pay a higher premium when it comes time for renewal. If you make a significant amount of claims in one year, your insurer may not want to cover you at all. Next time you have a claim, make sure it’s worth it in the long run.
  10. Limit the number of people who drive your car – The more people you have listed as drivers, the higher your premium will be. Teenagers and young adults under 25 are among the most expensive drivers to add to the policy.
  11. Verify the accuracy of your VIN – Most drivers are unaware of this, but an inaccurate VIN (even if it’s off by just one digit) can affect your auto insurance quote. Double check your VIN to ensure you’re not being overcharged.
  12. Mind your credit score – More and more auto insurance carriers are considering credit scores when giving you a quote. Sometimes, having bad credit can end in you paying up to 50 percent more. So, make sure to pay your bills on time and check that there are no items on your credit score that aren’t yours.
  13. Evaluate insurance costs when purchasing a new vehicle – When considering a new car, get a quote on your insurance rate, as the year, make, and model can make quite a big difference. Newer, sporty cars will be significantly more expensive to insure than used, family-style cars.
  14. Purchase a low profile car – Similar to the above, know that cars that are expensive to repair or have a high theft rate will end up costing you quite a bit more to insure.
  15. Don’t “pimp your ride” – Research has shown that adding modifications to your car, like a rear spoiler or lowering the suspension, can nearly double the cost of coverage.

 

 

 

 

 

And there you have it! Next time you’re shopping for new auto insurance, keep in mind the above tips – you may be surprised just how much money they can save you in the long run.

This is a guest post from Pam King.  Pam writes on frugality, safety and insurance literacy for Direct General, a provider of cheap car insurance . When not saving money on her insurance, Pam enjoys knitting, NASCAR, family and watching rollerderby! :)

Financial Infidelity: Do You Lie Or Keep Secrets About Money?

By 3 Comments

A topic that I see come up time after time on personal finance sites is related to married couples, and whether or not they should have joint accounts.  During those discussions one thing that invariably comes up is the topic of hiding money from one's spouse – or keeping secrets about what you're spending money on.

Today I thought I'd take a brief look at money secrets, and why people keep them.

How Many People Actually Keep Secrets About Money?

After reading the comments on several posts about having joint finances, I realized that there were probably more people keeping secrets about money from their spouses than I had originally thought.  Then I found a post on the Consumerist talking about financial infidelity.  It found that almost 1/3 of those polled admitted to lying to spouses about money.

An online poll commissioned by ForbesWoman and the National Endowment for Financial Education (NEFE) and conducted by Harris Interactive, surveyed 2,019 U.S. adults from December 17 to 21 and found that 31% of those who combined finances had admitted to lying to spouses about money. Another third of those admitted they themselves had been deceived about money.

For those couples experiencing financial infidelity, 67% said the deception led to an argument and 42% said it caused less trust in the relationship. A further 16% indicated the problem had led to divorce, and 11% reported a separation.

So almost a third have lied about money, and another third said they had been lied to. That's an amazing number of people lying about money!  Can people actually think that lying about money can be justified?

What Kinds Of Money Secrets Do People Keep?

The kind of money secrets that people keep seem to vary according to the study:

Among both offenders and victims, the leading money crimes were hiding cash, minor purchases and bills. Meanwhile, a significant number of people admitted hiding major purchases, keeping secret bank accounts and lying about their debt or earnings.

So for some reason people feel a need to hide cash, make purchases without their partner's knowledge and pay secret bills so they don't get caught.  Even more surprising to me is the number of people hiding more major purchases – opening secret bank accounts or lying about how much money they make.  There are even folks saving up money on the side “just in case” a marriage doesn't work out.  Talk about planning for failure!

I have an acquaintance who openly talked about having a secret bank account at work a few years ago.  Part of her paycheck went into the secret account so she could buy things she wanted, and the rest went into a joint account with her husband.  There was obviously little or no communication going on between husband and wife, and plenty of deception.  It was a big game of control – who could control the situation more.  Not surprisingly the two are now divorced, in part because of the deception and financial infidelity, but also because of sexual infidelity.  It was not a healthy relationship.

One matrimonial law expert, Nancy Chemtob,  feels like she has seen it all.  Some examples she gave on the Forbes article:

she once worked with the owner of a hedge fund who secretly spent millions on a mistress. In five of their 10 years of marriage, his wife had no clue that he was spending over $20,000 a month on the other woman, ultimately buying her a house, car and extravagant jewelry.

Another of her clients is in her 30s, remarried and has a son from a previous marriage, Chemtob says. Three years ago, she lied to her new husband that she wasn’t receiving child support. She was. Now he pays for the child’s expenses and private schooling while the woman stashes about $7,000 a month in a hidden bank account.

In one of the most extreme deceptions Chemtob’s come across, a 20-something woman fabricated her entire financial history. The original lie happened on the first date. Because he was very well-educated, successful and high-earning, she didn’t think he’d like her when she told him she didn’t have a degree or a job. She lied, saying she had her masters and a salaried position.

The woman continued the fib while they dated and into their eventual marriage. When he left home for work, she left too. When he returned home in the evening, so did she. Because he was so successful, he paid for everything and never noticed that she didn’t have an income. Eventually he did discover the truth and promptly filed for divorce.

The lies go on and on. Do people really think they can get away with the deception, and have no consequences?

Why Do People Lie About Money?

Why is it that people lie about money in the first place? Is it because they're selfish, insecure or just wanting to exert control in some way?

Boston-based family therapist Carleton Kendrick has been counseling couples for over 30 years and says money deception has become a huge issue in the last decade. He suspects the ease of using credit cards and purchasing online may make the act easier but doesn’t explain the lies.

Kendrick says the chief reasons people lie about money to their partners are pragmatism, control, guilt and fear. The pragmatic lie may result from planning an eventual split and not wanting the other to know how much money is available. Financial infidelity for control may include revenge spending, as one partner overspends to prove their independence or to get back at the other for something lacking in the relationship. Knowingly irresponsible behavior may cause guilt and embarrassment, so the person attempts to cover it up. Deceit may also occur because they fear their partner’s reaction to the truth.

Kendrick notes that how we are raised influences our money philosophies in relationships and can create some gendered behaviors or assumptions. “Girls still see their mothers at check-out, saying, ‘We won’t tell Daddy about this; it will be our little secret,’” he says.

So the reasons that people lie are just about as numerous and varied as the lies that people tell. They do it out of guilt, fear, control, and out of pragmatism when there is a faltering relationship.

What Can You Do To Fix Or Avoid Financial Infidelity?

So we've established that deception about money runs rampant these days, but what can we do to avoid having situations like this in our own marriages and relationships?

National Endowment for Financial Education’s Beck advises that couples have the money talk early–well before marriage–to avoid money lies in their relationships. If you are already married or in a committed relationship, he suggests using tax season as a nonthreatening way to ask your partner questions and gain a better grasp of shared finances. Those who suspect or discover that they are currently victims of financial infidelity should first figure out how deep the lies go and gather all the details.

One-third of those in relationships impacted by money deception say they have resolved to do something this year, with most planning to communicate more openly and create a shared budget for 2011.

To me the key here is for there to be plenty of open communication within a marriage. How do you foster those open lines of communication? By having shared weekly or monthly budget meetings, talking regularly about money with each other – even if one person is the main one doing the finances, and by creating a safe environment in the relationship for someone to ask forgiveness when they've done something they shouldn't have. They need to know the other person will be willing to forgive. And of course, you need to have a relationship where you're looking out for your partner's best as well – not just your own.

Have you ever kept a secret about money?  Did you feel justified in doing that, and if so, why?  Have you ever had to come clean about a deception, or had someone confess a deception?  Tell us your thoughts on money lies in the comments!

Changes To The Estate Tax Rates And Exemptions For 2011-2012

By 3 Comments

Among the changes that took place due to the recent Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was the reinstatement of an estate tax.   Due to gridlock in Congress last year, the estate tax was allowed to lapse.  That means anyone who had a wealthy family member die in 2010 could possibly see millions in tax savings.  For example, the family of George Steinbrenner will pay no estate taxes since he died in 2010.

Estate Tax Reinstated 2011

The tax bill that Congress just passed and President Obama signed in December reinstated the estate tax for the 2011 and 2012 tax years.   So what will the estate tax look like for the next two years?  Will it return to 2009 levels, or return to levels seen before the 2001 Bush tax cuts?

  • Pre-2001 Bush Tax Cuts: $1 million exemption, and a 55% rate on estates worth $1 million to $10 million. Rate rises to 60% on estates worth more than $10 million.
  • 2001-2009: $3.5 million exemption and a 45% tax rate on amounts over $3.5 million.
  • 2010: No estate tax
  • New Estate Tax For 2011-2012:  $5 million exemption for an individual or $10 million for a couple, with a rate of 35% for estates above these levels

So basically what happened was that the estate tax was re-implemented with a higher exemption, and at a rate lower than it had been from 2001-2009, and much lower than it had been before that.  So the estate tax is back for 2 years at least, at which time we'll need to revisit it again, or it will return to pre-2001 and Bush tax cut levels (55-60% rate)

From Don't Mess With Taxes:

For 2011 and 2012, estates worth $5 million or less won't be taxed at all. For estate values greater than that, a 35 percent tax rate will apply.

That's better than the 2009 law, which imposed a $3.5 million exemption and a 45 percent tax rate on the excess. And it's much better than what would have happened had the Bush tax cuts expired. If that had happened, estates worth more than $1 million would have faced a 55 tax rate. The bad news, though, is that Congress has set up a repeat of 2010. Unless it acts again in two years, the $1 million/55 percent rate law will be back.

How Many People Will Be Affected By 2011-2012 Estate Tax?

So now that the estate tax has been reinstated with a higher exemption, and at a rate lower than it used to be, how many people will be affected and still have to pay the estate tax?

The head of the American Bar Association's section that focuses on estate law estimates that less than one-half of 1 percent of people who die in 2011 will be hit by the estate tax. That's minuscule compared to the 10.5 percent of estates that paid Uncle Sam in 1977.

So while wealthy folks who died last year may have gotten away with paying no estate taxes, the families of those less than 1/2 of 1 percent who pass on this year can take solace that at least the estate tax is returning at a lower level than it was at previously.  They won't be subject to the 55-60% rates that were around pre-2001.

One other thing to note, while folks who died last year may not have had an estate tax, they also didn't have the benefit of a stepped up basis for capital gains taxes.  For a discussion of that, see this post that discusses the estate tax stepped up basis.

Also, in case it is any consolation, at least the tax rates in the US are at least somewhat lower than other countries: Tax Rates by Country

What do you think of the estate tax?  Do you think it is necessary and fair, or do you think that it is essentially taxing income twice?  What are your thoughts on the returning estate tax?