That legislation, which is part of the committee’s health bill, would let workers choose to have government deduct money from their paychecks — maybe $65 to $100 a month — and put it in a savings account. When they get old or disabled and need care, they could then use that money.

Anything that encourages automatic savings is generally a good idea. I would be interested to know whether the savings account would offer a high yield, and whether you could direct some of the money to be put into conservative investments. Of course, since it would be a long-term investment, I would favor index funds. I think that something similar to retirement accounts now — complete with tax advantages and the ability to direct some investments — would be in order. But it doesn’t look like that has really been thought out.

In any case, it is fairly obvious that health care reform on all fronts is needed. The private sector has largely dropped the ball, and offering a public option for health insurance (perhaps something similar to what our elected officials have access to) is a good first step. And you wouldn’t be forced to choose it if you could get a better deal elsewhere. A public option would introduce something akin to competition in a market where, quite frankly, there is very little.

Image source: NESRI via Flickr

Post from: EveryJoe

Long-Term Care: Help from the Government?

Times are tough-there is no doubt about that. If you have a retirement account that you are able to “borrow” from you may find yourself tempted to do just that to make it through a financial hardship. Unlike a savings account you are required to repay your 401(k) or face stiff penalties. Many people can and do borrow and repay retirement loans yet here are a few reasons why “borrowing” from your retirement should be your last resort.

• You will still have debt. There are many reasons why borrowing from one place to pay off debt in another is not successful. Granted in some instances -if you can grossly lower your interest rates AND you actually pay off the debt you may come out ahead, but that is not often the case. If you borrow from your 401(k) you may be able to reduce high interest debt but you must still pay back the borrowed money. The only thing you change is the interest rate and who you owe. Since there are other negatives to borrowing from your 401(k), reducing debt is likely not strong enough to offset these negatives.

• Your will put your retirement account on hold. Until you repay the amount you have borrowed you will not be able to contribute to your retirement account. If your regular contribution is $400 per month and it takes you two years to repay your loan, you have missed out on $9,600 of retirement contributions in addition to the interest you would have earned.

• Leaving your job will cost you. And it will cost you big time! If you leave your current job you will be required to repay the amount you borrowed in full within 60 days or pay the taxes and penalties of an early distribution.

• You could end up in a higher tax bracket. Many people take advantage of being in a lower tax bracket due to their retirement contributions. If you take out a 401(k) loan your payments are taken out post-tax and cannot be claimed as a tax deduction.

• You might end up worse than you started. If you are experiencing a true financial hardship, perhaps risk losing your home or your job you do not want to throw good money after bad. Unless you can truly see the end of the hardship in the near future you are better off leaving your retirement money where it is and exhausting any other options available to you. If you try to save your home and fail, you have not only lost your home but also any money saved for retirement. If you withdrawal money to repay debt yet end up filing bankruptcy you have again lost money that otherwise could have remained safe for retirement.

If you find yourself considering withdrawing money from your retirement account it would be wise to thoroughly investigate your options, research the penalties and consider any other available remedies before you risk losing your hard earned money.

Trisha Wagner is a freelance writer for DepositAccounts.com where you can compare rates of deposit accounts from dozens of banks in one place. Trisha writes regularly on the topics of personal finance and savings accounts.

image source: sxc.hu

Post from: EveryJoe

Don’t Treat a 401(k) Like a Savings Account

What an emergency fund isn’t

Many people make the mistake of thinking that credit cards are an emergency fund. I have a credit card that I take along with me for “just in case” moments while traveling, but I don’t think of it as an emergency fund. Credit cards are a loan. Trying to set them up as emergency funding is just asking for trouble, since you will have to pay interest on the money you use. Credit cards aren’t an emergency fund; they actually increase your chances of big financial problems.

What an emergency fund is

An emergency fund is a well of cash that you can dip into when an emergency comes up. It is money that you can use to tie you over if you lose your job, or that you can use to make unexpected car repairs. It’s also money that you can use to pay deductibles on insurance policies should the need arise. It’s a fund that is there, waiting to be called into action. Many experts agree that $1,000 is a good start for an emergency fund, and that you should keep adding to it regularly until you have around six months (or more) of expenses saved up. For best results, your emergency fund should be:

1. In an interest bearing account so that the money compounds as it sits there.
2. Fairly liquid so that you can access it when you need it (access within two or three days).
3. Not so liquid that you are tempted to use the money to buy big ticket items that you don’t really need.

I keep my emergency fund in a high-yield savings account. It requires a bit of transferring, and it takes two days to get my money. That keeps it out of my immediate reach, allowing me time to determine whether I really have an emergency on my hands, while still ensuring that the money is available to me in a timely fashion.

Do you have an emergency fund? Where do you keep it?

image source: sxc.hu

Post from: EveryJoe

Do You Have an Emergency Fund?

I know that some folks like to use a tax refund as a sort of savings plan. It pays off debt and may added to the savings account after the fact. This actually does one a disservice. It promotes poor financial planning habits and prevents you from maximizing your income. While I suppose it’s better than having no savings plan, it doesn’t encourage a mind set that leads to truly yielding wealth.

• If you use your tax refund to pay off debt, it means that you have been paying high interest for a good portion of the year. Meanwhile, the money that was already yours was earning nothing for you in government coffers. You’re better off paying your credit card balances every month and avoiding a build-up of debt.
• If you want an automatic savings plan, have your money directly withdrawn from your checking account every month. Make sure you set up your personal finance software so that you don’t think that you have that savings plan money to spend.

You can adjust your withholdings to more accurately reflect what you owe in taxes. If you work for someone else, this is usually a matter of visiting the HR department and filling out a new W-4 form. If you pay estimated taxes quarterly, you get a new estimate every year.

I ended up with a tax refund this year

This year, unfortunately, I actually got a tax refund. We bought a home in late 2007, so 2008 was the first year that we had a whole year’s worth of mortgage interest for a deduction. However, the hope is that with my latest estimated quarterly taxes I will be back to paying a little extra in taxes.

The last few years, I’ve owed money. As my home writing business has grown, my estimated tax calculations have not been adequate. However, I have normally accounted for that and made sure that I set aside a little extra to cover the difference. It’s not much of a difference, but I just accept that I’ll be off by somewhere between $200 and $800 each year. And that’s not a bad thing; it means my business income is growing. :)

What about you? Do you like a tax return of $0?

image source: arborlaw.biz

Post from: EveryJoe

My Preferred Tax Return Amount: $0

But, while cutting jobs in large numbers seems to be a no-brainer, Citi can’t seem to make the decision to cut executive bonuses. While major banks from Barclays to Goldman Sachs to UBS are lining up to show us they are ready to “sacrifice“,  Citi appears to be having a crisis about getting rid of executive bonuses for this year. (BloggingStocks believes that taxpayer bailout money could go to Wall Street bonuses.)

But the real clincher for me is this: Citi plans to raise interest rates on its credit cards. I don’t normally carry a large balance, but the move still bugs me. Credit card companies have been making some noises about raising interest rates due to the economic times, but most have been reluctant to do so in light of recent Fed rate cuts. Indeed, most have been doing the decent thing and lowering credit card interest rates.

Not Citi.

Consumerism Comentary reports that Citi will be “repricing” rates two or three percent higher. For those who do carry balances, or who are trying to pay down some of their debt, this is not going to be pretty. If your interest rate goes up, it means that more of your payment goes to interest, rather than principal, slowing your debt reduction plan and meaning that you pay more in the long run.

It seems a little backward — and blatantly self-serving — that yields on the savings account are going down while the interest on the credit cards are going up. We’re all having a hard time, Citi. But you’re making it even harder for the rest of us.

What do you think? Is this reason enough for me to ditch Citi and put my money elsewhere?

image source: Citi Web site

Post from: EveryJoe

Is It Time for Me to Pull My Money Out of Citi?

Overdraft protection can be worth it…but not if it’s tied to a line of credit. I don’t know if all banks are like this, but mine allows you to tie it to another account that you hold there, such as your savings account. Then you only get hit with the transaction fee. No annual. No interest.

I thought this was interesting, and asked my bank about it, only to find that it is not a possibility. The “customer service manager” told me that the decision was connected to federal law.

So I looked into it. According to the Federal Reserve’s Regulation D, a savings account can only do six transfers a month. Of any kind. My bank contact, when I asked him about it again, said, “That’s the main reason we don’t do savings account overdraft protection. It just raises questions because each transaction would be a separate transfer. You can come in and withdraw money as much as you want, but transferring directly is something different.”

(Although I do wonder if fees, lucrative fees, have something to do with the reticence to attach to a savings account as well.)

You can see where issues might come into question. If you didn’t catch your mistake soon enough, you may run into limitations on the transfering that can be done to cover your overdraft. Other than that, though, I can see the appeal in being able to have an automatic transfer.

Another option is to have the two accounts linked, or to be able to shift a large amount of money over — once — if you are worried.

Post from: EveryJoe

Savings Accounts and Overdraft Protection

But there are other bad spending habits that my husband and I have developed:

• Buy way more food than necessary when people come over.
• Feel like we have to have something “fancy” when others come over.
• Getting takeout once a week, in addition to going out to eat once a week.
• Failing to plan meals ahead of time.
• Propensity to buy things we like (books for me, video games for him) rather than renting or borrowing.

While separately, these spending habits probably won’t cause a huge problem, the fact of the matter is that all this spending adds up. I calculated how much money we wasted this month so far, and discovered our spending habits have resulted in about 8% of our income going to waste.

We’ve been doing better financially, thanks to some great opportunities, and we’ve sort of become lax in terms of frugality. But I’m thinking that it’s time to start moving back into the frugal lifestyle.

Breaking bad spending habits

A great post over at Cash Money Life offers some great tips for ways that one can break bad spending habits. As I read over the list, I reviewed my own spending habits. Here are some the things to think about when you are ready to break your bad spending habits:

• Know why you spend. Sometimes, I realize, I spend just because I can. I can afford a new book, so instead of checking it out at the library, I buy it. Even if I am fairly certain I will dislike the book. (Exhibit A: Breaking Dawn by Stephanie Meyer.) Other reasons you may spend can include: Trying to look good in front of others, the rush you feel, for something to do.
• Acknowledge bad spending habits. This is, of course, the point of this post. I have some terrible spending habits that are creeping back after years of keeping them at bay. Now that I know what they are, though, I can start to tackle them and change the way I do things.
• Avoid your weaknesses. My biggest weakness is books. This is why I try to avoid going into a bookstore. Your weakness may shoes, snack food or eating out. Come to think of it, eating out is one of mine and my husband’s joint weaknesses. The fact that we love food is also why we buy so much of it when we go shopping — even if we don’t need it.
• Change your habits. This is, of course, easier said than done. However, I find that one of the best ways to get rid of a bad habit is to replace it with a good habit. So maybe we make a meal plan and then create a shopping list based on that. A meal plan would also help us cut back on eating takeout. And, instead of buying a new book twice a month, I could go to the library once a week. And put the money I save into a high yield savings account.

Do you have any bad spending habits? Do you have tips for breaking bad spending habits?

image credit: sxc.hu

Post from: EveryJoe

Breaking Bad Spending Habits

So it’s rather refreshing that at least one bank is upping its APY, even if by a rather small amount. E*Trade Bank is increasing its APY on the high yield savings account. Does this mean that other banks (including mine, maybe) will follow suit?

Post from: EveryJoe

Saving Money: E*Trade Bank to Increase APY on Savings Account

The subject of today’s Ask the Piggy Bank has to do with playing the lottery. Many people regularly play the lottery, buying tickets about once a week. Those $1 tickets don’t seem like much, but they can sure add up. So, here is the question posed:

What wealth would someone accumulate if from 18 to 65 they saved $1 a week instead of buying lottery ticket?

A fabulous question. I’m going to do things very simply. Mainly because we can’t all be accountants, and I’m not an accountant. But it should give you an idea of what the general possibilities are.

First of all, the chances of you winning the lottery are very slim (check out this lottery calculator to help you figure it out). Using the lottery as an investing plan is a bad idea. If you just didn’t buy that ticket, and stashed that dollar under your mattress for the next 47 years (the amount of time between 18 and 65), you would have $2,444. But the fun starts when you use the power of interest to work for you.

Using a simple savings calculator, we can figure out how much you would have if you put $1 a week in a high yield savings account. I like online savings accounts. At the end of 47 years, if you had a 4.5% interest rate, you would end up with $7,740.65 in your account. With a better interest rate, you could do even better.

What if you invested that dollar elsewhere? Say you did a little dollar cost averaging with a mutual fund (some will let you open with as little as $50) or investments. This takes a little more derring-do, but happily for me, there is a more complex savings calculator available from CNN Money.

I pretended that I wasn’t going to save anything, but put my dollar in a tax-deferred IRA mutual fund. Starting with $50, and then putting the dollar in once a week for 47 years. In the end, at a modest 7% growth rate (it’s a boring mutual fund), that money would turn into $18,321.95.

While you might get lucky, chances are that you will never win the lottery, and that’s more than $2,000 down the tube. But if you invest that over the course of the 47 years, you can see that you would have much, much more. Add that to your already set out course of saving, and you should have no problem hitting retirement.

But if you must, set aside an extra $1 a month for the lottery (don’t diminish what you save, though!). I guess you still could get lucky.

Post from: EveryJoe

Ask the Piggy Bank: Lotto or Savings?

Online savings account

When you go to a traditional brick and mortar bank and open a savinga account, the pitiful return seems hardly worth it. Less than 1%. But if you go online, sometimes even to the Web site of that same bank, you will find that you can open a savings account with a 5% annual yield. That’s much better.

However, you should be careful when opening such accounts. You want to make sure you are dealing with a reputable institution, and you should realize that the bank will probably mail you documents that need to be signed and returned before the online savings account can be opened. And read the small print. The Citi online savings account (which I have) requires that you have a free checking account linked to it (it actually turned out to be quite convenient). I have to maintain a minimum of $500 between the two in order to avoid a fee. There are online savings accounts that do not have these restrictions (I think ING is one of them).

While the online savings account is going to replace your retirement account, it does make a rather handy way to build up an emergency fund that is readily accessibile while getting a larger yield.

Post from: EveryJoe

Boost Your Savings Account