Photograph by Declan Jewell

The only thing about as bad as fees you can’t afford to pay due to economic hard times is fees that you don’t even realize you’re paying. Thanks to declining returns on services customers do opt for however that’s exactly the kind of fees banks are starting to love. An easy way to rope you into fees is bank debit cards, and even if you have never had a problem with one you may want to take a look now.

The first way these lock you into fees is you pretty much require overdraft protection to use one. Many argue that if you manage your account well and treat a debit card transaction like a check you won’t get into trouble. Unfortunately this is not true at all. Banks use a number of tricks in how they process transactions that make it impossible to be certain when a charge will take place, or for what amount. One bank manager I talked to said he was frustrated because he honestly couldn’t understand how they process these transactions; he said he always leaves a couple hundred dollars just in case, even though he is very sure of what money comes out of his account. These cards are seriously designed to encourage Non-sufficient funds fees with balances that do not consistently update and a ‘courtesy’ of letting you overdraw your account by hundreds of dollars before they decline a charge. A courtesy that can result in hundreds of dollars worth of fees; a postage stamp could cost you more than forty dollars!

Another hidden debit card fee is annual membership to some ‘rewards’ program. Typically the rewards aren’t amazing, and the ‘points’ earned are no more consistent than the order in which debit card transactions are processed. In almost any situation you’d see a lot more rewards by opting out of this program and just saving the money in a savings account. A similar ‘rewards’ program is to acquire points for ‘being green’. In reality this one is more about saving the bank from paper costs than it is about the environment, but it can also keep you less informed about your account balances.

Frequently also these days there is a charge just to have a debit card, or to use one. If you receive an updated notice in the mail regarding your card make sure to see if there is a new annual or monthly fee, or even a new transaction fee. Careful management of funds can only happen when you know for sure what fees may post to your account. A new 35-cent fee for a specific type of transaction could have you literally seeing a bright red 35-dollar insufficient funds charge!

Many people, especially younger people who have grown up with debit cards, find it hard to manage without them. It does take getting used to but it’s worth the cash saved, and avoiding disastrous NSF fees. Keeping enough money on hand, and keeping a low fee credit card ONLY for emergencies makes a lot more sense then letting the bank borrow your money while you essentially pay THEM interest on it in subtle fees. If you really can’t live without the convince of a card then make sure you always know what fees are charged, opt out of high interest overdraft protection, and keep a safety net of at least a couple hundred dollars in your account in case an unsuspected fee posts to your account.

Piggy BankPhoto by: Marcelo Moura (Stock Exchange)

Piggy Bank #1: The Three Little Piggy Banks

Piggy Bank is a UWSA blog series discussing ways to save small amounts on a regular basis and how the savings add up surprisingly quickly. Please feel free to share your ideas and your stories about how saving “pocket change” added up and helped you and your family reach a meaningful financial goal.

In the grocery store check-out line the other day, I watched a mom struggling to say “no” to her two sons who were begging her to buy them each a little car that the store had strategically placed at their eye level. There were a whole bunch of toys and trinkets there – meant to encourage impulse purchasing in kids – and in parents who instantly decide that a couple of extra bucks is an easy way to make their child happy. Parents beware! These are NOT cheap toys; impulse purchases add up to big bucks very quickly, especially for parents on a budget. Worse, they encourage terrible spending habits in children from the very earliest of ages. We want to teach our kids how to save, not just spend.

The approach I took with my son, who’s two, is the “three piggy banks” system.” The idea is simple and you can make your “three little pigs” system easier or more complex, depending on your child’s age.

The first step is to get three piggy banks for each child. You can purchase inexpensive ones or make your own out of jars or plastic containers. Perhaps you want to let your child pick out the piggy banks or do a craft with them to turn used containers into piggies.

Next, label the piggy banks as follows: “Savings,” “Spending,” and “Sharing.”

The “Savings” piggy bank is for collecting money that your child will keep on adding to over time. One idea is to have the child periodically deposit the money from the “Savings” piggy bank into their very own passbook savings account. This lets them get used to going to the bank and watching the total in their account go up and up — and they’ll see how their money earns interest.

The “Spending” piggy bank is to help your child save for a long-term goal. This depends on age, but with prices nowadays, it’s probably not hard to imagine that even a younger child wants something that will require accumulating enough money. If they choose to purchase something else with this money, like an impulse toy, it means you have a chance to remind them of their other goal and that it will take longer for them to get “the big thing” they’re saving for. This helps children begin to understand the concept of “cost” as opposed to “price.” Their decisions will have real consequences for them – positive and negative. To reach the long-term goal, they will learn to be more patient and not give in to impulse buying and other diversions.

The “Sharing” piggy bank is for donations to a charity that is important to the child or to your family. The satisfaction of helping those in need it is a wonderful feeling to experience at any age. Charitable giving is as American as apple pie. We have the highest level of individual donations in the world year after year after year.

Once the piggy banks are set up, whenever your child receives money, whether it’s allowance, a birthday gift, payment for shoveling the neighbor’s driveway etc., it gets divided evenly among the three piggy banks.

The three piggy banks can teach children to see money in many ways, not just in terms of what it can buy them. They also see that money can grow into more money and that it can help them help other people. It’s never too soon to start.

The three piggy banks is also a way to encourage your child to spend from the “Spending” piggy bank, rather than your wallet. It might not stop a child from asking you to buy them a trinket they spot at the check out counter, but it will give them an understanding of why you say “no” and a true sense of appreciation on the rare occasion that you say “yes.”

Got a great story about saving money? Please share your inspiration! Write to me at: staff@uwsa.com

South African Krugerrands
Photo By Lyudmila Green

The stock market has been as volatile lately as a poker table at Las Vegas casino. Many traditionally conservative investments have seen unheard of volatility. Savers have begun asking the question, “What can I invest in to make sure I at least keep the principle of my investment?” For many investors, gold has come up on the list of options.

Before buying a boat load of gold, one should consider the reasons gold is valuable and what gold is useful for in terms of investments. Gold has industrial value, but there is frankly plenty of gold that is already mined and available for industrial purposes; so much so that you can easily find 30$ gold plated 2 foot S-Video cables at your local electronics supplier. Gold is useful either to preserve an investment, or as a hedge against falling currency. If you feel currency is unsafe, or your portfolio is overexposed to a specific currency, adding gold to your portfolio could be wise.

A wise investment rule has always been to diversify. Many investors wrongly get the impression that this means buy some tech stocks, as well as some utility stocks. A diverse investment portfolio, however, is not simply having a bunch of stocks; it is having a diverse set of investments. Gold is not a bad thing to add to that basket, which should include not simply stocks, but also real estate, material investments, proper insurances, and other assets that are not exposed to currency risk.

A mistake often made with gold is to treat it as a stock. Indeed, many who hear that gold is a great buy, run out and buy stock in a mining company or two. As mentioned above, there’s already tons of gold that’s already been mined; purchasing a mining company’s stock would really be a bet that either there is going to be a ton of gold mined, or a massive shortage of gold on the market.

So what should a gold saver purchase? Low-premium bullion gold. Bullion is a fancy word for coins, or other forms, of a metal that are only valued by the amount of the metal inside. There are coins that are made with gold that are valuable because they are old, or rare. That is not bullion. A bullion coin is one that you can set on a scale and immediately know its value based on daily spot gold prices. Anyone selling you a stock, or a certificate, isn’t really selling you gold. If you cannot hold it in your hand you’ve been sold a different type of investment.

What does low premium mean? Well, for instance, the US Government sells 1-ounce ‘American Eagle’ coins. These contain an ounce of Gold. The South African government also sells 1 ounce gold coins called krugerrands. American eagle coins contain the same gold as a krugerrand but American Eagles cost more; if you’re just looking to buy gold why pay more?

Bottom line? If you’ve decided that you are worried about a falling dollar, or worried about the risk of ‘traditionally conservative’ investments failing to preserve your investment, its time to buy gold. If you’ve determined to buy gold make sure that you buy gold you can hold in your hand, which is not more expensive because there’s a name on it.

Protect Your MoneyPhoto By Jakub Krechowicz (Stock Exchange)

Citibank is having an interesting week. First they apparently had two different employees tell a website owner his account was frozen because they found objectionable content on his web page. Now Citibank customers are concerned over a notice suggesting they may have to give a 7-day advanced noticed before withdrawing funds. In a statement hearkening to the bank runs of the Great Depression, Citibank assures customers they do not plan to exercise this right, but would like to note they have it. So what does this all mean?

Firstly, let’s look at the facts. According to Citibank representatives the notice is mundane in nature, and due to their recent deal to change how the FDIC treats some of their accounts. The FDIC is the program that backs banks with government dollars in the event of failure. Indeed the FDIC requires banks to reserve this right dating back to the 1933 crash. The rule is intended so that in the event of a bank run, it’s not simply a first come first serve free for all as to who is able to withdraw their money. Of course Citibank assures there is no chance of a bank run, and they were merely notifying their customers so as to be extra honest.

Without questioning Citibank’s motives, how possible is a bank run, or a more likely liquidity crunch that would require taking advantage of this rule? Well, a liquidity crisis is not unheard of recently. The banks that had to go to the government for loans were in many cases doing so because they didn’t have enough cash on hand to meet current obligations. As mortgage holders stopped being able to pay their mortgages banks that had planned on having those funds to pay their bills required extra cash to make ends meet.

Part of the problem is something called fractional lending. Many assume the bank cannot lend more money than it has deposited. This is not the case. Banks are able to legally lend several dollars for every dollar they have on deposit. Normally there are several checks within the financial system that help to ensure they still always have more than enough dollars to pay for withdrawals. Normally, however, most customers do not require significant amounts from their accounts at the same time.

While the idea of telling customers they cannot have the money they legally own may seem frightening, it really is designed to help customers. During the bank runs of the Great Depression those customers who got wind of a bank’s financial troubles got in quick to get their savings before the bank ran out of money. This rule was established, along with the FDIC, to help make sure that customers had a fairer chance at receiving their funds at all, as well as to help prevent potentially solvent banks from being wiped out by a sudden irrational panic. Also, Citibank’s change with the FDIC actually provides unlimited protection on some accounts. Certainly all this is in the customer’s best interest.

The curious thing though, is why Citibank would mention it. Yes, the change requires they reserve the right to ask for written notice of withdrawals 7-days in advance, but, as near as I can tell, there is no rule saying they have to make a special notice of it to their customers. In fact, many, if not most, banks that deal with the FDIC require this, and have not gone out of their way to advertise the fact. While I do not seriously believe that Citibank is planning to hold onto their customer’s funds for seven days, it is a sign.

The financial crisis made it clear that the financial industry is not nearly as solid as the huge marble columns on Wall Street might suggest. Citibank is if nothing else saying that they are not ruling out a repeat. If one of the largest banks it the world isn’t convinced there are not more troubles on the horizon it certainly means consumers shouldn’t assume so either.

This report comes out on the heels of President-elect Obama warning that the country faces “trillion dollar deficits for years to come”.

The CBO report states that the budget outlook for 2009 “will be dramatically worse than it was in 2008″. In the first three months of of the 2009 fiscal year, which began on October 1, the government spent $408 billion more than it took in. The blame goes to a drop in corporate and individual tax revenues, and increased federal spending. The spending increase is largely attributed to the TARP program and the recent federal takeover of Fannie Mae and Freddie Mac.

The CBO’s baseline projections serve as a “neutral benchmark” that legislators and policy makers can use to determine the potential effects of any change in policy. The projected deficit for 2010 is about $700 billion or 4.9% of the GDP. President-elect Obama mentioned the new CBO projection at his news conference on Wednesday. “We know that our recovery and reinvestment plan will necessarily add more,” he conceded.

The problem they saw was that not only was there a high rate of defaults for sub prime mortgages, they found that the Alt-A and option ARM mortgages, which enticed borrowers with very low initial rates, are beginning to reset. This in turn causes the mortgage payments to go up, and many of the home owners to default. If you project the current default rate data over the next few years, the housing market is in for a very tough time.

Every time there is a foreclosure, the housing prices drop, and the falling prices only add to the trouble. There was a Miami condo featured in the report that originally sold in October 2006 for $2.4 million, the asking price is now $939,000. The report also cited statistics from the National Association of Realtors that state the supply of housing units on the market has grown from 2.2 million units to 4.5 million units in three years. With that much supply, and fewer people eligible to get a mortgage, the prices will drop further. It will be some time before this sorts itself out.

So what do the leading economists in the nation think we should do? Increase the national debt to stimulate the economy. The thought behind it is that avoiding a deepening recession is more important than higher budget deficits. We have already committed $700 billion to bailout a financial industry that could not regulate itself. President-elect Obama has pledged to plow money into the largest infrastructure building plan since the Eisenhower Interstate highway program, and now we are going to pledge $14 billion to rescue the automobile industry, that is so oafish, it needs help to keep itself from stumbling into the abyss of bankruptcy.

We need a JFK challenge for the best and brightest Americans to come up with new solutions to our pressing issues. If we are going to invest tax dollars into bailing out companies that are too big to fail, shouldn’t we also have a say in how they use that money? If it comes down to borrowing money to stimulate the economy, shouldn’t we also invest in projects such as alternative energy to put people back to work and ease our dependency on foreign oil? In exchange for tax dollars, shouldn’t we demand that the foundering auto makers come up with a plan to focus on hybrid and 100% electric vehicles? Maybe then America can once again lead the world in something other than our carbon footprint.

The stakes are extremely high, but we have much to gain. Throughout our history, America has always risen to the occasion when things looked bleak. Tapping into the ingenuity of the American people has always been America’s salvation. Our deliverance from economic ruin depends on it.

• Can you really Afford it?
• Is it worth the price tag?
• Will the Terms Change?

Can you really Afford it?

Lenders are right now offering very low rates, often for the life of the loan. Still you have to make sure that you can really afford the extra monthly payment in an economy where food prices are still high, and while gas prices are low right now, it may not be the time to buy a Hummer. Inflation is still high and undertaking a large new bill could be taking away from cost of living expenses in years to come. It is important to consider where to put the extra cash if you are fortunate enough to have extra. Low interest rates, and enticing terms may make important purchases more affordable, and tough times for retailers mean lower prices as well. It could be a great time to put on that new addition, upgrade your appliances or buy a new car.

Is it worth the price tag?

A deal isn’t a deal if the product isn’t worth the price tag. There are places to invest in your home where you will always get a return on your investment. Upgrading your kitchen with granite counter tops, new cabinets and stainless steel appliances are always a smart buy, provided you don’t over improve your home for the neighborhood. Research the marketplace on the Internet, or check with a local real estate professional. Spending for a home improvement that will overprice your home for the location is a bad investment. Automobiles are always a bad investment, but for most of us they are a necessity. Compare prices and interest rates. You may be able to get a great deal on a “new” 2008 model, but you must remember that the vehicle is a year older than a “new” 2009 model, so at trade in time it will be worth less, no matter how many miles it has been driven.

Will the Terms Change?

You must also consider the terms on the loan. If it’s an introductory rate, then it is important to consider if you will be able to afford the payments after it changes. You will also want to consider if the lender has provisions to change the terms if you are late on a payment. Always read the fine print, and always make sure you can afford any debt you take on.

Summary

Irresponsibility caused the recent financial crisis. Some of that was irresponsible consumers, some was irresponsible bankers, some was irresponsible government overseers. In bad economic times it is vital to make smart choices with money. Using good judgment is always a smart policy.

The first thing you need to do is figure out where your down payment is coming from. With the end of Down Payment Assistance on FHA loans that was enacted when the housing bill was passed, you are now going to be required to have a down payment of at least 3.5% on an FHA loan, 5% on a conventional loan. If you don’t have that kind of cash saved up, all hope is not lost; there are a few different programs that may help you.

First is going to be the NACA program, which is a 100% financing program that is administered by a non-profit organization. There are no closing costs, no minimum credit scores, and no private mortgage insurance, which can save you a lot of money! The negative to this program is that it will take a while to get through; you must first attend a homebuyer workshop, and then there is usually a wait of between one to two months before your appointment with a loan officer. The whole process will take at least 90 days, possibly longer, depending on your credit situation.

For those of you that already have a home picked out, there are some grant programs out there that are legitimate. The Federal Home Loan Bank (FHLB) offers a grant program for “very low- to moderate-income families and individuals.” There are also grant programs that are sponsored by HUD, which are going to be administered by city and county governments. A good place to search for one of these is at Down Payment Solutions, they have a state-by-state listings of all grants available.

The next thing you want to do is check out your credit report. Almost all loan programs are now credit score driven, so you need to know what score you have. A 580 score is going to be the minimum that is going to be accepted on an FHA loan, while a score of 680 will be required for a conventional loan, unless you have saved up a down payment of 20%; in that case, normally a 620 will do. If you have open collection accounts, the lender may require them to be paid, especially if they occurred within the past 12 months. Any judgments or liens will be required to be paid regardless of the loan program.

While it may seem to be frightening to try and get a mortgage in these times, it is definitely possible if you have prepared. With all of the incentives available now, it may be the best time ever to purchase your first home!

Some of the President-elects other thoughts on the economy:

When asked about the $300 billion spent so far on The Troubled Asset Relief Program (TARP): We should be looking at what didn’t happen such as more banks failing or a bigger drop in the stock market, not just what has happened. He also wants more focus on the impact of foreclosures, and to “set up a negotiation between banks and borrowers so that people can stay in their homes.”

Comparisons of today to 1932: “We’re not going through something comparable to that. But I would say that this is as bad as we’ve seen since then.”

The dire straits of General Motors: “We need to provide assistance to the auto industry. But I think that it can’t be a blank check.” He would like the assistance contingent on all of the major stakeholders, management, labor, suppliers and lenders “coming together with a plan what does a sustainable U.S. auto industry look like?”

Moving the nation towards energy independence. “It’s more important. It may be a little harder politically (because of the drop in oil prices), but it’s more important.”

Re-regulation of the financial market “to restore a sense of trust, transparency, openness in our financial system.. And the answer is not heavy-handed regulations that crush the entrepreneurial spirit and risk taking of American capitalism.”