A Financial Education Event
     

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Double Your Returns on Investments – Viewer Q & A

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

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

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

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

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

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

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

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

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

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

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

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

Your Questions about Paying Bills, Credit & More


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Ellie Kay

America’s Family Financial Expert (R)

www.elliekay.com

Invest Now and Save Later! What’s worth it and What’s Not?


I was recently on ABC News, Good Money Show, talking about whether you should buy a hybrid, that extended warranty or a programmable thermostat–are they really worth it?

Consumers in a post recession economy are constantly looking for ways to save money. In some cases, there’s an upfront investment required in order to save more in the long run. Should you ante up now on the promise that the investment will pay off later? Today, I’m going to answer your questions about when to invest now in order to save later and when you should pass or just say “no.”

Q. When consumers consider purchasing a product that carries a good faith promise of “invest a little money now and save big money down the road” how can you tell which investments are worth the cash and which are scams?

ELLIE: Whenever there is a post recession economy, there is also going to be a proliferation of those unscrupulous individuals who will try to take advantage of a consumer who is out to save money and cut expenses. There is a difference between fraud, which is illegal and punishable by law and the empty promise, which a salesman might make to close the deal. Before you sign the dotted line with a solar panel sales company, check them out on the Better Business Bureau site. But just because there are no complaints doesn’t mean it’s a legitimate business. Ask for references, don’t give into pressure sales, never respond to an email inquiry, and guard your personal information.

Q. Let’s go down the list of common purchases that promise to save us money in the long run if we invest a little money now. Let’s start with a simple programmable thermostat that costs around $50. Is it worth it?

ELLIE: The average family spends $2700 a year on home energy and nearly half of that goes to heat or cool their home. A programmable thermostat is easy to install and should save you around $180 a year, so you’ll recover that investment in about four months. This is a “must have” purchase for every home.

Q. What about a hybrid car? The promise is that we will save enough on gas to recoup the extra cost of purchasing the car. How much more do these cars costs and do you think that it’s worth the additional expense?

ELLIE: If you buy a hybrid, you’ll pay 20 to 30% more than a nonhybrid counterpart. The answer to this question is Yes and No. Yes, if you buy a less expensive hybrid like a Toyota Prius (which starts at $22,000) and if you put 20K+ miles on your car every year. You’d also need to do mostly city driving for this to be worth it. No, it wouldn’t be worth it if you buy a more expensive hybrid, don’t put as many miles on it or if gas prices are under $4 a gallon.

Q. I use my laptop computer a lot and I’ve always bought an extended warranty on it because I want to make sure I can save on repairs. I spent about $100 for my laptop warranty for a two year extended warranty. Did I do the right thing?

ELLIE: If you have an expensive laptop ($1000 or more), then you did the right thing because laptops cost more to service than desktop computers. But if you bought a $400 desktop, chances are you can fix a lot of those problems yourself—they are very user friendly. So in the case of an inexpensive desktop, it would probably be best to just pass on buying an extended warranty.

Q. This past week the Mortgage Bankers Association released mixed mortgage rates. An average 30 year mortgage increased to 4.82% and the average 15 year mortgage rate was 4.23%. A big question on homeowner’s minds is: should I pursue a mortgage refinance? Ellie, when the average refi costs anywhere from 2% to 3% of the total loan, when is it a good idea to refinance?

ELLIE: There’s a good rule of thumb when it comes to refinancing your home. If you can get at least a full one percent break from the interest rate you’re now paying and if you do not plan to move for the next 3 to 5 years, then there probably won’t be a better time to refinance. Just make sure that you crunch the numbers, using my mortgage refi tool at elliekay.com and be sure you shop around with different lenders such as INGDirect.com, wellsfargo.com, and bankrate.com. Get a GFE (Good faith estimate) up front and don’t let them add the closing costs to the back end of your loan because you would be paying interest on your closing costs and that negates a good portion of the value of the refi.

Q. Summer is here and I’ve always heard that planting your own garden can not only yield great tasting fresh produce, but you can also save a lot of money. There’s also CSA (community sponsored agriculture) programs that allow members to purchase shares and get weekly produce from specific farms. Are these a good idea?

ELLIE: You’re going to pay around $70 to plant your own garden and it will cost around $450 to purchase a 12 to 15 week CSA share So the answer is “yes” this will save you money if you want to invest 5 hours a week on your own garden. If you go the CSA route, the breakeven point is spending more than $33 a week on produce. One other option is to split your efforts with a friend or neighbor. You can share a local garden or you can each go in on a CSA share (paying $225 each instead of the $450 for the full share). Plus, you’ll get some healthy and super fresh results!

Q. We’re hearing a lot about energy star appliances such as refrigerators and washing machines. They promise to save us 40% on energy and water bills but sometimes cost 70% more than non-Energy Star certified. Is it worth it to replace your existing appliance?

ELLIE: If you have to replace that appliance anyway and you shop around, then yes it can be a great example of spend now and save later. Let’s take the example of a washing machine. You have an older top loading model that costs around $44/ year in energy. An Energy Star rated front loader (such as the Frigidaire Affinity, 3.5 cubic foot model) costs only $18 per year in energy (gas or electricity). But, it also saves 40% on water, you use less detergent, the clothes come out less damp, which means less time in the dryer. All these additional savings, including the savings of around 7,000 gallons for an average sized family means that this is a good purchase. Plus, if you go to www.energysavers.gov , you’ll find a list of appliance rebates and tax credits that are available for Energy Star rated appliances in your state!

Q. What about credit card balance transfers. There are still a lot of offers out there that promise to save consumers money with a lower interest rate. It can cost up to 5% of your credit card balance. Every financial expert has an opinion on this. What’s yours?

ELLIE: I’m not a big fan of credit card balance transfers and it’s not just because of the transfer fee. I’ve seen too many “hoppers” who transfer balances frequently, chasing the lower interest rates when the existing introductory rate expires. I have an online calculator at elliekay.com that can help you determine how much money you would save in a balance transfer. A lot of these offers are for consumers that open a new card and when you’re opening multiple new cards and closing others down, just to chase a lower interest rate, you risk deteriorating your FICO, or credit score. So unless you’re going from an 18+% rate down to a fixed 5% rate (plus the transfer fee) and chances are not good you’re going to find that kind of good deal—then just pass.

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

Raiders of the Lost 401(k) – Loans? Withdrawals? Good or Bad?

Ellie was on ABC News and KLOVE discussing the attack facing 401(k) accounts.

The 401(k), which has long been known as the ticket to retirement for millions of Americans is under attack from within and has taken a hit in recent years. In the second quarter of this year, a record 2.2% of participants in 401(k) plans took hardship withdrawals from their savings, which is up 2% from the same figures available a year ago. What is the long term impact of raiding your 401(k)?

Q. The news about early withdrawals on 401(k) plans is worrisome and yet thousands of participants are making these decisions in increasing numbers. Why do you think people are taking the early withdrawal?

ELLIE: I think that it is worrisome when you are borrowing on tomorrow’s retirement to handle today’s financial issues. But I think that the vast majority of those who are taking this money out are doing it to pay their bills. Some have had their hours cut or maybe a spouse has lost their jobs. Others have seen their kids college fund shrink to where they cannot afford to pay tuition for this year and they’re raiding their 401(k)s to pay that hefty bill. It’s just a sign of the hard economic times in which we are living. Our parents’ generation tended to work for someone who gave them a pension check for the rest of their lives. This means that current workers may not have been raised with the mindset that they control their own pensions and need to make funding their own retirements a priority. There’s an alarming trend that involves looking at 401(k) accounts as “now” money when it’s really “later” money, that really must be saved for later.

Q. Aren’t there certain stipulations associated with a 401(k) hardship withdrawal? How easy is it to get?

ELLIE: I think that the increased percentage of those who qualify for an early withdrawal indicate the financial strain that many families are facing because this kind of withdrawal is not easy to get. Under IRS guidelines, 401(k) administrators can grant hardship withdrawals only for specific reasons, including tuition payments, the purchase of a primary residence, unreimbursed medical bills and prevention of foreclosure.

Q. The IRS has guidelines for hardship withdrawals, can companies also impose additional limits on their employees?

ELLIE: Yes, and in most cases the company rules are even tougher than the IRS. So if that number of Americans managed to actually secure a 401(k) hardship withdrawal, then it is a huge indicator of how the financial difficulty that many Americans are currently experiencing in our present economy.

Q. Of all the reasons you mentioned for taking a withdrawal, what is the number one reason that participants are raiding their 401(k)?

ELLIE: The number one reason is to pay the mortgage in the face of a foreclosure. In the second quarter, nearly 10% of households with a mortgage were at least one payment behind on their loans, this is according to the Mortgage Bankers Association report that came out last week. Families who feel they may lose their homes often believe they have no choice but to tap their retirement savings. But many of those families have not yet exhausted all their resources. If it’s a short term problem, then talk with your mortgage lenders and see if they will suspend or lower your payments over the next three to six months until you are back on your feet again. They can also go to MakingHomeAffordable.gov, which is a federal government website with the goal of helping families by providing free HUD-approved counselors who can help you modify your mortgage. These are far better options than raiding your retirement fund.

Q. What about those families who are tapping into their 401(k) to pay tuition, you say this is a very bad money move, why?

ELLIE: As a mom with three kids who have graduated from college, two kids in college and two more headed toward college, I believe I can speak to the importance of getting that college degree. That having been said, I still think that those families who pay for tuition with their retirement dollars have their priorities wrong. There are other ways to pay for college, including taking a year off and working, going to a junior college for a couple of years, getting funds through an internship or work/study program or even getting a loan. You can get a loan to fund college but you can’t get a loan to fund your retirement. I never think it’s wise to borrow on your own future to pay for your child’s short term goal.

Q. What are some of the taxes and other penalties that arise when you take a hardship withdrawal?

ELLIE: These taxes and penalties are the main reason I say that it’s not a good idea to raid your 401(k) and one of the primary reasons is that, depending on your tax bracket, you could end up giving a third or more of your money to the IRS. You’ll have to pay income taxes on the entire amount of your withdrawal, at your ordinary income rate. And if you’re under 591/2, you’ll also have to pay a 10% early withdrawal penalty. Since the average age of those who took the hardship withdrawal in the second quarter was between the ages of 35 and 55, this tells us that most workers who took the cash are paying the penalty!

Q. You also say that there is an intrinsic “opportunity cost” that arises at the time of withdrawal, what is this cost?

ELLIE: When you take a hardship withdrawal, you’re prohibited from contributing to your 401(K) PLAN FOR SIX MONTHS! That means you’ll miss out on any investment gains you could hae earned by contributing during that period. You’ll also miss out on the company match, which is a guaranteed return on your investment and depending on the match, it’s usually much more than what you can earn in the market if you made your own investment. For example, if your company matches 50% of what you put into the account, you just won’t find another investment out there where you would get a 50% return on the money you put into that investment. So there’s a double jeopardy penalty associated with early withdrawal. You’ll pay for it now and you’ll pay for it later—then at retirement, you’ll pay for it all over again because you won’t have that money in the account.

Q. What about the fact that you can deplete an asset that is off limit to creditors, how does this impact a participant?

ELLIE: While raiding an account to avoid bankruptcy or foreclosure is a well intentioned money move, it’s also foolish because if you end up in bankruptcy anyway, then you’ve passed up the benefit you have in the fact that most retirement accounts are protected under bankruptcy laws in most states. And when it comes to 401(k) accounts specifically, it’s important to know that when filing for bankruptcy protection, creditors will go after your assets to repay your debts but federal law protects your 401(k) from creditors.

Ellie Kay
America’s Family Financial Expert (R)

ABC NEWS – Q&A From Military Members & Families

Here’s a “Hero Shot” of hubby Bob and his F-4 Phantom, that he flew up until last year when a jet incident caused him to break his back. Thankfully, he is fully functional, but his injuries will not allow him to fly an ejection seat aircraft. The good news: he’s gainfully employed flying “regular” airplanes and also the Global Hawk UAV (think the high tech airplane on Transformers).

We had a lot of questions when he had that accident and I speak with a lot of military members and their families who have questions about their lives and finances as well. Some of these fine people were on ABC News with me recently for a Q&A. Here’s the recap for you to share with others you know who are in our armed forces. The questions that made it on ABC NEWS won a free copy of their choice of my books! But here are the answers to many more questions.

Q. Is SGLI enough insurance for families or do you need an additional supplemental insurance? From Melody O’Sullivan

ELLIE: SGLI is relatively cheap, term group life insurance that is offered to members of the military on active duty, in the ready reservists, members of the National Guard, members of the Commissioned Corps of the National Oceanic and Atmospheric Administration and the Public Health Service, cadets and midshipmen of the four service academies, and members of the Reserve Officer Training Corps. The insurance is also offered to spouses as well.
Servicemembers’ Group Life Insurance coverage is available in $50,000 increments up to the maximum of $400,000 for members of the military. The price for this insurance is very cheap, so it’s certainly a good value. But is it enough? If you are a young family with only one or two children, then it could be enough. But if you are a more senior servicemember with a lot of family members depending on you, then you might want to buy some term supplemental insurance. Remember that once you leave the military, SGLI is no longer available to you. So if you know you are going to separate in the next couple of years, then it would be a good idea to get a modest supplemental life insurance policy in place.

Q. As a “Key Spouse” how do we encourage other spouses to take advantage of all the benefits the military has to offer? From Starr Vuchetich

ELLIE: Thank you, Starr, for your volunteer work with other spouses, you are to be commended as should ALL our Key Spouses! There’s an old saying that “you can lead a horse to water, but you can’t make it drink.” Your job, as a key spouse, is a difficult one. You know the benefit of taking advantage of the services and perks available to military families, but others have to decide for themselves. The best thing you can do is to lead those spouses by example and express the benefits you are personally receiving from taking advantage of, such as free childcare for volunteering, free financial counseling, free oil changes (or whatever program your base offers), as well as the many benefits listed at sites such as www.militaryonesource.com or www.ourmilitary.mil

Q. How did you arrange childcare during deployments with very little money and how did you maintain sanity with so many small children on a tight budget?
From Jana Baez

ELLIE: I do remember what an incredible challenge it was when all my kids were so young and my husband was gone for weeks (or months) on end. But the first thing I did was plug into all the “free babysitting” I could get. Go to the Family Support Center and see if they offer free childcare for those who volunteer. I also got on site childcare provided when I attended Army Family Team Building classes, so sometimes you can get a break and learn something, too. Don’t forget the community outside of the base gates, either. There are a number of churches, community centers and MOPS (Mothers of Preschoolers) groups that try to support military families during deployments by offering free “Mother’s Day Out” programs or onsite classes where childcare is provided. Last, but not least, form a babysitting co-op, where you get tickets for every child you babysit for every hour. You can “redeem” your tickets with other co-op members and it serves as a way to escape for a while as well as a playgroup when you are watching other children.

Q. How does one begin a business without acquiring debt?
From Chana Montgomery

ELLIE: In the case of a military family, you need to start a business that is completely portable and can move with you. It’s important to select a homebased business that requires little initial investment and will still yield an income to keep you in the black. Do your research and talk to a mentor at SCORE.org where you can get free business counseling in your desired field. If you follow your passion, you’ll be far more likely to succeed. Just email assistant@elliekay.com and ask for the “Homemade Business” file, we’ll send it to you for free as it contains all the information you need to be successful in your endeavor.

Q. When you have extra income flowing in, is it better to work on paying off debts or continue paying normal payments and stash the money into savings?
From Emily Haffner

ELLIE: The answer is “both” if you pay even $5 to $10 more on your credit card minimums, you’ll improve your FICO score and begin to pay down that debt. But you also need a safety net in savings just in case your car breaks down and your husband is downrange and not home to fix it. The optimum savings goal is to have 12 months worth of living expenses. But even if you just save up to 3 months (and keep adding to it little by little) you’ll be better prepared for rainy days.

Q. I have three children and I wanted to know if I should apply the new 9-11 GI Bill to the first child (not knowing how long it will be around) or should I split it up among the children.
Stephanie Berg

ELLIE: Because the Post 911 GI bill is relatively new, and because we don’t know how Congress will vote to continue this practice, it may be best to take the money while you can. It’s still important to have your child go to the most affordable school possible, get scholarships and other means of payment. But go ahead and use as much of that GI Bill money as you can to pay what you can on your oldest child’s college. In the meantime, the money you would have put toward his/her college (from your own 529 plan or other savings vehicle) put into another college fund for your other two children.

By funding more on the other two children’s accounts, your money will continue to grow as the market continues to rebound. But in the meantime, you will also be able to take advantage of the current bill. Do not give your first child his/her saved “college money.” Instead, put whatever you have saved toward the other two. You can tell your oldest that his/her college money is coming in the form of the POST 9ll GI bill. Because you don’t want the youngest two to be stuck with student loan debt that the oldest child did not have to accrue.

Q. With limited funds, what should be the priorities for the best use of financial planning? Should I invest in the TSP (Thrift Savings Plan), IRA, life insurance or mutual funds? Major Anthony Smith

ELLIE: Once you’ve paid off your credit cards and funded a 12 month savings account, then you are ready to take your investments to the next level. It will depend on your family size, retirement needs and current income. I do not recommend life insurance as a good investment tool, even though agents may point you toward that route since the commissions are significant. Better to max out your TSP benefit since those funds will still be available to you if you do not make the military your career for a twenty year retirement requirement. It’s also a good idea to get a ROTH IRA or regular IRA. Go to your Airman and Family Readiness center and ask for an appointment with a financial counselor. It’s free advice and the expert there can look at your entire financial picture to help you come up with the best method of investing. Or try the military friendly company, USAA, they help to fund a lot of military events and can offer good advice on mutual funds.

Q. Being that you moved many times during your military career and have many children, how did you present it to the children when you had to PCS (Permanent Change of Station)? From Kristie Fromer

ELLIE: This is the hard part of military life, Kristie, and thank you for your willingness to go through this. One of the advantages of having so many kids is that they were sure to have built in playmates wherever they went! When we told our kids they would have to leave their friends, we allowed them the freedom to grieve and be sad over leaving. But we were also positive about where we were going. We printed out materials about the new base and all the places we could visit and where we would go camping along the way. By focusing on the positive, while allowing them the freedom to express their feelings, we had healthy, adjusted kids and a well bonded family.

Q. If your auto is less than two years old, is it a good time to refinance? We retire in 2011 and will be buying a house wherever my husband starts his second career. Is this wise to do before buying a house? From Lisa McClain

ELLIE: Refinancing a car will cause a hit to your FICO score, but it can be a good idea in order to get you a lower interest rate. I offer two words of caution: 1) refi at least six months before you get a home loan in order to give your credit time to recover and 2) refi with payments that will end at the same time your original loan would have ended (otherwise, you’re just paying interest over a longer period of time.) For example, if you have 3 years left on your car loan. Then refi the loan for 3 years (instead of 4 or 5).

Thank you for your service, military members and your families. Remember three things:

  • America loves you
  • We support you
  • And together we’ll be all right!

Ellie Kay
America’s Military Family Expert (TM)

Give the Gift of Education

Christmas is one of my most favorite times of the year and this year, more people are getting into the idea of gifting than last year. In fact, according to a recent survey, 73% of consumers say that they will spend the same as last year during the fourth quarter, and 18% of consumers report that they will spend more. So spending is back up again, but I think that strategic spending is more important now than ever.
It’s important for consumers to be careful and thoughtful in the decisions they make when it comes to buying gifts this holiday. That’s why I’ve partnered with Upromise to tell my friends about the gift of education. So while parents and grandparents (even favorite aunties) are splurging on kids, why not work on saving for kids, too by providing for that cute kid’s college education?

You can open a 529 account for any beneficiary, or gift money using Ugift into an Upromise Investments 529 plan. If you don’t already have a 529 plan, then you are really missing out because the contributions can benefit from tax deferred growth. Also, gifting into one of these plans this time of year also means that you can possibly take advantage of year end tax deductions. Just check to see if you are eligible for states income tax deductions or credits for saving for college. For example, parents and grandparents can contribute as much as $13,000 ($26,000 if married filing jointly) into a 529 plan without incurring gift taxes. A special rule allows married couples to gift up to $130,000 ($65,000 if single) as long as no additional gifts are made to that beneficiary over a five year period. This also applies to recent college grads who might appreciate a meaningful gift to help pay a student loan payment. Plus, you don’t have to be a parent or grandparent to participate, other friends and family can make contributions to your child’s 529 plan by gifting money or by buying gifts, which brings me to my next point—how to save money by spending money.

Most people, know about Upromise from signing up for their buying program. I’ve been participating for years by going to Upromise.com and then purchasing through participating online retailers. These are stores where I would shop anyway and I get anywhere from 1% to 25% back for the purchases I make. And our family isn’t the only one doing this. Last year, during the holiday season Upromise members received $12 million in college savings rewards from eligible holiday spending. Because membership is free and members have collectively earned $575 million in college savings from purchasing items online or even by buying gas or groceries. I book a lot of travel for my business and often find myself eating out—all these are also included toward my children’s 529 plans.

So consider giving the gift of education to a child you love—either by saving or spending, and the world will be a much smarter place!

Happy Holidays!

Ellie Kay
America’s Family Financial Expert ®
www.elliekay.com

Gold Hits $1600/oz – What are some “safe” investments?

I was on Fox News – Your World with Neil Cavuto — this week discussing the fact that gold hit $1600 an ounce. I want to give a big shout out to Larry Shover, the author of Trading Options in Turbulent Markets who (literally) wrote the book on how to invest during economic turmoil.

First of all, remember that “safe investing” is an oxymoron. When you invest seriously (for more than 1% on a bank CD), then you are going to face some kind of risk. But there are some areas to invest that present less risk than others. So with that disclaimer, let’s look at where to put your money in a turbulent economy.

1. Stock Market (S/P 500 stocks): It’s important to acknowledge that there have been and will likely be strong corporate profits. The stock market is very attractively priced – especially given the good profits and strong balance sheets of the top-tier US stocks. Could the stock market go lower? Of course, yet the “cheapness” in the stock market is a reflection of: Sovereign debt, US issues, concern of slowdown in emerging economies. It would appear a lot of this negative stuff is already priced into the market. Any top-tier (dividend paying) issue is a good long-term bet.

2. CTA: Invest in a “Commodities Trading Advisor” most of which take advantage of the various/sundry trends in the market whether they be up or down. CTA’s tend to perform very,very well in economic uncertainty – especially in very toxic markets like 2008. Every portfolio should take advantage of a CTA fund that captures trends in: FX, oil, grains, indexes, bonds, et al. Warning: CTA’s can be very volatile yet, history has proven that even with the volatility they tend to be less risky.

3. Gold: According to my friend, Larry Shover, “Gold is the Casual driver of global liquidity” and,I agree. If you believe that money is to remain cheap than gold makes sense. However, if you feel there will be a spike in inflation or reverse monetary policies I wouldn’t own gold with a ten foot pole. Also, golds most recent run-up to 1600 has had more to do with contagion fear than fundamentals. I wouldn’t be suprised to see it back at around 1550 in the near-term.

4. Asian Tiger Exposure: Invest in either a mutual fund or ETF that has genuine exposure to the asian tigers (Hong Kong, Singapore, South Korea, Taiwan). These are countries that are booming – without all the fetters of taxation and regulation. In fact, most of them have been described as replicating the US back in the early 20th century! Cheaper labor, low taxation, growing middle class = success!

Ellie Kay
America’s Family Financial Expert (R)

Investing with Ellie – Mid Year Investment Thesis

 

I’ve been on television and radio, as well as in live conferences lately giving my mid-year investment update. Due to so many requests, I’m posting the update today. Just remember that there’s no such thing as a safe investment and that any investment advice is something that must be evaluated by individuals as to what will work best for them personally.

Also, remember that before you invest in the stock market, an ETF or buy Gold as an investment, make sure that you’ve paid off all consumer debt, have funded your 401(k), built up a basic savings account with six months of income and funded an IRA.

What we know is true:

 

  • The bloom has falloff the rose in Europe. The market seems to be pricing in a 50% chance of a “bad outcome” –thus the current market pricing.
  • The end of disparities has seemingly brought US eco numbers down to earth. (Still not terrible).
  • US corporate balance sheets are at a 50-year high.
  • US equity valuation multiples are at a multi-decade low.
  • US GDP now estimated @ 2%. GDP is simply NOT in recovery mode yet.

 

 

 

 

  • Although things appear bad, keep in mind two things:  First, a lot of terrible news has already been digested in the market (and the market has adjusted to receive that news). Two, setting yourself up for Armageddon has, thus far, never worked out very well.
  • Housing Market:  The sheer fact that median rental yields are more than 1.5% higher than the average 30-year fixed rate mortgage should help support property prices. This suggest more residential property investment is becoming cash flow positive meaning there is scope for rents to cover interest and principal. I would recommend the SPDR Homebuilders ETX (XHB) for passive exposure to the US housing recovery.
  • Oil:  Brent crude prices have fallen $25 (WTI 40%) per barrel from the recent highs earlier this year. The recent price drop has been driver by: soft global supply demand, risk sell off due to global macro uncertainty, liquidation of substantial derivatives positions. I expect global crude prices will recover and would recommend: BP
  • Gold:  My friend, Larry Shover, author of Trading Options in Turbulent Markets  (Bloomberg Financial) says: “Gold is the end driver of global liquidity” and he is right. Industry consolidation and supply potential in western China provides a lot of expansion opportunities. In addition, bear in mind that China’s jewelry consumption per capita is less than 10% of the US. Everyone should have some exposure to it. I recommend the ETF (GLD).

 

Ellie Kay

America’s Family Financial Expert (R) 

 

Recession Proof Retirement

Last month, the National Institute on Retirement Security unveiled the findings of a new research report, The Retirement Savings Crisis: Is it Worse Than We Think? Of note, the report found that

  • The average working household has virtually no retirement savings.
  • When all households are included— not just households with retirement accounts—the median retirement account balance is $3,000 for all working-age households and $12,000 for near-retirement households.
  • Two-thirds of working households age 55-64 with at least one earner have retirement savings less than one times their annual income, which is far below what they will need to maintain their standard of living in retirement.

There are a few things you can do to recession proof your retirement. I have been working with the Indexed Annuity Leadership Council, a not for profit group that helps educate consumers. I’ve been working as a spokesperson to help consumers plan for retirement. For my full blog on recession proof retirement, click here and enjoy!

What are some of the ways YOU are planning for retirement?

Ellie Kay

America’s Family Financial Expert (R)

 

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