I try to make my irregular income go as far as possible. With so many options at my disposal, I want to make sure I’m not wasting these great opportunities. Since I’ve had the opportunity to chat with some readers, I know that some of you have also created, or are currently building, some extra income streams. I thus thought it would be worth sharing some tips on handling the unpredictable cash flow.

Handle your tax obligations first

My first piece of advice is set aside money for taxes before you budget the rest of your side income. You don’t want to have an unexpected tax bill come due, and you definitely want to make sure you avoid underpayment penalties. If you need help figuring out your estimated taxes, you can use Form 1040-ES.

This year, I’m paying estimated taxes on a quarterly basis for my freelance business. I want to make sure I have the right amount when the next quarter becomes due April 15. I’ve put aside 30% of my freelance income aside into a savings account and then pay I pay taxes directly from that account.

I use EFTPS (Electronic Federal Tax Payment System) to handle the payments. It’s free, and you can manage everything online. You do have to register in advance and apply for a PIN for the account, but I found it to be an easy process.

Reinvest back into your business

You may think that since I’m usually writing about reducing debt and building up some savings, I’d mention that as then next goal. Actually, my advice is to make sure that you allocate some money back into growing your business. If you want to continue to grow your business, you can’t afford to take any shortcuts.

Some areas you might want to consider investing in include:

• Office equipment and supplies: Don’t go out and buy brand new computers and software just because you have some extra money, but do look to see if there are any equipment upgrades that will help you stay ahead of the competition.
• Training and seminars: You want to stay at the top of your game so you can provide more value to your clients and generate more business.
• Bookkeeping: If handling the bookkeeping or accounting for your freelance work gets in the way of “real” productivity, consider outsourcing it to a professional. This will pay for itself down the road, and allow you to spend more time working on your project(s).
• Business savings: Yes, I’m suggesting that you put some money in savings for future business expenditures. Since you can’t always predict your busy and slow months, having a cushion reduces your chances of going into debt while weathering the storm.

Prepay your monthly expenses

If your income varies, my advice for your next step is to play it safe and deposit into your checking account enough money to cover your regular monthly expenses for awhile. Everyone has a different comfort zone, but having an additional buffer for the lean times will make your life less stressful. We try to put in an extra month or so as our checking buffer (in addition to our regular emergency fund, which we’ve also bulked up), and it has given us some peace of mind.

In the past, we’ve used some of our side income to go ahead and take care of things like major car repairs or other household needs. I’ve also set up an automatic transfer from my business checking account into our joint savings account at ING Direct so we can earn a higher interest rate than is available at our local bank.

Reduce debt and invest

Once you’ve taken care of taxes, re-invested in your business, and taken steps to smooth out any bumps in the road, the “regular” financial rules apply. If you’re carrying any debt, you should consider directing at least some of your excess toward debt reduction. Investing for the future is also an important goal. And guess what? There are some special tools available for the self-employed, including the SEP-IRA and solo 401(k), which are great retirement savings vehicles.

Freelance thoughts and tips

Do you own your own business? Or maybe you generate side income in another way? If so, how do you budget and handle the resulting irregular income?

---
Related Articles at fivecentnickel.com:

» Late Monday Roundup – Guitar Hero Edition
» Hidden Costs of Retiring Overseas
» How to Handle a Missing W-2 Form
» How to Handle a Missing 1099 Form
» Money Poll #25: Tax Preparation
» Heat and Air Repairs: Decisions, Decisions…
» Cut Your Own Grass or Use a Lawn Service?
» How to Get an Employer Identification Number (EIN)

I know you’ve written a lot about emergency funds, but my question is can a Roth IRA serve as an emergency fund?

At first blush, the answer seems obvious. Roth IRAs are designed for retirement investing, not for use as a short-term savings vehicle. Thus, nobody in their right mind would use a Roth as an emergency fund. Or would they?

Making Roth IRA withdrawals

Did you know that you can withdraw your Roth IRA contributions without paying any taxes or penalties? This rule applies only to your contributions, but it provides a significant degree of flexibility when it comes to managing your Roth IRA.

At the same time, I would caution against pulling money out of a Roth IRA unless absolutely necessary, as your future contributions will still be subject to the normal contribution limits. In other words, you won’t be able to simply put the money back into your account.

Roth IRA as emergency fund?

With the foregoing information as a backdrop, let’s return to the original question… Can a Roth IRA serve as an emergency fund? Yes, with some limitations, it can.

More importantly, should you rely on your Roth IRA as an emergency fund? In my opinion, the answer is no, except under very specific circumstances.

Beyond the inability to put your money back into your Roth IRA after you recover from whatever emergency happens to crop up, you also have to consider the issue of liquidity and accessibility.

If your Roth funds are invested in a “normal” fashion, then you likely have at least some of the money in stocks. If you rely on your Roth as an emergency fund, you might be forced to sell investments when the market is down.

As for accessibility, even though you’re allowed to withdraw your contributions whenever you want, it could take a week or so to receive funds from your IRA custodian. Thus, you shouldn’t rely on a Roth IRA to cover you in circumstances that require immediate access to your money.

When you should consider it

I noted above that relying on your Roth IRA as an emergency fund is a bad idea except under very specific circumstances. The circumstances that I’m talking about are when you have a healthy emergency fund in place, but not enough excess to contribute to a Roth IRA.

In this case, you might want to consider using a portion of your emergency money to fund a Roth IRA, secure in the knowledge that you can always pull the money back out if an emergency crops up.

There are two important caveats here. First, be sure to keep enough cash in a local account to cover any short-term, immediate needs that might arise. That way you won’t find yourself in a pinch as you wait for the check from your IRA custodian.

Second, don’t invest this money in anything that is subject to market fluctuations. Instead, keep it in a money market fund, or something similar. Once your emergency fund recovers (more below) you’ll be free to invest more aggressively.

Once you make the contribution to your Roth IRA, it’s time to buckle down and rebuild your emergency fund. If something goes wrong and you need to pull the money back out, there was no harm done. After all, you wouldn’t have contributed to the Roth in the first place, so you don’t really lose anything by withdrawing your contributions.

On the other hand, if all goes well and you get your emergency fund rebuilt before you need it, you’ll be a step ahead. You’ll now have a fully-funded emergency fund plus money in a Roth IRA. At this point, you’ll be free to invest the Roth funds more aggressively.

Obviously, you can repeat this process many times over, and don’t forget that it works the rules are essentially the same for a spousal IRA. Thus, depending on your circumstances, both you and your spouse can take advantage of this strategy.

---
Related Articles at fivecentnickel.com:

» How Large is Your Emergency Fund?
» Building an Emergency Fund
» Ten Things to Do With Your Tax Refund
» Funding an IRA When You’re Not Sure You Can Afford It
» Max that Roth!
» Saving for College
» When Should You Use Your Emergency Savings Fund?
» Weekly Roundup – 12/22/06

Even the brightest Wall Street mavens make investment errors, so don’t beat yourself up if you’ve made a financial misstep or two. Instead, learn from your mistakes and set a better course for your financial future.

Here are seven common mistakes to avoid:

1. Failing to strategize investments

Think about your risk tolerance as you develop a strategy, advises the CFA Institute, a global, not-for-profit association of investment professionals. Know how much money you can stand to lose before you invest, and take into consideration your financial goals and time horizon for investments. Your strategy should aim for a diversified portfolio, with investments in a wide range of industries, companies, countries, and asset classes.

2. Wishful thinking

You need look no further than recent investment scandals as evidence of investors’ wishful thinking. Even sophisticated people are too eager to trust investment pros who promise to perform financial miracles. In his $65 billion Ponzi scheme, for instance, Bernie Madoff reported unrealistically consistent performance to investors, which should have been a red flag that something was wrong. Texas financier R. Allen Stanford, accused of swindling more than $7 billion from investors, reeled in investors with promises of incredible rates on CDs.

3. Paying too much in fees for investments

Ask for the fine print when dealing with a brokerage or trading company, advises the CFA Institute, and understand the fee structure before you invest. Don’t let high fees wipe out investment returns. This goes for stock and mutual fund investments as well as for lower-risk vehicles, such as CDs. Keep in mind you’ll pay fees if you invest in CDs through a broker. Weigh the cost of the fees against the rates the broker offers, and compare the returns to the highest CD rates you can find on your own.

4. Holding onto loser investments too long

Why do investors hold onto obvious losers? The answer comes from the field of behavior finance. In a Wall Street Journal article, Santa Clara University finance professor Meir Statman notes that when faced with losses on paper, investors comfort themselves with the notion that perhaps the investment will go back up. Selling at a loss would mean facing pain squarely, so investors procrastinate and hope for the best, holding loser investments long past their time.

5. Overconfidence

Too many investors think by listening to some tips from financial gurus on cable TV they can do better than professional investors. Overconfident investors tend to trade too rapidly. They don’t do as well as investors who buy and hold diversified portfolios, and they pay more in transaction fees.

6. Neglect of investments

If the tough economy is keeping you from being proactive with investing, then get re-engaged. The CFA Institute recommends setting up a regular contribution program and scheduling regular checkups with your investment professional to keep you focused on your goals and to fix any problems.

7. Buying high and selling low

If you buy a stock after it’s peak, you’ve missed its growth potential. Likewise, many investors bail from the market when it tanks. But when stocks are down, that’s the best time to buy because prices are low and growth potential is high.

You can’t be a perfect investor, but you can prevent a lot of financial heartache by using common sense and avoiding the most common mistakes.

---
Related Articles at fivecentnickel.com:

» Money Madness: The Championship Round
» One Year Ago This Week (September 17th – September 23rd)
» From the Archives – (March 16th – March 22nd)
» One Year Ago This Week (January 14th – January 20th)
» From the Archives (January 13th – January 19th)
» Money Madness, Round Two
» Six Common Financial Aid Mistakes to Avoid
» Ten Real Estate Mistakes, Part 1

My earliest memory of personal finance (though I didn’t know the term at the time) was when I was in middle school. My mother had always told me the importance of saving, but one afternoon, she pulled me aside and took out a few sheets of paper – the amortization schedule for the 30-year mortgage on our first home.

She then showed me how much interest we could save over the life of our loan if we accelerated payments on the principal during the early years of the loan. Although my mom first framed the session as an applied math lesson (percentages! subtraction!), that would be my most memorable lesson in financial decision-making.

Many experts say that leading by example is the way to show your kid show to be financially responsible adults. Show, don’t tell, they say. I agree that action is important, but my experience with my parents lets me know that parents should show AND tell. Kids learn from your actions, but they also benefit tremendously from words that explain the reason behind the actions.

Growing up, frugality was the normal state of things for me. My mother was aggressively paying off our mortgage. Every month whenever there was something extra, she put it into the house. As I grew up – and as I ventured into the homes of friends or classmates and become more exposed to malls and advertising – I come to realize that my parents led a very frugal lifestyle.

They bought reliable cars new, but then drove them for over a decade; they almost never went out to eat; and they refrained from buying a DVD player until a few years ago, when it was utterly clear that VCRs were truly machines of the past. Married for almost 30 years, my parents have rarely been on a vacation by themselves.

So I grew up in an environment where saving money is normal. Had my mother not told me later the reasons behind her aggressive payment of the mortgage (financial freedom, she would explain to me patiently), however, that lesson may not have stuck with me for all these years.

Even when I was a little kid, looking at the papers and the rows of figures under the Interest Saved, Years Remaining, Principal Paid columns, I knew I was looking at something powerful. Those numbers were the reason we sat in faded fabric couches when my parents might have upgraded to leather, and had the thermostat set 66 degrees instead of 72 in the winter.

Because of the choices my parents made, they were able to ultimately pay off their mortgage a decade early, invest in other real estate ventures, and pay for my college education. I didn’t quite realize it then, but I realize it now – that amortization schedule was much more than an applied math lesson.

It was a show and tell of a careful weighing and calibration of dreams – of choosing to forgo something (nicer cars, bigger TV, more stylish clothing) in exchange for gaining something else that my parents deemed more important – the ability to pay off our home years ahead of schedule, thus freeing up cash flow for other goals. To this day, I think that amortization schedule explained to me the essence of personal finance more than any expert every could.

Note: Also check out GetRichSlowly’s post on how to raise money-smart kids. JD Roth polled readers who provided tips on how their parents helped prepare them for financial independence.

---
Related Articles at fivecentnickel.com:

» Money Monday: Tag Team Edition
» The Biggest Saver
» Happy Father’s Day
» How Much Should You Pay a Babysitter?
» How our Estate Plan is Structured
» Charities of Choice 2006, Part I: Modest Needs
» Texas Raises Speed Limit
» Five Reasons you Should Care About your Credit (FICO) Score

In contrast, how many of us maintain a similar diversification perspective with respect to our income? Multiple streams of income can be one of our greatest allies in the pursuit of financial security, and yet few pursue this sort of thing. Having additional sources of income serves to hedge against job loss and other employment variables, so shouldn’t income diversification be sewn into the fabric of our daily financial strategy?

Multiple streams of income

How much time you’ve spend diversifying your income (or even thinking about it) probably depends on the circles in which you run. I can say with confidence, however, that our culture generally does not place enough emphasis on the concept… So we need to think outside the box and adopt it ourselves.

In 5 years of marriage, I have had three separate employers and my wife has also had three (jobs in Michigan are particularly unstable). Since January of 2009, we have been focused on expanding our income sources to increase financial security and buffer risk. The possibility of job loss, pay cuts, furlough days, and dubious markets fed our desire to assemble a sprawling network of income sources that we continue to build upon today.

In 2008, we had 2 sources of income; today we have more than 10. The sources we have developed usually center around our passions, tend to be at least partially passive in nature, but also have the potential to grow with additional effort. We get out of them what we put in, and have become addicted to the direct control of our own success.

Don’t quit your day job

Do not misunderstand my appeal for income diversification as a call to quit your day job. The idea is to diversify income sources, not eliminate or constrict them.

Both my wife and I still hold our “career positions” and intend to do so until our debt is eliminated, or until our alternate sources are earning us enough for us to bow out gracefully – whichever comes first. Neither of us are crazy about our “day jobs,” but any discontent we have is rooted more in the necessity to maintain them due to our debt load than in the jobs themselves.

If you have recently lost employment and are in the process of looking for work, then you have a perfect opportunity on your hands! When you’re not out searching for a job, brainstorm a list of several alternate income sources that you could develop and get started. You will be as successful as you want to be… More than anything, success is driven by hard work and consistency.

Trim fat and reallocate existing income

Always remember that there are two parts to leading a healthy financial life. Earning more and spending less. In addition to searching for more income sources, you should take a close look at your spending and see if there are any areas where you can plug unnecessary leaks. For example, if you’re spending a ton of money on servicing your debts, you need to get serious about debt reduction. In the long run, you might find that “trimming the fat” improves your bottom line more than some of your possible alternate income opportunities.

How to brainstorm alternate sources of income

I started with a highly technical approach that I like to call “doing whatever you can think of to make an extra buck,” then tweaked things over time by visualizing things with a mindmap.

Mindmaps provide an excellent canvas to freely sketch out ideas in digital format. If you are unfamiliar with them, mindmaps are diagrams used to represent words, ideas, tasks, or other items linked to and arranged around a central key word or idea (source).

The following image provides a fairly generic representation of my current income sources. I actually have a much more detailed and descriptive breakdown for my personal use that I update and refer to on a regular basis. Laying everything out in this manner helps me brainstorm and organize my projects with a much higher degree of success.

If you want to get started with mindmapping, here are some software options that I recommend:

• Mindjet MindManager – This is the software that I use. In my opinion, it’s the best option on the market, but it costs nearly $300. There is, however, a free 30 day trial.
• Freemind – A free and open source option that I recommend you use to get started with mindmaps.
• Xmind – Offers a free version and a more feature-rich pay version.

In closing…

Income diversification is a prudent practice that can increase financial security and even self-fulfillment. If you’ve never taken the time to map out a network of actual and potential income that incorporates all your gifts and passions, then I highly encourage you to do so. I promise that you will (at the very least) be intrigued by your findings, and you might discover some new possibilities.

---
Related Articles at fivecentnickel.com:

» Tax Diversification When Investing
» How to Handle Irregular Income
» The Three Biggest Risks of Retirement
» Best Jobs in a Bad Economy: Recession-Proof Careers
» How do Federal Income Tax Brackets Work?
» Roth IRA Conversion in a Down Market
» Recovering From the Crash
» Our Biggest Income Tax Deductions

I’m 28 years old with a wife and a six month old baby. We’ve always been money-conscious, but would really like to focus our efforts. We both have Roth IRAs, but are not satisfied with them. They are heavily loaded, and we weren’t that familiar with them when we were advised to set them up. My question is where you would recommend I go for a long-term investing vehicle? I always hear to go with no-load mutual funds but would like your opinion.

This is a great question. I’ve said it before, and I’ll say it again… Friends don’t let friends pay mutual fund sales loads.

My personal preference when it comes to long-term investing centers on low cost, no-load mutual funds. When I say low cost, what I’m really talking about is “passively-managed” index funds that seek to match the market as a whole, or some segment thereof.

As for my favorite places to invest, Vanguard is at the top of my list. We also have some money with Fidelity and have been quite happy with their offerings. A third option would be Schwab, who has a bunch of low cost mutual funds with a low minimum investment of $100.

A slight variation on the above would be to go with index ETFs instead of index mutual funds. The underlying premise is the same, but you get a bit more flexibility when it comes to trading shares. If you do go this route, make sure you select a good discount broker so the trading costs don’t eat you alive.

Of course, there are other options to consider, such as opening a Treasury Direct account so you can buy Treasury securities such as T-Bills, T-Notes, T-Bonds, Series EE Savings Bonds, Series I Savings Bonds, etc. This will allow you to purchase these securities direct from the Federal government with no middleman.

Just keep in mind that the optimal composition of your portfolio depends on many factors, so you really need to give a lot of thought to your time horizon, risk tolerance, etc. before you make any major moves.

---
Related Articles at fivecentnickel.com:

» An Interview with Ben Stein, Part 1
» How to Prioritize Your Retirement Accounts
» Should We Get Rid of 401(k) Plans?
» Skip Lunch, Save $100k
» Retirement Savings Rate Poll Results
» Pay Off Debt or Invest?
» FDIC Insurance Higher on Retirement Accounts
» Figuring Out Your Retirement Contributions for 2010

Many people got religion about saving money during the recent recession. This reversed a trend of steadily climbing U.S. debt burdens–or is it just a temporary pause in that trend?

The answer depends largely on whether people continue the good savings habits they acquired during the recession. You may not be able to do anything about national savings rates, but you can take some steps to make sure your own savings rate stays on track.

Keeping the savings habit going

On the surface, it may seem counterintuitive to find that savings rates actually improved during the recession. After all, incomes were down, and low bank rates created little incentive for saving. Even so, people were scared into good savings habits, and found they could get by with less.

Here are four things you can do to continue good savings habits as the economy turns from recession to expansion:

1. Lock-in low interest rates. If you refinanced your home loan, make sure you locked in those lower interest rates with a fixed-rate mortgage.
2. Eat in more often. Many individuals cut down on their restaurant habit during the recession. Continuing to eat at home more often will make going out seem special again–and could be good for your waistline as well.
3. Reduce your credit card usage. By choice or by force, many people have cut down on the number of credit cards they have. Even once credit becomes more freely available again, keep in mind that having fewer credit cards gives you fewer ways to get into financial trouble.
4. Avoid “expense creep.” Over the years, it seems bills for services like mobile phones and cable television have ballooned drastically. The recession forced people to cut back to what they really need, and you can keep pocketing those savings if you guard against letting unnecessary services or luxuries gradually creep back into your lifestyle.

If Americans were able to increase savings rates during a recession, just imagine how powerful those habits could be once incomes start rising again and there’s more to put into your high yield savings account. If you really want to build wealth rather than just fight off trouble, maintaining good savings habits in an economic expansion is the way to do it.

---
Related Articles at fivecentnickel.com:

» U.S. Economy Officially in Recession
» When Will the Recession End?
» Greenspan Speaks: U.S. Economy in a Recession
» Sunday Roundup – Gas Experiment Edition
» Are You a Spender or a Saver at Heart?
» Why Do You Want To Be Debt Free?
» Lending Money to Family and Friends
» Spending Habits that Will Make you Graduate Poor

He seems determined to get us to use him for all our insurance needs. I told him that would be fine; we’re always trying to get a good deal. I doubted he could offer something comparable to what we have now since it’s already such a good deal.

He called again Friday and told me his quote, and suggested that we review the copy he’d be sending in the mail. That’s good, because I don’t make big decisions like that over the phone; my husband and I like to research the numbers and ask around for opinions on customer service. I also look at companies like NetQuote, Geico, Esurance, and Progressive to make sure I’m getting a fair deal (compare rates and get tips on how to save at our post on how to save money on car insurance).

Examining car insurance coverage

The first we did when comparing rates was to pull out our existing car insurance policy so we could compare apples to apples. Here’s what we’re looking for in car insurance coverage:

Bodily Injury ($100,000/$300,000): We need to coverage to protect us from medical bills and lawsuits from any injuries or death that are our responsibility. North Carolina has a lower requirement for bodily injury ($30,000/$60,000), but we believe medical bills can easily top those amounts so extra coverage is important for us.

Property Damage ($100,000): This coverage will pay for any property we damage (such as to someone else’s car) due to an accident. This amount reflects the maximum paid per accident; we think $100,000 should be enough to cover these expenses. North Carolina only requires $25,000, but we think that is too low. We could save money on our premiums if we went lower, but we’d then be responsible for anything over our coverage limit.

Uninsured Motorist Coverage ($100,000/$300,000/$100,000): If we get into an accident due to the other driver’s fault and they don’t have insurance, then this protects us and our property.

Collision: Collision coverage can help when your car is damaged and is in need of repairs. It also includes repairs if your car is broken into. We currently only have collision for my car (2000 VW Jetta). If you have a car loan, most lien holders will require collision, but it’s optional once you pay the loan off. Since collision typically pays up to the value of the car, having coverage for my husband’s car (a 1994 Acura Integra) didn’t make financial sense.

Coverage-wise the new offer looks about the same, but I noticed that our current policy is has slightly lower premiums.

Discounts for car insurance

While reviewing the new policy, I noticed it was lower than what he had been quoted by the same agent months before, and I wanted to know why. I noticed that we now qualified for more discounts. Besides having a multi-car policy, we were now having a multi-policy discount with this insurance company. After getting some more information on our cars, he included discounts for having car alarm systems installed, and we also qualify for something called NC Tiering Program.

Beyond the above, you can also get a better rate though big things like not having any accidents as well as little things like having a clean credit report. With everything included, our 12 month car insurance premium would be around $775/year or about $65/month. It’s definitely in the ballpark with our current policy so we’re considering it. One thing in favor of the new policy is that it would simplify things a bit, as we’d only have one insurance agent.

Consider your Circumstances

Besides price, we’re also looking at any extra benefits of the policy. The car insurance policy the new agent quoted has lower deductibles ($500 instead of $1,000), but our current policy has towing and roadside assistance included with no additional charge.

The new policy quote doesn’t include towing on it, so I’m going to ask the agent if that’s an additional charge. We’ve already used the roadside assistance with our current policy a few times, so we’re definitely interested in keeping it. While celebrating our anniversary, for example, our car got stuck in the mud. All it took was a quick phone call to get a tow truck dispatched, and there was not out-of-pocket expense.

How do you save on car insurance?

Now that you’ve heard about our situation, I want to hear about your tricks for shopping around for car insurance and getting a better deal. What tips do you have for saving money on car insurance? Please let us know by leaving a comment.

---
Related Articles at fivecentnickel.com:

» How to Save Money on Health Insurance
» How to Save Money on Life Insurance
» How to Save Money on Car Insurance
» Do You Need Longevity Insurance?
» Save Big on Well-Child Care
» Weekly Roundup – 07/21/06
» Save Money on Life Insurance by Paying Annually
» How to Save Money on Homeowners Insurance

If you haven’t yet received your W-2 form, which reports your wages for the past year, chances are the post office monster ate it. By law, your employer is required to mail a copy of your W-2 to you by January 31st, which means it should get to you at the latest before mid-February. Since it’s early March, we are way past the deadline and since your employer probably didn’t forget, it’s likely disappeared into the abyss of the postal system.

So what are you supposed to do? The easiest way to handle this situation is to go to your payroll or human resources department and ask them for another copy. If you’re eager to get your taxes done and/or don’t want to risk it getting lost in the mail (again!), you can ask them to print you out a copy and hold it for you to pick up in person. If you’re due a tax refund (the average tax refund last year was almost $2700), requesting an in-person pickup can help you file and thus get your refund that much faster.

What if you received your W-2 form but lost it? Do the same thing, go to payroll or HR and request another copy. In either case you might have to fill out a form, depending on how strict your company’s policies are, to get a new copy but it’s usually not a big deal, and you also don’t have much of a choice.

What if you never received a 1099 form? That’s easy… This post explains how to handle a missing 1099 form.

Happy filing!

---
Related Articles at fivecentnickel.com:

» How to Handle a Missing 1099 Form
» How to Get an Employer Identification Number (EIN)
» Are Unemployment Payments Taxable?
» Heat and Air Repairs: Decisions, Decisions…
» How to Request an Income Tax Filing Extension
» Cut Your Own Grass or Use a Lawn Service?
» Save Money With Do-it-Yourself Car Repairs
» Be Careful What You Ask For

While it’s difficult to overcome the urge to react to unexpected events in our lives, patience and consideration of the facts almost always yields better results than emotional reactions. We encounter this every day, from holding off on hitting that send button on a nasty email you haven’t yet fully digested, to not punching the guy in the face who just said something stupid to your girlfriend.

In retrospect, such instinctive responses that were delivered without considering the full context, the facts and the likely outcomes most often lead to regret and often, financial pain, down the road.

“Storm of the Century”

While the media loves to talk about the “Storm of the Century” every few years to keep eyeballs glued to the set, we actually have had the snowfall of the century this year in many parts of the Northeast.

Well… We have some friends who tend to make rapid, emotional decisions that often have heavy financial implications. Last week, they proclaimed, “We’re moving to California. This snow is ridiculous and we’re not dealing with another winter like this.”

In truth, they probably won’t see another winter like the East Coast has had, but their minds are made up. They’ve already talked their parents into moving out West with them so they can still see the grandkids, and he’s already looking for work.

They’re serious; they’re moving because of snow.

Take a deep breath

Based on my recollections, this winter has been off the charts. In fact, I can recall several winters where we didn’t even have any snow to speak of, perhaps a dusting here or there. So, I looked into it a little further.

As it turns out, we haven’t had this much snow in our region for over 100 years, dating back to when they first started tracking snowfall in 1884. Hmmm… Maybe it was a Storm of the Century. But still… Moving?

What’s the big deal about moving? Well, if snow is the sole catalyst, it just strikes me has highly irrational – and expensive.

• An equivalent house (they have a roughly 3,000 sq ft new-construction home) in a reasonably desirable area of California is going to cost more than double what it does here.
• California is essentially bankrupt. It’s inevitable that services will be cut while taxes are being raised – and current tax rates are already higher than most states. Is this a place you want to be moving TO? Or running FROM?
• Moving costs are not trivial.
• What if the job doesn’t work out? It’s tougher to find high paying jobs than it used to be.

It’s now evident this wasn’t a typical snowfall season. Since we haven’t had this much snow in over 100 years, it is unlikely that we’ll see something similar anytime soon. This winter was an outlier, pure and simple.

Wanting to avoid bad winter weather is a lot like the understandable, yet irrational feeling of not wanting to drive a car again after a bad car accident, or even people that are afraid to fly even though the trip to the airport is more hazardous than the plane flight itself. While disasters do occur, they are extremely rare, and repeat events of similar magnitude are nearly non-existent.

So, if there’s a once per hundred year earthquake on the fault line which causes damage and fear, will our friends turn around and move back East? This business of reacting to rare events can get pretty expensive!

Investment decisions

This brings me to how similar thinking affects investors. Left to their own devices, millions of retail investors damage their prospects for an optimal retirement asset allocation by constantly tinkering with it. In the midst of the financial crisis, friend after friend proclaimed that they were boldly moving all their money out of stocks and into bonds – Treasury Bonds that is.

Many retirement accounts offer some sort of “conservative” bond fund, and tons of people have flocked into such investments. Not only did most of these people exit at the worst possible time – pivot bottom in March 2009, but they then shifted money into a money-losing Treasury fund while stocks rallied over 60% from their lows in less than a year (compare Mar 9 onward)!

If you thought Treasuries could never lose money, think again. With yields so low that investors were actually taking a negative yield just to stay liquid in short term paper, the only direction for Treasuries to move was down (driving yield up). And they did. It was so plainly obvious to me in 2009 that I shorted Treasuries in my trading account with a practical risk-free gain in my book.

So, what you have here is people that initially had a reasonable asset allocation suited to their risk tolerance and time horizon (often 20-30 years from now!) shifting money around at the worst possible time. By deviating from a long-term strategy with short term reactive measures, their nest egg at retirement could be hundreds of thousands of dollars short.

While stocks make people nervous, no responsible financial adviser would propose a 0% stock allocation and 100% Treasury bond allocation for a 30 year time horizon. History has demonstrated that you’re lucky if you even beat inflation over decades long periods of time in Treasuries, while equities always outperform other conventional asset classes over long time periods.

Regardless of what your long term strategy is – be it asset allocation in your 401K, career moves, altering a small business strategy, or whatever the situation may be – before you “go with your gut” and make a major decision based on a single data point, your emotions, or a perceived reality, make sure you consider the context and what the possible long-term implications are.

What are some of the worst “Gut Reaction” moves you’ve seen?

---
Related Articles at fivecentnickel.com:

» Kids & Money: Tweaking our Allowance System
» Kids & Money: Long Term Savings
» Kids & Money: Setting an Allowance
» Buying Term Life Insurance, Part II
» Buying a New Car: This Year or Next?
» Buying Term Life Insurance, Part IV
» Buying Term Life Insurance, Part V (Epilogue)
» “Borrowing” Money from an IRA

In short, you can report them to Visa or MasterCard and (hopefully) corrective action will be taken. Here’s how to get in touch with the two companies…

Reporting Visa credit card violations

Perhaps the easiest way to get in touch with Visa is to call them at 1-800-VISA-911. Alternatively, you can call the number on the back of your card.

If you would prefer to send a written complaint, you can address it to:

Visa U.S.A. Inc.
P.O. Box 194607
San Francisco, CA 94119-4607

You might also be able to register your complaint online through your card issuer’s website, but Visa doesn’t have a centralized way of doing this.

Reporting MasterCard credit card violations

Once again, you can call in your complaint to 1-800-MASTERCARD, or you can call the number on the back of your card.

Alternatively, you can register your complaint online via the MasterCard Merchant Violations page. You’ll be asked for your name and address, details about the merchant, and the nature of the problem. There is also space for freeform comments.

Have you ever reported a merchant?

Have you ever reported a merchant for violating the terms of their credit card agreement? Perhaps they required ID, attempted to add a surcharge to your purchase, or tried to enforce a minimum purchase amount.

If so, please share your experience in the comments.

---
Related Articles at fivecentnickel.com:

» Credit Card Processing Fees
» What Do Credit Card Numbers Mean? Making Sense of Your Credit Card Number
» Dave Ramsey is Bad at Math
» More Credit Card Customers at Risk for Fraud
» MasterCard Credit Card Acceptance Guidelines
» How Do You Know if a Credit Card Number is Valid?
» Best Business Credit Cards: What’s Hot, What’s Not
» Sam’s Club Now Accepting MasterCard

MasterCard credit card rules

What follows is a synopsis of MasterCard’s rules regarding card acceptance straight from their merchant guide. The rules regarding card acceptance aren’t quite as explicit as Visa’s in some areas, though there are many parallels. Also note that there are many more rules that what I’ve listed below — I tried to filter out the ones with the least everyday relevance.

Honor all cards. Merchants are required to honor all valid MasterCards without discrimination when properly presented for payment. Merchants may not discriminate amongst customers who seek to make purchases with a MasterCard, nor can they discriminate against or discourage the use of a MasterCard in favor of another brand.

Additional cardholder identification. A merchant must not refuse to complete a transaction solely because a cardholder who has presented a card to pay for a purchase refuses to provide additional identification.

Charges to cardholders. A merchant may not directly or indirectly require a cardholder to pay a surcharge or any part of the merchant processing fees charged in connection with a transaction. However, fees are allowable if they are charged regardless of the form of the payment, and merchants can provide a cash discount.

Minimum/maximum transaction amount prohibited. A merchant may not require, or indicate that it requires, a minimum or maximum transaction amount in order to accept a valid and properly presented MasterCard.

Sale or exchange of information. Merchants may not sell, purchase, provide, exchange, or in any manner disclose MasterCard account numbers, transaction details, or a cardholder’s personal information.

Noncompliance assessment. If MasterCard learns of a merchant’s non-compliance to their rules, they will notify the “acquirer” (i.e., the bank that processes transactions for the merchant) and the acquirer must “promptly” bring the merchant back into compliance.

Failure to safeguard account data. If a merchant is found to have violated any of the security rules (there are several listed), MasterCard can impost a noncompliance assessment of up to $100,000 per violation. They also specify the steps a merchant must take if they believe account data has been compromised, including notification of the acquirer withing 24 hours.

There are a handful of other requirements that I’ve heard about with MasterCards that weren’t listed in the their merchant guide. For example, the cards have to be signed to be valid, and so on. Once again, I’m betting that the biggest hot-button issue will be asking for ID, followed closely by minimum transaction requirements.

What’s your biggest annoyance when it comes to merchants accepting (or not) you credit card?

Source: MasterCard.com

---
Related Articles at fivecentnickel.com:

» How to Report Visa and MasterCard Violations
» Visa Credit Card Acceptance Guidelines
» Best Business Credit Cards: What’s Hot, What’s Not
» Sam’s Club Now Accepting MasterCard
» How Do You Know if a Credit Card Number is Valid?
» What Do Credit Card Numbers Mean? Making Sense of Your Credit Card Number
» Reward Credit Cards – What’s in My Wallet?
» Kroger Gas Discount, Take Three

This is interesting…

The current rate on their savings account is 1.35% APY, and their CD rates range from 1.50% APY for 12 months up to 3.00% APY for 60 months. The savings account has no minimum balance and no monthly fees. Unfortunately, I couldn’t find any mention of a minimum deposit for CDs. Not surprisingly, all accounts are FDIC insured up to current limits.

In addition to a fairly competitive rate, Sallie Mae Bank will match up to 10% of your Upromise earnings (subject to some restrictions). I don’t have an account with Sallie Mae Bank, so I can’t vouch for their user interface or customer service. If any of you have experience with them, please leave a comment and let us know how you like it.

---
Related Articles at fivecentnickel.com:

» American Express Introduces Online Banking Products
» Best Online High Interest Savings Accounts (Updated!)
» More Online Bank Interest Rate Decreases
» Online Bank Savings Account Interest Rates (Updated!)
» ING Direct Introduces User-Friendly Login Names
» Alternatives to High Yield Online Savings Accounts
» Online Savings Account Rate Changes
» Ally Bank Raises Savings Account Interest Rate

Oh well, our plan moving forward is to pay off our mortgage early and stay put until prices trend upward.

As an aside, if you want more information on buying a home vs. renting you can check out Laura’s view of the buy vs. rent dilemma, as well as my opinion on the same thing.

Mistake #1 – Zero down mortgage

So many new homeowners made the mistake of entering into a zero down mortgage. If you cannot afford a down payment of at least 20%, lenders typically require either a 2nd mortgage or carrying private mortgage insurance (PMI).

One positive result of the housing crisis has been a huge scaling back of the zero and low down payment mortgages, which has been a large contributing factor of plummeting home sales. Nowadays people who don’t have any money cannot buy houses. Go figure, right?

2nd mortgages and Private Mortgage Insurance (PMI):

Private mortgage insurance (PMI) is insurance payable to a lender or trustee for a pool of securities that may be required when taking out a mortgage loan. It is insurance to offset losses in the case where a mortgagor is unable to repay the loan and the lender is not able to recover its costs after foreclosure and sale of the mortgaged property. Typical rates are $55/mo. per $100,000 financed, or as high as $1,500/yr. for a typical $200,000 loan. (source)

A second mortgage (commonly used as an alternative to PMI) is a secured loan that is subordinate to another loan (your 1st mortgage) against the same property. The 2nd mortgage typically carries a significantly higher interest rate and is typically used as part or all of the 20% down payment. The higher rate is a reflection of increased risk to the lender, and results in much higher interest costs to the borrower over time.

We fell into this trap like so many others. We wanted to get into our new home now, and were ready to employ any creative financing necessary to make it happen… And so we entered into a 2nd mortgage for 25% of the purchase price (75/25 loan.)

To avoid a costly 2nd mortgages or PMI, save at least 20% of the purchase price of the home.

Mistake #2 – Buying high and selling low

Whether you’re trying to time the stock market or time real estate transactions, buying low and selling high should always be the goal. In a bad market the temptation to do the opposite can be powerful.

Take my housing situation, for example. I hate the fact that we have debt at all, and am very tempted to sell, despite the fact that we would have to take a loss! I’m tempted to sell our house for a loss and then rent for much less than our current mortgage payments and pay off our remaining debt while renting.

Though getting out from under the mortgages is tempting, I decided against it for mathematical reasons. If we were to sell now, we would not only lose money on the transaction, but we’d have to pay cash to our lender. If I could wind up even money, I would sell tomorrow. Instead, we are doing the next best thing… Making our 2nd mortgage the next victim of our debt snowball.

The faster we can reduce our amount owed, the sooner we can sell without any out-of-pocket costs. Our hope is that the housing market will bounce back in the mean time, affording us the option to sell for gain.

To avoid selling your home for less than you owe, increase mortgage principal payments and wait for the market to rebound.

It is worth mentioning that we cannot control market conditions, so we should spend our energy focusing on the factors that we can control:

1. Once you have high interest consumer debts under control, focus your debt snowball on reducing your mortgage – and look into refinancing your mortgage to see if rates are attractive as you may be able lock in a lower rate. If you have a 2nd mortgage, pay it off ASAP. Those of you with PMI should also focus on reducing your mortgage principal to speed your ability to drop the PMI once your principal is reduced below 80% of the home value.
2. Make property upgrades that raise the value more than the amount they cost to implement. DIY projects can cost very little, yet yield superb ROI.

In closing…

Most who fall victim to either of these housing and mortgage blunders end up paying dearly. I hope this article will help future homebuyers avoid the same mistakes. For our next home purchase, my wife and I intend to save 100% of our payment before buying… But that is a post for another day!

---
Related Articles at fivecentnickel.com:

» From the Archives – (March 16th – March 22nd)
» Your Investments: Seven Common Mistakes to Avoid
» Money Madness: The Championship Round
» One Year Ago This Week (September 17th – September 23rd)
» Weekly Roundup – Self Promotion Edition
» Banks May Rescue Defaulting Homeowners
» One Year Ago This Week (January 14th – January 20th)
» From the Archives (January 13th – January 19th)

Check your credit report. You’re entitled to a free credit report from each of the major credit bureaus once per year, so there’s no excuse not to do this. But don’t stop there… Be sure to fix any errors that you find.

Start building positive information. If you’ve had credit problems in the past, put that behind you and get back on track with your payments. If you have a secured credit card, be sure that they report your information to the major credit bureaus, as not all of them do.

Try to get negative information removed. Beyond getting inaccuracies removed from your credit report, you might want to try to get legitimate negative information removed. If you’ve been late in the past, but are currently paying on time, call your creditor and ask to have the information removed. They might balk, but it can’t hurt to try. If you have past due accounts, you might be able to negotiate removal of the negative information in return for getting caught up on your payments.

Dispute inaccuracies that can’t be removed. If there’s inaccurate info on your credit report that you can’t get removed, ask the credit bureaus to place the word “disputed” along with a short explanation alongside any items to which you object. They are required to comply. This won’t actual increase your numerical credit score, but it might appease some wary creditors.

Be patient. If you have legitimate negative information on your credit report, you might simply have to wait for it to drop off. Negative information typically remains on your report for seven years, so it might take awhile, but your score will rebound over time if you clean up your act.

So there you have it… Five simple steps to improve your credit score. One last tip is to be very wary if a company offers to help you improve your credit for a fee. There really aren’t any magic bullets here, and you’re perfectly capable of doing pretty much anything that a credit repair outfit can do.

---
Related Articles at fivecentnickel.com:

» Yet Another Reason to Value Your Credit Score
» Another Reason to Value Your Credit Score
» Five Ways to Hurt Your Credit Score
» Do You Care About Your Credit Score?
» Delinquency Rates and FICO Scores
» Carnivals – Week of 05/19/08
» Effect of Foreclosure, Short Sale, and Bankruptcy on Your Credit Score
» MyFICO ScoreWatch: Free Access to Your FICO Credit Score

I can’t remember the details, but it was something like 2%, when the prevailing savings account interest rates (especially at brick and mortar banks) were much lower. Not only that, but he said he could apply it to our existing personal savings account, as well.

When we got up to leave, he said that the promo rate would end in a few months, but that they’re always introducing new ones. Thus, if we’d just call back and ask, he’d go ahead and apply the code for the new promo rate to our accounts.

I recently called him back and he gave us the new promo rate. I forget the details, but it was significantly higher than their “standard” savings account interest rate. All we had to do was ask.

Oh, and just in case you’re thinking that we must have been dealing with some local bank, and that there’s no hope of getting this treatment from the behemoth bank that you’re dealing with… We do all of our “local” banking with Bank of America.

---
Related Articles at fivecentnickel.com:

» SunTrust vs. Bank of America Online Bill Pay Question
» Bank of America Online Banking Annoyance
» Breaking News: Washington Mutual to be Acquired by JPMorgan Chase (Update1)
» Q&A: Earnest Money
» Cheap Self-Inking Rubber Stamp
» The Cost of a Failed House Deal
» From the Archives (December 23rd – December 30th)
» Bank of America’s “Out of State” Check Policy

I’m not sure about anyone else, but I don’t think it’s taboo to talk about money. I do, however, recognize that it may be awkward and thus considered a bit wrong by someone to talk to others about how they should handle their finances. Thinking back on conversations we’ve had recently, money has often been a part of the subject matter.

I’ve heard friends and family members say they want to improve their finances and then they mention something that completely contradicts their stated goal. It’s kind of like when you hear people say they’re watching what they eat and then you notice that they’ve ordered and eaten their appetizer, entree, dessert, and even sampled on some of yours.

Do you let things like this slide? If not, when do you speak up and make a suggestion? And if you do feel compelled to talk to them, how can you encourage them to actually do something?

I wanted to go over a few topics that have come up in casual conversation when hanging out with our friends. Hopefully you can relate, and may have an insight that could help with these sticky situations.

Vacationing on credit cards

Our friend invited us to join him and his wife for a conference and show in Los Angeles this summer. Since we’ve never been to LA, we thought this might be a great excuse to go, see some other friends we’ve haven’t seen in a while, and have a good time.

Honestly, it sounds like a great idea. I was already thinking about finding a cheap flight and start budget for the trip when our friend interrupted my thoughts. He mentioned that he was putting it all on his credit card to get some rewards.

At first, I thought that seemed fine. After all, we typically reserve hotels and rental cars with a credit card and then pay it off once we get home. Later in the conversation, though, he told us that he’s still in debt from some of his elaborate vacations. He mixes business and pleasure, extending work trips for fun, and it had resulted in five figure debt.

I kind of backed off of even approaching the topic of funding a big purchase with your credit card. I couldn’t think of a way to begin the conversation without putting him on the defensive (which is a natural reaction). As you’ve probably figured, I hate to see people carry high interest credit card debt, and I worry when they use dent to pay for their wants.

Saving up in advance may force you to delay your purchases, but once the purchase has been made, the hard part is over. You can enjoy your TV or vacation and not worry about how you’re going to pay it all back. We mentioned to him is that we’d definitely like to go, but we’ll need to check our budget and set aside money. I think was probably the best approach in this situation because we’re not going to convince someone in one conversation to change their spending habits. We can, however, show him how budgeting can make it possible to have a debt free vacation.

Creating a budget (and sticking to it)

I’ve heard a few of my friends say that they find it impossible to budget. Like the latest diet or fitness routine, they start off gung-ho with a ‘perfect’ budget that accounts everything to the last penny. They soon wind up going off budget, however, and either wind up back where they started or worse.

This is something I completely understand. I empathize with them on how hard it can be to budget. The most common mistake is that their system is too strict and there is not cushion between what should happen and what actually happens.

I feel a bit better about how we usually handled this because we gave them a couple of tools that have helped us personally with our finances. I also told one friend some of my mistakes with my first few attempts at budgeting and how automating our bills has made it much easier to stay on track.

I think this has been the easiest financial topic for helping other to change their personal finance habits since many people can relate to how hard it can be to start.

Building an emergency fund (only for emergencies!)

Another topic I hear a lot is creating an emergency fund. It can be hard to stay on top of bills while setting aside money in a savings account, but you have to do it. I’ve had some friends lose their jobs or have their hours cut, so I know how important this can be.

I had a friend that was living paycheck to paycheck and wanted to have some money tucked away for an emergency. She had just recently gotten her jobs (yes, she went from no jobs to 2 jobs) and didn’t want to wind up back in the predicament that she just got out of. Whenever people ask for ideas or advice, I take it as a green light to give them some tips that can help them right away.

I suggested that she cut down on things that she doesn’t really care about and use that money to start her emergency fund. It wasn’t a big step (she’s going to stop buying so many magazine at cover price), but it’s a sustainable way to fund her savings.

I also talked to her about using money management tools like Quicken or Mint to see where she could adjust her budget and save some more money. We compared options for different savings accounts. Even though ING Direct (where we bank) offered a high interest savings account, she felt more comfortable at her local credit union (another good option).

The good news is that I was chatting with her again a couple of weeks ago, and she now has two months of expenses tucked away. It felt good to help a great friend and she appreciated the suggestions. If only it was like this every time!

Your Thoughts

How do you handle money discussions with your friends and family? What are some ways you’ve helped others? What are some mistakes you’ve made when talking about finances?

---
Related Articles at fivecentnickel.com:

» Lending Money to Family and Friends
» AT&T, Verizon Price Cuts: Change Plans, Get a Lower Rate
» Helping Your Parents With Their Finances
» About FiveCentNickel
» How do you Keep Track of your Finances?
» Lending Club: Invest in Your Friends
» How to Plan a Wedding Without Breaking Your Budget
» Just Do It

As you may or may not aware, most credit card numbers are generated based on something known as the Luhn algorithm. It thus stands to reason that a credit card number is valid if (and only if) it satisfies the “Luhn check” (a.k.a., the Mod 10 check), which is a simple mathematical test that involves manipulating the credit card number, adding it up, and checking to see if it’s evenly divisible by ten.

Testing credit card numbers

Here’s how to apply the Luhn check to test whether or not a credit card number is valid:

• Step 1a. For a card number with an even number of digits (e.g., Visa or MasterCard), double alternating digits starting with the first digit in the sequence.
• Step 1b. For a card with an odd number of digits (e.g., American Express), double alternating digits starting with the second digit in the sequence.
• Step 2. If the doubling resulted in a number with two digits, add them together to get a single digit number
• Step 3. Now go back to the original credit number and replace the digits that you doubled with the new value — either the doubled value, or the doubled value with the digits added together — and add it all up.
• Step 4. Check to see if the sum is evenly divisible by 10 (you can simply look to see whether or not it ends with a zero).

If the card number does not pass this check, then it is not a valid number. If, on the other hand, it does pass, then it may be a valid number.

Checking validity: an example

Those steps are a bit convoluted, so here’s a real world example… The following credit card image comes from the CitiCards homepage for their Platinum Select MasterCard. The number on the card is 5424 1801 2345 6789. For starters, the fact that the number starts with a “5” indicates that it’s a MasterCard (as does the little MasterCard symbol on the card).

Since there are sixteen digits, we’ll start by doubling the 1st, 3rd, etc. digits and then summing as outlined above. I’ve highlighted the doubled (and in some cases summed) values in parentheses, below. I’ve also underlined the check digit.

(1+0) + 4 + (4) + 4 + (2) + 8 + (0) + 1 + (4) + 3 + (8) + 5 + (1+2) + 7 + (1+6) + 9

This totals up to 70, which is evenly divisible by 10. In other words, this is a potentially valid credit card number, though I’m sure it doesn’t correspond to a real account number. If it does, then L. Walker (the name on the card) probably isn’t too happy about his/her credit card number being spread around like this.

---
Related Articles at fivecentnickel.com:

» What Do Credit Card Numbers Mean? Making Sense of Your Credit Card Number
» Establishing Credit With a New Taxpayer Identification Number
» Visa Credit Card Acceptance Guidelines
» Beware New Credit Card Fees
» MasterCard Credit Card Acceptance Guidelines
» Get Free SkyMiles from Delta
» How to Report Visa and MasterCard Violations
» AmEx Buyer’s Assurance Warranty Extension Program

For starters, the first digit in the number indicates what type of card you’re dealing with. This number is always a 3, 4, 5, or 6, and can be interpreted as follows:

3 = Travel or entertainment card (e.g., Amex or Diner’s Club)
4 = Visa Card
5 = MasterCard
6 = Discover Card

Visa credit card numbers

For Visa cards, the numbers are 16 digits long. Visa has used to have 13 digit numbers, as well, but those have been mostly (completely?) migrated over to the 16 digit format.

When looking at the balance of the numbers, the 2nd through 6th digits are the bank number, and the 7th-15th numbers are your account number. The remaining digit is known as the “check digit,” which is used to help determine whether or not the overall number is legitimate.

MasterCard credit card numbers

For MasterCard cards, the number is also 16 digits long. The first digit is always a 5 and the second digit is always between 1-5. The 2nd-3rd, 2nd-4th, 2nd-5th, or 2nd-6th digits correspond to the bank number, and the remaining digits up through the 15th are the account number. As above, the 16th digit is the check digit.

American Express card numbers

For American Express cards, the number is always 15 digits long and it always starts with 34 or 37. The 3rd and 4th digits indicate the card type (business vs. personal) and the currency. The 5th-11th digits are the account number, the 12th-14th digits are the card number associated with the account, and the 15th digit is, once again, the check digit.

As an example, my wife and I have an Amex Blue Cash Rewards account. Our card numbers start with 37, and the 12th-14th digits on our cards are different. The rest of the digits are, however, the same. As far as I’m aware, both Visa and MasterCard issue identical numbers when there are multiple cards per account.

Source: How Stuff Works, Credit Addict

---
Related Articles at fivecentnickel.com:

» How Do You Know if a Credit Card Number is Valid?
» Establishing Credit With a New Taxpayer Identification Number
» Are You a 0% Credit Card Daredevil?
» How Not to Win the Lottery
» Beware New Credit Card Fees
» Feds to Crack Down on Credit Card Issuers
» Visa Credit Card Acceptance Guidelines
» Thoughts on Frequent Flyer Credit Cards

I was recently digging around for information on the Visa website when I ran across a document containing the Visa card acceptance guidelines for merchants. It includes some pretty interesting information that I thought was worth sharing.

Visa credit card rules

What follows is a summary of Visa’s rules regarding card acceptance. I’ve mentioned some of these things in the past, but ultimately decided that it’s worth having them all in one place.

• Merchants can choose to honor all Visa cards, Visa credit and business cards only, or Visa consumer debit and prepaid cards only.
• Merchants must always honor valid Visa cards in their acceptance category regardless of the dollar amount of the purchase. Minimum and maximum purchase amounts are a violation of Visa rules.
• Merchants must always treat Visa transactions like any other transaction (with a minor exception). They may not impost a surcharge for using a Visa card, but can offer a cash discount. This discount cannot be offered for use of a “comparable card” such as a different credit card.
• Merchants who offer an alternate payment channel, such as telephone or online, are allowed to add a convenience fee as long as it is disclosed, never applied to face-to-face transaction, applied to all forms of payment through the alternative channel, etc.
• Merchants must include all applicable taxes in total transaction amount, and may not collect taxes separately in cash.
• Restaurants, cab drivers, etc. can only authorize an account for the known amount, not for the transaction amount plus estimated tip.
• Merchants may not provide cash refunds for merchandise originally purchased with a Visa card.
• Merchants must deposit their Visa transaction receipts within five calendar days.
• All electronic POS terminal are required to provide account number truncation, such that only the last four digits of the credit card number are printed on the customer’s receipt. The expiration date should not appear.
• Merchants must keep cardholder account number and personal information confidential.
• Return/exchange policies must be properly disclosed before a transaction is completed, or made available online or via mail for “card-absent” transactions.
• An unsigned credit card is invalid and should not be accepted. If an unsigned card is presented, the merchant should check the cardholder’s ID, ask the customer to sign the card, and compare the signature to the one on the ID.
• Writing “See ID” or “Ask for ID” is not a valid substitute for a signature. The customer should be asked to sign the card, as outlined above.
• Visa rules do not preclude merchants from asking for cardholder ID prior to completing a transaction, but merchants cannot make the presentation of ID a condition of acceptance.

I don’t know about you, but I’m regularly asked for ID when I make purchases, and I don’t mind. In fact, I’m one of those people carrying around an invalid card because I chose to write “Ask for Photo ID” on the back instead of signing it.

My biggest complaint is when a merchant enforces a minimum purchase requirement. While I fully understand that even small purchases are accompanied by significant processing fees, nothing frustrates me more than getting to the register and being told I can’t use a credit card unless I spend more money.

At the same time, it’s important to recognize that the cashier doesn’t make the rules and is just trying to do his/her job. Thus, if you have a problem with a merchant’s policies, it’s best to take it up with a manager and/or your card issuer.

Source: Visa.com

---
Related Articles at fivecentnickel.com:

» How to Report Visa and MasterCard Violations
» MasterCard Credit Card Acceptance Guidelines
» Best Business Credit Cards: What’s Hot, What’s Not
» Credit Card Processing Fees
» What Do Credit Card Numbers Mean? Making Sense of Your Credit Card Number
» New 0% Balance Transfer Credit Card Offers
» AmEx Blue Cash Rewards Performance
» Weekly Roundup – The Internet is Dead Edition

Three of the big fees changes that they highlighted were:

• Fees because you’re not spending enough. Some Citibank cardholders are apparently being hit by annual fee of $30-$90 if they spend less than $2400 per year on their card.
• Fees because you’re not swiping enough. Some FigthThird cardholders are being hit with a $19 fee if they don’t use their card for a year.
• Fees… Just because. Bank of America has introduced annual fees of $29-$99 on a variety of new and existing cards.

There have been a number of other charges, as well, including new or increased fees on balance transfer credit cards, fees for participating in credit card reward programs, and so on. In other words… Fees, fees, fees!

The lesson here is to keep a close eye on your credit cards, and be sure to read any mailing from your card issuer. What you don’t know can hurt you (or at least your pocketbook).

Source: CNN/Money

---
Related Articles at fivecentnickel.com:

» Buyer Beware: Sharper Image Gift Card Restrictions
» Credit Card Reform: Inside the CARD Act of 2009
» Should You Pay Your Taxes With a Credit Card?
» Credit Card Processing Fees
» Ask for Credit Card Fees to be Reversed
» Carnivals – Week of 11/26/07
» Beware the Siren Song of Gift Cards
» Carnivals – Week of 04/07/08

As my wife and I lazily follow American Idol, we’ve noticed a common statement of hope uttered by many of the contestants, “American Idol is the best thing that has ever happened to me, it’s gonna change everything!”

The contestants are not alone in their zeal to believe that happiness is a direct result of more money, fame, and/or success. Still… Every time I hear those words I cannot help but wonder if these changes will be for the better.

Setting aside fame and success, let’s hone in on the presumption that more money leads to more happiness.

Money and happiness – the wrong way

Whether we’re willing to admit it or not, many of us believe that if we just had more money, things would be better. But would they really? I mean, think about it… What have you done with the money you’ve earned up to this point? Were you responsible with it, or did you spend with disregard and without a plan?

If you’ve failed to responsibly manage little then it’s rational to assume you will do the same with more, only on a much larger scale.

We need only examine the life of the late Michael Jackson to see the possibility of earning untold millions yet departing awash in debt and scandal. Irresponsible money management is not cured by more money, and happiness is not achieved as a direct result of attaining more money.

I believe the “troubled rich” are troubled simply because they place an inordinate amount of attention on the money itself. When we improperly equate money with happiness, we set ourselves up for disappointment and possibly heartache.

Money and happiness – the right way

When kept in the proper perspective, it is possible to achieve an improved state of happiness through the wise use of money.

At this point in my life I can honestly say that more money would increase my happiness, but that statement hinges on my understanding the following two points:

1. Have a specific goal for using the money. It’s important to have an explicit goal in mind to buffer the risk of tying happiness to the money itself rather than to the achievement of the goal.
2. Define a specific amount and do not covet more. If we don’t cap the amount necessary to reach our goal, the fine line between need and want is too easily crossed. Defining amounts protects against temptation.

My goal is to be debt free. I need a specific amount of money to meet that goal. My happiness is tied to the goal, not the money. Ultimately, my happiness lies in the freedom and flexibility that accompany the absence of owing others.

In conclusion…

More money can afford us the ability to reduce or eliminate debt, thus increasing our financial freedom and free time. At the same time, more money can lead to corruption, stress, and burden of possession.

Just as personal finance is personal, the link between money and happiness can only be determined at the individual level. Based on my needs and intents for using the money I believe more money could very easily increase my level of happiness.

As Dave Ramsey is quick to point out, money is amoral. Our use of it can be moral or immoral, but money itself is neither. The link between money and happiness is much the same… It’s not the money itself that influences our happiness, but rather how we view the money and how we choose to use it.

Would more money make you happy?

What do you think of money as an amoral entity, attributing the relative good or evil to the person and their use of it rather than to the money itself? What about your particular situation – would more money bring you more happiness? If so, why?

---
Related Articles at fivecentnickel.com:

» Can Money Buy Happiness?
» The Role of Money and Success in Happiness
» Happiness is…
» Money and Happiness
» Carnivals – Week of 03/20/06
» Carnivals – Week of 08/20/07
» From the Archives (September 21st – September 27th)
» Weekly Roundup – 3rd Quarter Taxes Edition

More specifically, the CARD act requires colleges to disclose any marketing agreements they may have with credit card issuers, perhaps by just posting the info somewhere on their website. Moreover, “tangible items” (a.k.a. free stuff such as gift cards, t-shirts, etc.) cannot be used to induce students to apply for a credit card within 1,000 feet of campus.

The CARD Act also prohibits credit card issuers from extending credit to anyone under 21 unless there is an over 21 co-signer or the young applicant can demonstrate and independent means of repaying their debts (though this requirement might not be very effective).

This all begs the question of whether or not these sorts of protections are a good thing. It’s a bit like the military/drinking age thing. If you’re old enough to serve the country, shouldn’t you be old enough to have a beer? The same logic could easily be applied to credit cards.

That being said, I don’t have any real problem with protecting college students from their own stupidity when it comes to finances. What about you? What do you think about these age-related restrictions?

---
Related Articles at fivecentnickel.com:

» The Convenience of Using a Debit Card
» Should You Pay Your Taxes With a Credit Card?
» Why do Credit Cards Expire?
» Weekend Roundup – Labor Day Edition
» Extended Travel Abroad for the Young
» Weekly Roundup – Easter Madness Edition
» Credit Unions Can Seize Funds to Cover Credit Card Defaults
» Beware New Credit Card Fees

How to check the status of your refund

The good news is that IRS has a refund hotline (800–829–1954) as well as an online “Refund Status” tool for finding our when you can expect your refund. Whether you call or go online, you’ll need your social security number, filing status, and exact refund amount to get an answer.

If they’re unable to locate your tax refund information, you’ll be asked to provide the approximate date that you filed as well as how you filed (paper or electronic). If they still can’t find your refund info, you’ll need to call the IRS for an answer.

Refund check for wrong amount

If your refund showed up but was for the wrong amount, then read on…

If your receive an unexpected check, or a check for more than you expected, don’t cash it until you receive a notice from the IRS explaining the discrepancy.

If you receive a smaller refund than you anticipated, you can go ahead and cash the check. If it is later determined that you should have received more, you should receive a check for the difference.

Either way, if you have questions about the amount of your refund, you can reach the IRA at 800-829-1040. Note that they ask you to wait two weeks from receipt of the erroneous check to provide time for any mailed notices to show up.

---
Related Articles at fivecentnickel.com:

» Get Your Telephone Tax Refund
» Tax Refund Poll Results
» Phone Tax Credit Refund Abuse
» Getting a Refund? No Need to File on Time
» IRS Error in Your Favor
» Money Poll #8: Tax Refunds
» IRS Tax Refund Phishing Scheme
» 2005 Federal Tax Refund Received

I’ve taken out student loans to support my education in the past and, like some, I wasn’t responsible with all that I borrowed. While I blew some of the cash, however, I soon realized that I needed to pay it all back. I got serious, created a spreadsheet, and got back on budget so I can pay back what I owe.

Work with your lender

Managing your student loan payments depends on several factors, with your lender being the biggest one. With federal student loans, you can usually find a workable solution to get you get back on your feet. Private loans can be a bit harder to negotiate, but it’s still possible.

Either way, you have to come prepared with numbers. Before calling your lender, organize a budget and have a ballpark figure of what you can afford to pay right now. If the customer service representative doesn’t give you a practical number, speak up and tell them what you can afford.

Consider your options

When trying to improve your situation, there are several options you may wish to pursue in hopes of getting back on top of your debt.

Choose a repayment plan that better fits your situation. You may be able to switch to a graduated payment plan with lower initial payments that gradually increase over the term of the loan. You’ll pay more in interest in the long run, but it may be worth it. Alternatively, if your current income has decreased, an income-based payment plan may be a beneficial option. If you have a Federal loan, you can change your payment plan by logging on at Federal Direct Loans.

Apply for a deferment to buy yourself some time. A loan deferment allows excuses you from making payments on your student loan for a set period of time. I’ve had friends use this option as they were job hunting and they resumed payments once they found employment. You can also defer loans when you return to school.

Apply for a forbearance. With a loan forbearance, you may be able to make reduced payments for a limited time, or stop making payment altogether (though interest will continue to accrue). With Federal loans, you can get more information about deferments and forbearances by calling Federal Direct Loans at 800-848-0979. For private loans, contact your lender to inquire about your options.

Consolidate your student loans. If you’re looking for a long-term plan to reduce your student loan payments, loan consolidation may be right for you. Depending on your interest rate, you may be able to consolidate your loans, reduce your interest payment, and have only one monthly payment to make. For private loans, check with your lender to see if there is a minimum amount to consolidate. If you have a mix of Federal and private student loans, you should keep your Federal loans separate as they tent to have very competitive rates.

Your take

Have you ever had to adjust your student loan payments or otherwise modify your loan agreement in order to make ends meet? If so, please share any tips, tricks, or experiences in the comments section.

---
Related Articles at fivecentnickel.com:

» Q&A: Using IRA Funds to Pay Off a Student Loan
» Tuition Bills and Indentured Servitude
» Paying Off Fixed vs. Variable Interest Debt
» Common Income Tax Deductions
» Weekly Roundup – 05/26/06
» It’s Never Too Late to Start Fixing Your Finances
» Some Stimulus Payments Diverted to Pay Outstanding Debts
» From the Archives (September 7th – September 13th)

For those that are unaware, an HSA is similar to a flexible spending account (FSA), but better. While both provide a tax break on qualified medical expenses, the HSA has a higher annual contribution limit ($6150 for families, $3050 for individuals) and it’s also not subject to the “use it or lose it” provision.

Another very important difference is the freedom to invest funds in an HSA in much the same way you can invest the money in your IRA. While your employer might have a “preferred” HSA custodian, you can actually use an custodian you want.

A better use for our HSA?

All of this got me to thinking… Assuming that you can afford to pay for their medical expenses out-of-pocket and make HSA contributions, should you make claims against your HSA? Or should you leave the money in place and let it grow, completely tax free?

When you really think about it, the HSA combines the best attributes of the Traditional and Roth IRAs. That is, it combines the deductible contributions of a Traditional IRA with the tax-free distributions of a Roth IRA. Add to that the high contribution limits and you’re talking about a very powerful investment vehicle.

Getting your money out of your HSA

Obviously, we’ll eventually want to get our money back out of our HSA. How can we do that? Simple. According to IRS Publication 969:

When you pay medical expenses during the year that are not reimbursed by your HDHP, you can ask the trustee of your HSA to send you a distribution from your HSA.

The go on to say that:

You can receive tax-free distributions from your HSA to pay or be reimbursed for qualified medical expenses you incur after you establish the HSA… You do not have to make distributions from your HSA each year.

(emphasis added)

But wait… It gets better:

If you are no longer an eligible individual, you can still receive tax-free distributions to pay or reimburse your qualified medical expenses.

One other little safety net is that, once I turn 65, the 10% penalty for non-qualified distributions goes away.

Here’s a quick translation:

• You can take distributions in return for any qualified medical expense that you incur after open your HSA
• You are free to wait as long as your want to take these distributions
• You can even take distributions after you’re no longer eligible to contribute to an HSA
• You can also claim qualified expenses incurred after you lose eligibility
• Once you turn 65, you can take non-qualified distributions by paying taxes (like a Traditional IRA) without paying the 10% penalty

Of course, you’ll have to save your documentation to make this happen. The good news is that you can simply scan and archive the paperwork (just be sure to keep backups!) as the IRS accepts scanned documents.

Your thoughts

So, dear readers, what do you think? If you’re in a position to cover the out-of-pocket expenses associated with your healthcare while contributing to an HSA, should you take distributions from your account? Or should you leave those funds in place to grow tax free such that you take better advantage of them in the future?

As for us, leaving the money in place is a pretty attractive proposition, and we’re currently archiving receipts instead of taking distributions while we consider our options.

N.B. It seems like I’m not the only one that thinks this way.

---
Related Articles at fivecentnickel.com:

» Vanguard Changes Target Retirement Fund Offerings
» Is Ethanol the Answer?
» Cash for Clunkers: Paying You to Junk Your Car
» Save Gas With a Tune Up
» Tax Diversification When Investing
» Early Retirement: Figuring Out How Much You’ll Need
» What Inflation Will Do to Your Retirement Savings
» Should We Get Rid of 401(k) Plans?

Our housekeeper is not our employee; she is an independent contractor. Because of this, taxes aren’t an issue.

This is a convenient answer, but is it true? It’s clearly beneficial from a tax perspective to hire your housekeeper as independent contractor vs. an employee, but just because you claim they are an independent contractor doesn’t necessarily make it true.

According to the IRS:

To determine whether a worker is an independent contractor or an employee under common law, you must examine the relationship between the worker and the business. All evidence of control and independence in this relationship should be considered. The facts that provide this evidence fall into three categories – Behavioral Control, Financial Control, and the Relationship of the Parties.

(source)

While I’m not a tax expert, it seems likely to me that JD’s going to run into trouble with the Behavioral Control aspect, where the IRS is interested in whether or not the employer “has a right to direct or control how the work is done, through instructions, training, or other means.” I’m guessing that JD and his wife do exert some level of control over the work being done.

As further evidence that the IRS frowns on treating a housekeeper as an independent contractor, check out IRS Tax Topic 756, where it states:

Household employees include housekeepers, maids, baby-sitters, gardeners, and others who work in or around your private residence as your employees. Repairmen, plumbers, contractors, and other business people who work for you as independent contractors, are not your employees. Household workers are your employees if you can control not only the work they do but how they do it.

Also note that the IRS has ruled in the past that the employee/contractor issue is dependent on the nature of the relationship, and not the existence of a contract stating that someone is an independent contractor. Again, just because you say someone is a contractor doesn’t mean that it’s true.

Now… As I noted above, I’m not a tax expert, so perhaps my interpretations are wrong. As always, please feel free to chime in by leaving a comment if you have anything to share.

---
Related Articles at fivecentnickel.com:

» Thinking About a Housing Addition
» Home Values, Appraisals, and Fraud
» Beer Prices on the Rise
» Weekly Roundup: Mail on Sunday Edition
» My Employer’s Wellness Program
» 401(k), 403(b) and 457(b) Contribution Limits for 2008
» How to Find a Good Auto Mechanic
» Top Tax Scams, Part 2

Earlier this week, I ran across some interesting data from the National Association of Colleges and Employers. More specifically, they had a listing of the ten highest paying college degrees of 2010.

Note that they’re talking specifically about Bachelor’s degrees here, so things like doctors, lawyers, etc. are off limits. Here’s the list:

1. Petroleum Engineering ($86,220)
2. Chemical Engineering ($65,142)
3. Mining & Mineral Engineering (incl. Geological) ($64,552)
4. Computer Science ($61,205)
5. Computer Engineering ($60,879)
6. Electrical/Electronics & Communications Engineering ($59,074)
7. Mechanical Engineering ($58,392)
8. Industrial/Manufacturing Engineering ($57,734)
9. Aerospace/Aeronautical/Astronautical Engineering ($57,231)
10. Information Sciences & Systems ($54,038)

Notice anything about the entries on that list? Every single one of them involves science, engineering, or computers. This probably shouldn’t come as too much of a surprise, though I did sort of expect to see something in the finance sector creep onto that list.

Just for the sake of contrast, check out this list of the lowest paying college majors that I published last fall:

1. Social work
2. Special education
3. Elementary education
4. Home economics
5. Music and dance

Quite a difference, huh? This isn’t to say that you (or your children) should pick a major based solely on future earning potential. After all, not everyone is cut out to be a petroleum engineer, and fewer yet would be happy showing up to work as one on a daily basis. Nonetheless, future earning potential is one of many factors that should probably be kept in mind during the overall decision-making process.

What did you major in, and do you have any regrets?

---
Related Articles at fivecentnickel.com:

» Five Lowest Paying College Majors
» Highest Paid Dead Celebrities
» The Least (and Most) Expensive College Towns
» Tuition Bills and Indentured Servitude
» Saving for College
» Permanent Tax Exemption for 529 College Savings Plans?
» Six Common Financial Aid Mistakes to Avoid
» The Best 529 Plans – 2009 Edition

Tracking notes in Quicken

As a quick refresher, I track my loans under a mock security name of “LC Loans,” and with a stable share price of $1. If I invest $25 in a note, I “BUY” 25 shares of LC Loans. As principal is repaid, I “SELL” the appropriate number of share. Interest payments are recorded as dividends (DIV), and so on. I do this on a monthly basis with a single, aggregated BUY, SELL, DIV, etc. transaction. But I hadn’t figured out the default thing until this past weekend.

How to record defaults

As it turns out, the solution is very simple. In this case, it was a $25 note that went into default, and the borrower never made a single payment (nice, huh?). Initially, I thought I’d simply record a “SELL” transaction in Quicken for 25 shares of “LC Loans” at a price of zero. Unfortunately, Quicken wouldn’t let me assign a share price of $0.

My workaround was simply to leave the share price at $1, and to record a $25 “commission” in the commission field. The end result is that I deducted 25 shares of my investment without adding any cash value to my account. This has the same net effect of selling them for $0/each, or just magically erasing them.

As for timing, I recorded this transaction during the month in which the loan was finally declared a lost cause (November 2009). Quicken now gives me a completely accurate picture of my true portfolio performance, including the effects of both idle cash and loan defaults.

Any other suggestions?

If you have any tips or tricks for tracking your Lending Club investments, please share them in the comments. While the above approach doesn’t allow you to track things on a note-by-note basis, it’s very easy to implement, and gives you accurate numbers for your portfolio as a whole.

---
Related Articles at fivecentnickel.com:

» More on Lending Club’s Reduced Interest Rates
» Lending Club: The Cost of Inactive Money
» Lending Club $64.62 Signup Bonus
» Lending Club – June 2009 Performance
» Lending Club Update – December/January Performance
» Lending $100 Giveaway Reminder
» Lending Club Portfolio Fully Funded
» Free Money from Lending Club – $25 Signup Bonus

Giving is an important and integral part of personal and family budgets throughout the nation. As American’s we are blessed with an abundance, and with great abundance comes great responsibility. But are we forgetting our own communities by focusing our giving efforts on national and international tragedies?

No matter where you go in the world you will always find the needy. There are needs in Indonesia, needs in Haiti, and needs in Africa, and need elsewhere in the United States, but…

What about the needs right here at home? Extensive television coverage of major tragedies can easily command our attention. Local community needs, on the other hand, rarely grace our TV screens.

Does this make one need more important than another? Of course not. It simply means that the focus our media gives tragic global events can cause the needs of our local communities to slip under the radar when it comes to charitable giving.

Shouldn’t we focus on meeting the needs within our local communities before committing our support to other national and international crises?

Media tends to focus on sensational events

When disaster strikes, no nation responds with the speed or quantity of the United States… Yet there is so much unmet need at the local community level. Why? Do American’s care about the broader needs of other states and nations more than the needs of their own neighborhood?

I don’t think so. I think local needs often go unmet simply because we’re unaware of exactly what they are. It’s more sensational for media outlets to carry stories of global disaster than to talk about the homeless people living 10 miles away.

If we care to know the needs that exist right in our own back yards, we have to seek out that information ourselves.

How to find local need

If you are interested in giving locally, here are a few place to start:

1. Local churches – Many local churches actively support community needs. If you’re interested in seeing how your church budget is spent, ask to see a copy of it. Churches often keep open books and are usually proactive about giving attendees a breakdown of how charitable funds are being distributed.
2. Township and city halls – Another great way to discover local needs is to check with your local municipality. Many times they will have precompiled lists of all local charities complete with location and contact information.
3. The phone book – Crack open the phone book and look up your local homeless shelter or food bank. Next, give them a call or stop by to see what they’re all about.
4. Take a walk – If you really want to get a feel for the needs of your community, just take a walk or a drive around town… It shouldn’t take you long to discover local needs. This may be a little disorganized, and you don’t want to just hand over cash to strangers on the street, but taking a look around can open your eyes to things you never saw before.

Giving locally makes sense

As I was writing this article, my wife came home from work and told me about a local family that lost everything in a house fire last night. She gave a good portion of her the money from her miscellaneous cash envelope to help their cause. This is the exactly the kind of local tragedy that happens every day, but rarely receives the media coverage necessary to elicit enough giving to meet the need.

The following snippet from a local charitable organization expresses the point beautifully:

“Giving locally makes sense because you know where and how your charitable dollars are being spent. Local charities and non-profit organizations understand and embrace the interests and values of our community. Local charities have fewer layers of administration than international or national charities and more of your dollars are likely to go directly to delivering the service the charity or non-profit was established to provide. In the end, giving closer to home improves our city’s quality of life and helps to build a stronger local community.”

Give where your burden or passions lie

Ultimately, you should give where you feel called to give. If you feel that your charitable donations should go to the aid of a foreign nation, then you should follow your heart. If you feel inclined to work with the homeless population in your community, then do that. The most important thing is to give somewhere.

Where we give

Because we believe giving should be focused locally before being committed elsewhere, our entire giving budget is allocated to our church and our local homeless shelter. Once we become debt free, we hope to be able to expand and give much more, but that’s a story for another day!

Personally, I have never given to an international organization nor to support the tragedies in a state or country other than my own. This is not because I don’t care about other nations or other communities, but because I have limited resources and would rather see them resources poured into the place where my family lives, works, and plays.

While I don’t want to project my burden for giving onto anyone else, my view is that a locally-focused giving strategy would greatly benefit individual communities.

Where do you give?

Do you give? If so, do you give locally, nationally, or internationally? Or perhaps a combination of all three? What do you think of the idea of focusing on your local community first?

---
Related Articles at fivecentnickel.com:

» The Economics of Gift Giving
» Finding the Right Charity
» Six Ways to Save Money this Holiday Season
» Setting a Savings Ceiling – How Much is Enough?
» To Gift or Not to Gift: Frugal Gift-Giving Strategies
» Beware the Siren Song of Gift Cards
» Saving and Spending During the Holiday Season
» Economic Analysis of Halloween

Streamlining our Netflix subscription

As I noted awhile back, we decided to scale back our Netflix subscription because we weren’t taking full advantage of it. We’d been on the 3 DVDs at-a-time plan, but we haven’t been watching all that many DVDs. On the other hand, we use the heck out of the online streaming service thanks to our Roku player. We thus decided to drop to the 1 DVD at-a-time plan, which still gives us access to unlimited streaming.

That decision saved us roughly $8.50/month and we haven’t missed a beat. Granted, $8.50 isn’t exactly a princely sum, but it’s our $8.50, and we weren’t really gaining anything by forking it over, so we might as well keep it for ourselves.

Cutting back on cell service

Next, I was recently reviewing our cell phone bill when I realized that we’re paying for way more service than we need. We’ve been on a family plan with 700 monthly minutes at a base price of $60, but we’re nowhere near that in terms of actual usage.

We ultimately dropped from the 700 minute cell phone plan to a 550 minute plan that costs $10 less per month and which qualifies for an additional $7.50/month discount from my employer. When you figure in the nearly 15% in taxes that gets added to our bill every month, we’re looking at roughly $20/month in savings.

Where can you cut back?

I could do the typical finance-writer thing here and point at that it costs nearly $40 in per-tax earnings to cover that $28.50 in unnecessary costs (depending on your income tax bracket), or that by investing that $28.50/month at an 8% return for the next 30 years will result in a roughly $40k nest egg. But I won’t.

Instead, I’ll simply point out that I’ve merely scratched the surface here, and further challenge you to take a closer look at your own spending. Are there any areas in which you can cut back without even noticing it? If so, then do it.

This isn’t to say that you should only cut back in areas where you won’t notice the impact, that’s up to you to decide. But you have no excuse not to cut back in the pain-free areas.

---
Related Articles at fivecentnickel.com:

» Calculating Your Real Hourly Wage
» Flexible Spending Account Improvements
» Increasing Our Life Insurance Coverage
» Saving Money: Focus on Big or Small Items?
» Navigating the Recession
» Finding the Right Charity
» How to Get Out of Debt
» Uncommon Charitable Tax Deductions

“We are writing to let you know that your E*Trade Bank account referenced above will soon be transferred to Discover Bank, and become a Discover Online Savings Account. This follows our plan to focus more exclusively on providing optimal investing solutions to our customers. We expect this transfer to occur on or about March 7, 2010.”

Apparently slashing their savings account interest rate to 0.5% APY last fall wasn’t enough to drive away all of their customers, so they’re selling their banking operations to Discover Bank.

(We have an account with E*Trade Bank, but it’s currently empty.)

If you have an E*Trade Bank account, here’s what you need to know:

• You’ll still be able to access your account for the time being.
• Seven days prior to the transition, they will no longer allow Quick Transfers from outside of E*Trade Bank.
• Any checks deposits have to be made at least seven days prior to the transition.
• Direct deposits will be accepted until March 5, 2010. After that date, they will be returned to the sending institution.
• Past statements and tax documents will remain available from etrade.com after the transition, but your account history will not be transferred.

You should receive a welcome letter from Discover Bank approximately five days before the transition with your new account details. The good news in all of this is that Discover Bank is paying nearly twice as much, at 1.35% APY.

Update: I’ve seen statements in the news that this doesn’t apply if your E*Trade Bank savings account is linked to an “active” brokerage account.

---
Related Articles at fivecentnickel.com:

» Bank of America’s “Out of State” Check Policy
» E-Trade Online Savings Account Opening Process
» SunTrust vs. Bank of America Online Bill Pay Question
» Our Online Banking Changeover
» Improved Security for Online Banking
» $25 ING Direct Signup Bonus Links
» ING Direct $25 Electric Orange Account Signup Bonus
» Breaking News: Washington Mutual to be Acquired by JPMorgan Chase (Update1)

We’ve been feeling as if we don’t have enough life insurance given our new financial circumstances. We thought it would be prudent for both us of us to have adequate coverage in case of an unfortunate event.

Estimating our life insurance needs

The first step was deciding how much we actually need. We’re not looking for a huge amount of coverage, but we want to be able to take care of our obligations should one of use die. We basically asked ourselves:

• How much support would each of us need?
• How long will it take to get back on our feet?

Since the main obligation is our new mortgage, we decided to get enough coverage to pay off the balance of the mortgage, cover our final expenses, and create a bit of a buffer. We figure our emergency fund can also help cushion us during the difficult time if necessary.

Term vs. permanent life insurance

Once we decided on an amount, our next decision was whether to buy a term life or permanent life insurance policy. Each has its own pros and cons.

Term life insurance covers you for a specific time (typically 10-30 years) with guaranteed level premiums. If you die during that term, your beneficiary, such as your spouse and children, will get the full value of the policy. Some benefits of term life are:

• Cost: Term life premiums are cheaper than whole life insurance premiums because they don’t include an investment component.
• Ease: It’s a pretty clear policy: if you die within the term of the policy, your beneficiary receives the policy’s full value.

The biggest problem with term life insurance is that once the term is over, you’re no longer covered (unless you get a new policy). Also, while you can always “buy term and invest the rest,” many people lack the discipline to do this.

Permanent life insurance (including whole life, universal life, and variable universal life) doesn’t have a set term. Rather, it covers you as long as you pay the premiums. Some benefits of whole life are:

• Cash value: Because a portion of your premium goes into an investment account, your policy accrues a cash value. In the long run, you can opt to have your premiums paid by this cash value, or to annuitize it as a source of income.
• Credit line: If you’re ever in serious need of cash, you can borrow against the cash value of your policy.

A major problem with permanent life insurance is that it is very expensive, at least at first. What good is a life insurance policy that you can barely? Permanent life policies can also be much more difficult to evaluate because of the complexities associated with the investment component.

After looking at both the numbers and our goals, we chose to go with a 30 year term life insurance policy. We chose 30 years to protect each other and cover the mortgage.

Comparing policies

We used an online insurance comparison tool to get ballpark estimates of life insurance premiums for healthy individuals in their late 20s. We then looked at several life insurance companies to get specific rates. I also asked some friends and online buddies if they had any thoughts, problems, or good experiences with the companies they use.

We also contacted our local insurance company to see if they could offer a competitive rate on term life insurance. After checking around, we went with 30 year term life policy from our local agent with a face value of $150,000. By opting for bi-annual payments, we also got a small discount on our premiums.

We now have a small health exam coming up and, assuming all goes well, we’ll be done (for now) with life insurance.

What do you think?

Do you have life insurance? If so, what type? And how did you decide how much coverage to buy? And how did you find your policy?

---
Related Articles at fivecentnickel.com:

» Buying Life Insurace (Again), Update #2
» Insurance Needs for a Couple with No Kids
» FDIC Insurance Limits Increased to $250k
» Buying Life Insurance (Again), Update #3
» Accidental Death & Dismemberment: What’s the Point?
» The High Cost of Hurricane Insurance
» Thoughts on Long Term Disability Insurance
» Buying Life Insurance (Again)

Income tax bracket changes

In case you weren’t aware, the Bush tax cuts of 2001 and 2003 are set to expire at the end of 2010. Thus, if Congress doesn’t act, the relatively low income tax rates that we’ve been enjoying (hah! enjoying?) will soon be a thing of the past. They will be replaced by the pre-2001 tax brackets.

In other words, the 10%, 15%, 25%, 28%, 33% and 35% tax brackets that we’ve grown accustomed to will be replaced by 15%, 28%, 31%, 36%, and 39.6% brackets. It’s hard to say exactly where the income cutoffs will lie, but if we base the numbers on the 2010 income tax brackets and add 3% for inflation, the 2011 tax brackets might look something like this:

Capital gains tax changes

Beyond the increased federal income tax brackets, the capital gains tax rates will also be changing (and not for the better). The top rate for long-term capital gains will be rising from 15% to 20%, and the 0% rate for those in the lowest tax brackets will be replaced by a 10% long-term capital gains rate.

Why worry about 2011 income tax changes?

Since the 2011 tax year is so far off, you might be wondering why we’re even talking about it right now. Well, as I noted above, the time to being planning for things like this is right now – before the changes go into effect.

What sort of planning should you be doing? I can think of several things off the top of my head. For starters, if you’re in a position to accelerate income from 2011 into 2010, you might want to do so. In many cases this is easier said than done, but it’s worth exploring if you’d like to shield your income from the potentially higher rates.

Also, if you’re anything like me, you may wait until the end of the year to make your charitable donations. If so, then by waiting just a few more days (until January 1, 2011) to write that check, you could net a substantial tax savings. While you’d have to wait longer to claim the deduction, it might be worth it.

Similarly, if you anticipate selling investments to generate cash during 2011, you might consider moving that up to the end of 2010 to get in on the (presumably) lower capital gains tax rates.

---
Related Articles at fivecentnickel.com:

» How do Federal Income Tax Brackets Work?
» 2010 Income Tax Brackets (IRS Federal Income Tax Rates)
» Will Moving to a Higher Income Tax Bracket Cost You Money?
» 2009 Federal Income Tax Brackets
» Roth IRA Conversion in a Down Market
» 2006 Federal Tax Rates
» Limits on Itemized Income Tax Deductions
» Have You Filed Your Taxes Yet?

If you have a good credit scores and are willing to pay a transfer fee, however, you can still obtain a low introductory rate (0% introductory APR) balance transfer credit card. These balance transfer credit cards allow you to move balances away from high interest rate cards and thus save a ton on interest. While the current crop of credit card balance transfer offers aren’t as good as they used to be, they can still be a useful tool for getting out of debt.

The outlook for balance transfer credit cards is uncertain. Many balance transfer offers have simply ceased to exist, and in the current economy, it’s uncertain whether credit card companies will continue to offer these products in their current incarnation in the long run. Thus, if you’re thinking of doing a balance transfer to take advantage of a 0% promo rate, you might want to look for one sooner rather than later, since an offer that’s here today may be gone tomorrow.

I’ve listed below some of the best current balance transfer offers. As noted above, however, the credit card landscape is changing quickly. Thus, you should review the terms and conditions before you apply.

Best 0% Balance Transfer Credit Cards

Citi Platinum Select Master Card (Best 0% APR offer) offers 0% APR on balance transfers and purchases for up to 12 months. Credit card features include:

• 0% APR on balance transfers for up to 12 months
• 0% APR on purchases for up to 12 months
• Balance transfer fee: 3%
• Regular APR: as low as 11.99% variable, based on your application and credit history
• No annual fee
• Citi® Identity Theft Solutions
• Good credit required. If you don’t know your credit score, you can get a free sneak peek at your credit score
• See full details or apply

Discover More offers a 0% APR on balance transfers for 12 months. At 5%, the balance transfer fee is a bit higher than the others, but FiveCentNickel readers love Discover credit cards for the Cashback Bonus® awards which lets them earn back bonus on purchases they would have made anyway. Credit card features include:

• 0% APR on balance transfers for up to 12 months
• 0% APR on purchases for up to 6 months
• Balance transfer fee: 5%
• Regular APR: as low as 11.99% variable, based on your application and credit history
• No annual fee
• 5% Cashback Bonus® in popular categories like travel, home improvement stores, department stores, gas, restaurants, pet stores and many more
• Up to 1% unlimited Cashback Bonus® on all other purchases
• 5% to 20% Cashback Bonus® through their exclusive online shopping site
• Good credit required. If you don’t know your credit score, you can get a free sneak peek at your credit score
• See full details or apply

Chase Freedom offers 0% APR on balance transfers for up to 12 months. Credit card features include:

• 0% APR on balance transfers for up to 12 months
• 0% APR on purchases for up to 6 months
• Balance transfer fee: 5%
• Regular APR: as low as 12.99% variable, based on your application and credit history
• No annual fee
• 3% Bonus Cash Back quarterly bonus reward offer (as long as your account is in good standing and statements are sent to a US address)
• Excellent credit required. If you don’t know your credit score, you can get a free sneak peek at your credit score
• See full details or apply

Slate from Chase offers 0% APR on balance transfers for up to 12 months. Credit card features include:

• 0% APR on balance transfers for up to 12 months
• 0% APR on purchases for up to 12 months
• Balance transfer fee: 3%
• Regular APR: as low as 13.24% variable, based on your application and credit history
• No annual fee
• Comes with Blueprint from Chase® which allows you to separate out and pay for larger items from smaller purchases on your statement, so that you can avoid paying interest on every day items
• Excellent credit required. If you don’t know your credit score, you can get a free sneak peek at your credit score
• See full details or apply

Discover American Flag offers 0% APR on balance transfers for up to 6 months. Credit card features include:

• 0% APR on balance transfers for up to 6 months
• 0% APR on purchases for up to 6 months
• Balance transfer fee: 3%
• Regular APR: as low as 11.99% variable, based on your application and credit history
• No annual fee
• 5% Cashback Bonus® in popular categories like travel, home improvement stores, department stores, gas, restaurants, pet stores and many more
• Up to 1% unlimited Cashback Bonus® on all other purchases
• 5% to 20% Cashback Bonus® through their exclusive online shopping site
• Good credit required. If you don’t know your credit score, you can get a free sneak peek at your credit score
• See full details or apply

Miles by Discover offers attractive mileage benefits as well as 0% APR on balance transfers for up to 6 months. Credit card features include:

• 0% APR on balance transfers for up to 6 months
• 0% APR on purchases for up to 6 months
• Balance transfer fee: 3%
• Regular APR: as low as 11.99% variable, based on your application and credit history
• No annual fee
• 12,000 Bonus Miles – 1,000 Bonus Miles each month you make a purchase for your first year
• Double Miles on travel and restaurant purchases. One Mile for every dollar on all other purchases
• Double Miles through their exclusive online shopping site
• Good credit required. If you don’t know your credit score, you can get a free sneak peek at your credit score
• See full details or apply

Discover Biodegradable More Card is made out of biodegradable card plastic that breaks down 99% within five years in landfill conditions and leaves no toxic effects behind. It also has 0% APR on balance transfers for up to 6 months. Credit card features include:

• 0% APR on balance transfers for up to 6 months
• 0% APR on purchases for up to 6 months
• Balance transfer fee: 3%
• Regular APR: as low as 11.99% variable, based on your application and credit history
• No annual fee
• 5% Cashback Bonus® in popular categories like travel, home improvement stores, department stores, gas, restaurants, pet stores and many more
• Up to 1% unlimited Cashback Bonus® on all other purchases
• 5% to 20% Cashback Bonus® through their exclusive online shopping site
• Good credit required. If you don’t know your credit score, you can get a free sneak peek at your credit score
• See full details or apply

Discover Escape Card offers attractive mileage benefits as well as 0% APR on balance transfers for up to 6 months. Credit card features include:

• 0% APR on balance transfers for up to 6 months
• 0% APR on purchases for up to 6 months
• Balance transfer fee: 3%
• Regular APR: as low as 11.99% variable, based on your application and credit history
• Annual fee: $60
• 25,000 bonus miles – 1,000 Bonus Miles each month you make a purchase for your first 25 months
• Unlimited Double Miles on all purchases
• Flexible redemption options for travel, gift cards, or cash.
• Additional 2 Miles for every $1 you spend through their online shopping site
• Good credit required. If you don’t know your credit score, you can get a free sneak peek at your credit score
• See full details or apply

---
Related Articles at fivecentnickel.com:

» Are You a 0% Credit Card Daredevil?
» New 0% Balance Transfer Credit Card Offers
» Current 0% Balance Transfer Offers
» Why Avoid the 0% Balance Transfer Game?
» Credit Limits Poll Results
» 0% Balance Transfer Offers With No Fee (Updated!)
» Carnivals – Week of 03/05/07
» Q&A: Debt Reduction Strategy

Is one superior to the other? Let’s take a closer look…

Interest free financing

One of the first purchases I made after joining the ranks of working professionals was a killer sectional sofa. Why a couch first? Several reasons:

• My dad always kept our house furnished with the most terribly uncomfortable couches in the history of mankind, and I vowed to be different.
• I had a brand new apartment furnished with little more than a few comfy pillows and a TV.
• Chicks dig cool couches… right?

I figured that I needed the couch, and was motivated by an offer of 0% financing for two full years at a local furniture store. I jumped at their offer of free money and, despite being new to the world of promotional credit financing, I successfully paid the couch off before the interest free period ended. I thus avoided any interest.

Although I avoided paying interest I could have better leveraged the deal by following a few simple rules before rushing into the purchase.

Here are some considerations before borrowing interest free:

• Don’t borrow more than you could pay cash for. Using the interest free financing as a free ticket to spend will get you into trouble fast, so make sure you only spend what you could afford to pay in cash. If you have no cash saved consider saving before you buy. Having the cash saved acts as a hedge against job/income loss.
• Be organized and knowledgeable. Become intimately familiar with the terms of your purchase and pay careful attention to the details of the “interest free” period. Know how long you have before interest kicks in, and whether or not you will be charged interest on the entire purchase amount after the promotional period ends – regardless of amounts owed. Deferred billing programs can be tricky, and knowledge is your friend.
• Investing your cash. How much can you truly expect to earn on your cash during the time span under consideration? The stock market really isn’t appropriate for such short timeframes, and even altrernatives such as Lending Club have a three year payback period. Thus, even if you select your investments carefully, this sort of investment probably isn’t what you’re looking for. In truth, you should probably be looking at truly risk free investments, and the rates on CDs and high yield savings accounts just aren’t that attractive right now.

I was able to borrow free money to buy my couch without getting burned, but looking back wish I would have considered other options before accepting a loan based solely on an offer of promotional financing.

Cash discounts

Debt advocates like Dave Ramsey argue that using cash for purchases can help you secure better upfront discounts while preventing entanglement in questionable financing programs.

Every time I make a purchase, I ask for a discount. My wife hates haggling, but never argues with the results.

Here is a summary of cash discount tactics to try:

• Be courteous. You catch more flies with honey than with vinegar.
• Flash cash. Visual stimuli are very powerful and can make quite a difference.
• Use the silent treatment. Name your price and use awkward silence to your advantage.
• Know your haggling lingo. Phrases like “Is that the best you can do?” can work wonders. Put them in the position of having to say no.
• Be willing to leave without buying. Determine your maximum price ahead of time and walk away if it cannot be met.
• Understand who holds the power. You are the buyer, they are the seller. If you don’t buy, they can’t sell. Never forget this.

Final thoughts

When properly employed, either approach can benefit your pocketbook. But if I had to choose, I would pick cash discounts over promotional financing. Here are three reasons I like cash:

1. Immediate and guaranteed returns. Receiving a cash discount happens immediately, and is not subject to any sort of risk, penalties, etc.
2. Avoiding questionable financing programs. I hate bills, and I hate finance charges. If I pay cash up front I am 100% sure to avoid both.
3. More likely to buy within my means. Using cash for purchases makes spending beyond our means harder since there is only so much cash to spend.

When I use cash, I make my purchase, secure my discount, and walk out the door. End of story.

Which do you prefer, and why?

Do you prefer using cash to secure a possible discount, or are you more likely to see greater returns by taking advantage of promotional financing programs?

---
Related Articles at fivecentnickel.com:

» More Discounts on Quicken 2009
» Quicken 2009 Discounts for the New Year
» Quicken 2009 Discounts Extended
» Is it Un-American to Ask for a Discount?
» Quicken 2009 Discounts
» Weekly Roundup – 04/14/06
» Weekly Roundup – 02/23/07
» Best Business Credit Cards: What’s Hot, What’s Not

Whether you tend to save money or overspend is largely determined by your financial habits. Have you ever noticed that good financial habits come much more naturally to some people than to others?

It’s not all in your mind, but that’s the starting point when it comes to saving. Psychologically, some people are just more geared toward saving than others.

Spender or saver? Five questions to ask yourself

Here are five questions to help you determine whether you’re a natural saver or spender:

• Is the present more important to you than the future? People are often encouraged to live in “the now” rather than worry about the past or the future. However, those who live too exclusively in the present have a hard time seeing the value of saving. After all, the act of saving money is literally trading off benefits today for benefits tomorrow.
• What’s more satisfying to you: instant or deferred gratification? This is related to the first question, but it comes down to what gives you more pleasure – the ability to do what you want, when you want, or the satisfaction of setting and meeting goals. The more you take pleasure from long-term achievements, the more inclined you are to save money.
• Are you susceptible to peer pressure? Keeping up with the Joneses has a great deal to do with the spending habits of Americans. The more important you think it is to keep up appearances, the more likely you are to spend more from your savings account than you can afford.
• Do you think of debt as a natural financial condition? Most people have to take on debt at some time, and there’s nothing wrong with that. However, while some live with it as a permanent condition, others start thinking about how to pay off debt as soon as they incur it. The less comfortable you are with debt, the more inclined you are to save.
• Do you communicate with your family about finances? If you don’t communicate financial goals to your partner or spouse and kids, you are more likely to get into conflicts over spending priorities. The net result of compromising your financial goals every time is that your family as a whole will spend more than it should. It’s important to carve out regular time to thoughtfully evaluate your family’s finances. This not only includes tracking spending habits but also where you will keep the money you’ve saved. Shop around online to identify the banks that are offering the best savings account rates, CD rates, and money market account rates for your hard-earned funds.

Even if you’re a natural spender, you can still acquire good saving habits. You may have to work a little harder at figuring out ways to counteract some of your natural inclinations, but you can make changes for the better if you’re willing to try.

See also: Money Management Practices of Couples

---
Related Articles at fivecentnickel.com:

» Savers vs. Spenders – Does There Always Need to be a Fight?
» ING Direct Introduces User-Friendly Login Names
» Sunday Roundup – Patio Furniture Edition
» The Biggest Saver
» Hospital Rankings Available Online
» Amazon Prime Free Trial
» From the Archives (December 2nd – December 8th)
» Back in Town

As you know, we constantly monitor our marketplace to provide better rates to borrowers and great returns to investors. We keep an eye on our own market dynamics as well as the overall economy trends.

This time, we observed that defaults continue to trend lower, which gave us the opportunity to decrease rates to borrowers while preserving investors’ net returns (rate minus defaults & fees). Also, lower interest rates help attract higher quality borrowers, leading to less defaults, so it is a virtuous circle.

So there you have it… Lending Club has been able to drop their rates because borrowers have been behaving themselves. It’ll be interesting to see how the “virtuous circle” plays out in the coming months.

---
Related Articles at fivecentnickel.com:

» Lending Club Reduces Interest Rates for Borrowers
» Prosper Resumes Peer-to-Peer Lending
» Lending Club $100 Giveaway
» Lending Club – June 2009 Performance
» First Lending Club Loan Payments Received
» Reduced Credit Limits? Share Your Experience
» Lending Club $64.62 Signup Bonus
» Lending Club: The Cost of Inactive Money

Mortgage payments

For example, our first mortgage payment is due in March. Along with our mortgage payment, we’re also putting money into an escrow account to cover our property tax bill and home insurance premiums. While we budgeted for it and anticipated paying these costs, it still feels odd to have our housing bills mapped out for the next 30 years.

The mortgage payment itself (considering principle and interest) is much lower than the rent we were paying for our two bedroom apartments. The discrepancy between the cost to own and rent in our city is one of the big reasons we considered buying a house. If it was much cheaper to rent, we would’ve continue renting, either saving for a huge down payment (making the mortgage much smaller) or investing the difference for other goals.

Our goal is to pay an extra $150/month starting with our first payment for 2010 payments to help pay off our mortgage early and greatly reduce the amount of interest we pay over the life of the loan. If and when we can afford more, we’ll add to this amount accordingly, but we want to make sure we build up our emergency fund first.

Homeowners’ association fees

This is a new bill that I’m not too crazy about, but membership is mandatory with in our development. Our HOA fees covers water and sewage, pool and clubhouse access, lawn maintenance, and condo area upkeep. When we were looking at some older homes in the area, we found that the HOA dues were often higher and sometimes came with fewer amenities.

After reading some horror stories on HOAs, we asked some friends who live in a development by the same builder and with the same company running the HOA for their opinion. It turns out that they’ve been happy with their experience thus far, and the fees have remained consistent so far.

Property taxes

As I noted above, we’re paying into an escrow account every month to cover our property taxes (as well as our homeowner’s insurance). Property taxes are an unavoidable expense of being a home owner.

My best advice is to look at your city or county’s tax records online to get an idea of what you might expect to pay in taxes before you buy. While we were shopping around, I looked at different neighborhoods and researched the property taxes. As a result of this additional information, we actually ended up reducing the amount we were willing to spend on a new home just so we could stay within our budget.

Once you’ve bought your home, don’t let your guard down. Keep an eye on your property tax assessment, and don’t be afraid to appeal your home’s assessed value.

Your take

I’m curious to hear how you guys made the transition when you went from being renters to owners. What was the biggest financial adjustment you had to make as a home owner? If renting is a better option for you, I’d like to hear about that, too.

---
Related Articles at fivecentnickel.com:

» The Home Office Tax Deduction
» More on the Home Office Tax Deduction
» Common Income Tax Deductions
» Geographic Location: How it Affects Your Wealth
» Calculating Your Real Hourly Wage
» Saving Money: Focus on Big or Small Items?
» Uncommon Charitable Tax Deductions
» What’s the Difference Between Tax Exemptions and Tax Deductions?

As an investor, I’m not crazy about this change, as I’ll earn a bit less while shouldering the same risk that I’ve always faced. Prospective Lending Club borrowers, on the other hand, should be thrilled with this move. If you’re looking to refinance your high interest debt, now appears to be a good time to do so.

I’m still looking for an announcement to provide some context for this change, but haven’t found anything yet. I’ll update if/when I know more.

---
Related Articles at fivecentnickel.com:

» More on Lending Club’s Reduced Interest Rates
» Lending Club $100 Giveaway
» Prosper Resumes Peer-to-Peer Lending
» Consolidate Your High Interest Debt With Lending Club
» Lending Club Update – October 2009 Performance
» Lending Club Historical Repayment Rates
» Lending Club Update – November 2009 Performance
» Lending Club $64.62 Signup Bonus

If you’re like most people, you may think that retirement is so far away that it can be dealt with later. The reality is that it is never too early to begin planning for retirement, and there is no better day than today. But some of you out there may be wondering, “How can we adequately save for retirement when my spouse and I only have one income?” Well, you’re in luck, as there are some options available to help you meet your goals.

Spousal IRAs

Whether you are a stay at home parent or simply taking time off work, you should still be taking the appropriate measures to save for retirement. Most individuals who work for a company have the option to save for retirement via a 401(k) or other savings plan.

Even if they don’t have a retirement plan at work, working individuals can save money in an Individual Retirement Account (IRA) because they have qualifying income. But what about those who do not have an income of their own, such as a non-working spouse? This is where the “spousal IRA” comes to the rescue.

A spousal IRA is a special type of account that is funded with the working spouse’s income. Technically, there really is no such thing as a spousal IRA. It just means that a non-working spouse can rely on a working spouse’s income to contribute to fund an IRA. In order to qualify, you must file a joint tax return, and the working spouse must make enough income to fund the account.

Based on current IRA contribution limits, you can contribute up to $5,000 ($6,000 if you are over 50) per year in either a traditional (deductible) IRA or a Roth IRA.

Traditional Spousal IRA

The non-working spouse can contribute up to $5,000 ($6,000 if over 50) to a traditional IRA as long as the working spouse has enough income to justify the contribution. These contributions can be deducted on the joint tax return up to a certain adjusted gross income (AGI) limit. Depending on your income tax bracket, this deduction can result in significant upfront savings.

The deductibility of the spousal IRA begins to be phased out when your joint modified AGI reaches $166,000 and is completely phased out at a modified AGI of $176,000. However, if the working spouse does not have a retirement plan at work, the full deduction can be claimed regardless of income. These contributions grow tax-deferred until retirement. Once withdrawn in retirement, the earnings are taxed at your ordinary income rate.

Roth Spousal IRA

If tax-free growth is more desirable, the non-working spouse can contribute to a Roth IRA. The Roth IRA allows you to contribute up to $5,000 ($6,000 if over 50). Just keep in mind that your contributions will become limited once your joint AGI reaches $166,000 and will be completely phased out once it reaches $176,000 (meaning you cannot contribute to a Roth IRA).

The big advantage of the Roth IRA is that, since you are placing after-tax dollars into the account, they will grow completely tax-free. That means that there will be no income taxes due when you take the money out in retirement.

Taxable Accounts

Although taxable accounts are not the preferred option for retirement saving, they may be advantageous for one income households. Since retirement options are limited for the non-working spouse (i.e., they have no workplace savings plans), a taxable account can be used to supplement retirement savings.

Because investments in this type of account will be typically be held for a long time horizon, they will be taxed at the favorable long-term capital gain tax rates when you liquidate them. Currently, the long-term capital gain tax rate is 5% or 15% depending on your marginal tax rate.

So there you have it. No more excuses. Start saving for retirement today! And remember… You have until April 15th to fund an IRA for last year, so you can still make up for lost time.

---
Related Articles at fivecentnickel.com:

» Roth IRA as an Emergency Fund?
» Save for College or Retirement?
» Saving for Retirement at the Last Minute
» Weekly Roundup – Deathly Hallows Edition
» Money Poll #9: Retirement Savings Rate
» Saving for College
» Retirement Savings Rate Poll Results
» Early Retirement: Figuring Out How Much You’ll Need

• Interest earned (1099-INT)
• Dividends received (1099-DIV)
• Cancellation of debt (1099-C)
• Government payments (1099-G)
• Proceeds from broker transactions (1099-B)
• Retirement distributions (1099-R)
• Miscellaneous income (1099-MISC)

There are more, but I’ve hit the big ones above. When these forms are issued to you, the issuer is also supposed to send a copy to the IRS. This allows the IRS to keep closer track of how much money you’ve earned.

There are a couple of things to keep in mind when it comes to Form 1099, however. First, a 1099 is generally not required unless you earned more than $600 from that source during the year. This doesn’t mean the income isn’t taxable, just that they payer doesn’t have to issue a 1099. Second, payments to a corporation don’t require a 1099. Thus, if you’re self-employed and have incorporated your business, you might not receive any 1099s.

What if you didn’t get a 1099 form?

Assuming that you’re truly due one or more 1099s, you should have received them by now, as the deadline is January 31st. If you are expecting one and it hasn’t shown up, your best bet is to contact the payer. If it still hasn’t shown up by February 15th, you can call the IRS at 800-829-1040.

Note that you don’t really have to have all of your 1099s to file your taxes, as you don’t usually need to attach them to your return. As long as you can accurately piece together your income (as well as any income taxes withheld) from other sources, you can just go ahead and report it without documentation.

If you file your taxes and later receive a 1099 that you had forgotten about, you’ll have to amend your return using IRS Form 1040X.

---
Related Articles at fivecentnickel.com:

» How to Handle a Missing W-2 Form
» Are Unemployment Payments Taxable?
» Top Tax Scams, Part 2
» What is Backup Withholding?
» How to Get an Employer Identification Number (EIN)
» Heat and Air Repairs: Decisions, Decisions…
» How to Request an Income Tax Filing Extension
» Cut Your Own Grass or Use a Lawn Service?

I’m at the “now what” stage. We have paid the car off, and a fat savings account. We do not plan to pay off the house because we want to move soon. Not sure that the house will sell for the amount we paid. 401(k) is funded.

This is a great question. We spend a ton of time and energy focusing on getting out of debt, building an emergency fund, funding our retirement accounts, saving for college, paying off our mortgage, etc. But once we get a handle on these things, what’s next?

It’s not uncommon for people to be so focused on their daily lives that they don’t give any serious thought to what the future holds. In fact, if you ask around, you’ll find that a lot of people will flatly state that they’re pursuing “financial independence” without really knowing what they mean.

This is actually an issue that fellow blogger JD Roth tackled about a year ago when he wrote the following about the so-called “third stage” of personal finance:

I’ve reached a place of financial security. My income is good. I save and invest. I don’t spend frivolously. Now I find myself in the enviable position of having to decide: Should I decrease my workload, or should I use some of my income to invest in the things that make me happy?

Unfortunately, JD didn’t have the answer, and neither do I. In fact, I’ve struggled mightily with this issue. Should we charge ahead toward the finish line (retirement) trying to get there as quickly as possible? Or should we slow down and enjoy the ride?

There are no easy answers. Moreover, just as Matt pointed out when he wrote about financial priorities, the “right” answer will vary from person to person. With that in mind, I’d like to hear your thoughts…

Stepping back and taking a look at the big picture, what are your long-term goals?

---
Related Articles at fivecentnickel.com:

» What’s Your Money Mindset?
» Net Worth vs. Net Investable Assets
» Sunday Roundup – Gas Experiment Edition
» Attention Finance Freaks – Consider Your Loved Ones!
» Questions to Ask Your Financial Planner
» What to do When Your Job is in Jeopardy
» Independent Contractor vs. Employee: What’s the Difference?
» Middle-Class Millionaires: Your Questions Answered

A healthy challenge for each of us

In response to my recent article on when you should start investing, FCN reader John laid out his financial “order of priority.” John’s rundown moved me to prioritize my own specific plan, publish it here on FCN, and challenge you to do the same.

We all have unique circumstances, but because financial fundamentals remain consistent, we’ll likely see a lot of similarities sprinkled amongst the difference between our individual plans.

In writing this article, I have two specific goals. First, I want to challenge everyone reading it to prioritize their financial plan. Second, I want to highlight the fact that unique circumstances sometimes call for deviations from well accepted “best practices” such as Dave Ramsey’s baby steps.

My financial order of priority

Before giving you my ordered list, I should briefly touch on our giving strategy, and also outline our 75/25 method of debt reduction and savings contributions we adhere to throughout most every step.

• We always give away at least 10% of our pretax income.
• 75% of our discretionary income (i.e., after living expenses, etc.) is applied to high interest debt reduction (post tax.)
• 25% of discretionary income gets evenly distributed among our liquid and retirement savings accounts (post tax.)

Once we have given, paid the bills, and divvied up our cash into our budgetary envelopes, all remaining money goes toward savings, debt, or interest on debt. Below is our current road map of financial priority.

1. High interest debt repaid. For us this means around $4,200 in a Lending Club debt consolidation loan that was used to pay off credit card and auto loan debt.
2. Finish building emergency fund to one month of expenses. (if not already achieved via our 75/25 method)
3. Repay 2nd mortgage. This is not our next smallest debt, but rather the one with the next highest interest rate.
4. Repay my student loans. Again, this loan carries our 3rd highest interest rate.
5. Repay my wife’s student loans. Here I deviate from the highest interest plan adhered to earlier and opt to pay this lower rate loan off prior to repaying our 1st mortgage.
6. Finish building emergency fund to six months expenses. (if not already reached via our 75/25 method)
7. Max out tax sheltered retirement savings. This includes a 401(k) and 403(b) (mine and my wife’s, respectively), both of our IRA accounts, and possibly other tax sheltered accounts we may have in the future (like a SEP-IRA.)
8. Repay first mortgage. If all goes according to plan, this will be our last debt and will work to pay it off early using all discretionary money remaining after step 7.
9. Savings for children. At this point, we have no children (yet), and see our freedom from debt as being more beneficial than worrying about contributing to their education. As time goes by, however, we will start saving thinking about branching out into things like a 529 college savings plan.

What about you?

Now that you know our plan, please share yours. While certain details of your approach might clash with ours, that’s okay. It’s not imperative we agree on every little detail and, in fact, what’s right for me might not be right for you. The important thing is for each of us to have a written plan in place that is tailored to our specific needs.

So… What is your financial order of priority?

---
Related Articles at fivecentnickel.com:

» Pursuing Financial Independence: Now What?
» Weekly Roundup – 01/12/07
» Weekly Roundup – 02/03/06
» Carnivals – Week of 06/05/06
» One Year Ago This Week (April 1st – April 7th)
» Financial Goals for 2010
» Are You a Spender or a Saver at Heart?
» Estimating Your Life Insurance Needs

As of February 1, I’m rocking a 10.23% net annualized return on a portfolio that is currently composed of 233 notes. You can see from the graph below that my performance is currently right around average. I’d be thrilled if this keeps up.

Regular readers know that I’ve had one default thus far, which was a byproduct of my initial “high risk,” auto-selected portfolio. I’ve had one other loan in that portfolio go late, though that borrower is not on a payment plan and has been meeting their obligations.

In contrast, all of the loans in my “low risk,” auto-selected portfolio are current. The same can be said of my hand-selected portfolio, which is how we’ve invested the bulk of our funds. If you’re curious about how I select notes, check out my Lending Club loan selection criteria.

If you’ve been investing with Lending Club, I’d love to hear the details. How long have you been doing it? How many notes do you have? How do you select them? And how has your performance been?

---
Related Articles at fivecentnickel.com:

» Testimonial From a Peer Lending Borrower
» Lending Club – July 2009 Performance
» Lending Club – June 2009 Performance
» Lending Club Update – October 2009 Performance
» Lending Club – August 2009 Performance
» Lending Club $64.62 Signup Bonus
» Lending Club Reduces Interest Rates for Borrowers
» Prosper Resumes Peer-to-Peer Lending

Are you at all concerned about where mortgage rates are headed as we roll into 2010? If so, it’s understandable since many analysts have predicted rates to rise as the year goes on.

While there’s still some uncertainty surrounding the future direction of mortgage rates, it’s safe to assume that rates will rise in the absence of the Fed’s mortgage-backed securities (MBS) purchase program. As evidenced by the statement from the very latest Federal Open Market Committee Meeting (FOMC), the Federal Reserve maintains that their purchase program will expire at the end of the first quarter.

A quick history lesson

As a strategy to lower conforming fixed rate mortgages and to promote stability in the housing market, the Fed announced a program on November 25, 2008 that was designed to purchase $500 billion in Fannie Mae and Freddie Mac MBS. By early 2009, the Federal Reserve decided to purchase an additional $750 billion in MBS in order to keep mortgage rates low.

The Fed’s influence on rates

By March 31, 2010, the Fed will have spent $1.25 trillion to keep conforming rates at or near historic lows. By our reckoning, the Fed’s involvement in the mortgage market brought conforming fixed-rates down perhaps 0.75% below where they would be absent the program. This means that we expect interest rates to rise somewhat when the program concludes.

By how much rates will actually rise will depend on whether or not private investors will be in a position to buy these investments. How strong that private demand will be is still uncertain at this time. It’s best to plan for at least some increases in interest rates as the end of the Fed’s program approaches, and for some period after the March 31 deadline.

While some analysts expect an immediate increase of up to a full percentage point in rates when the Fed decides to stop buying agency MBS, we’re not among them. We think that any rise in rates would be accompanied by a reduced demand for mortgages, which in turn would serve to somewhat temper any upward rise in rates.

Here’s why: The Fed’s purchases are serving to help keep rates low by absorbing MBS supply that the private market cannot or will not buy. When the Fed exits, the additional supply might overwhelm remaining demand, causing a rise in interest rates. That rise in rates would strongly curtail refinancing (and possibly some homebuying) activity, limiting the amount of new MBS supply the private market will need to absorb. This falloff in new MBS supply means that rates might not rise as much as some fear, since the private market may be able to more easily digest it.

Back to “Normal”

During 2010, the mortgage market will transition from almost-fully-government-supported to one once again driven by the private market to a much greater degree. As markets return to “normal,” so too will mortgage rates, which, for the early portion of 2010, should still remain among the best seen during the past 50 years. However, barring a double dip to the recession, borrowers should have no expectations that rates will remain at multi-generation lows throughout the year.

Broadly, we expect 30-year fixed-rate mortgages to hang around the 5% mark during the first quarter of 2010, as support programs (MBS purchases and the homebuyer tax credit) remain fully in force. After that we’ll start the transitional period described above and, for planning purposes, borrowers should expect rates to rise one-half to even a full percentage point higher than where they are now.

Rates for the rest of the year are likely to be more economy- and inflation-dependent. With continued economic healing expected, pressure will build for the Fed to raise their Federal Funds rate and remove certain supports like the TALF and the TSLF. Absent any resumption of these programs, rates will nudge closer to 6% than 5% for the final two quarters of 2010.

Will yesterday’s failed loans continue to distort the market? Will Fannie Mae and Freddie Mac’s evolution cause rates to rise or fall? Will lending standards ever ease? You can get the answers to these questions and more by consulting HSH.com’s “2010 Outlook for Mortgage Rates and the Mortgage Market.”

---
Related Articles at fivecentnickel.com:

» Making Mortgage Prepayments
» Effect of Paying Off Your Mortgage on Your FICO Credit Score
» Mortgage Refinance Complete
» Deciding When to Refinance Your Mortgage
» 15 vs. 30 Year Mortgages: Which is Right for You?
» An End to Rising Rates?
» 2011 Federal Income Tax Brackets (Projected Tax Rates)
» Mortgage Refinance Rates Continue to Fall

Aside from carpooling, there are a number to reduce our automotive expenses. Today I’m going to highlight some suggestions that will hopefully save you some money.

Saving money on gasoline

Saving money on gas is a big concern for us. My husband is in the habit of saving gas receipts and dumping the information into a spreadsheet. He’s therefore able to track and see his gas mileage and spot trouble. For example, we noticed that I needed a tuneup when my car’s mileage dipped lower than normal.

Your behavior behind the wheel can also help improve your mileage and thus save money. “Hypermiling” was a popular term when gas was $4/gallon and everyone was trying to cut down on fill ups. The term basically refers to driving in a more fuel efficient way, though some practitioners take it to the extreme. For most drivers it boiled down to a few simple changes when they’re on the road.

• Track your mileage. Take a page from my husband’s book and record your miles driven and gallons burned after every fill up in a mileage spreadsheet.
• Drive the speed limit. Life in the fast lane isn’t always better, as your mileage drops dramatically at high speeds.
• Reduce fast acceleration and braking. By maintaining a relatively steady speed, you can waste less gas. Anticipate the traffic and lights ahead and coast if possible. If you’re driving a distance on a relatively flat highway, consider using cruise control to help you maintain a fuel efficient pace.
• Turn off your car to reduce idling. I was surprised to learn that if you’re going to be idle for more than 10 seconds, it pays to turn off the car and restart it later. While I’m not comfortable doing this at a red light, it might be useful for those waiting to pick up their kids from school.

Saving on car insurance

Another big expense with owning a car is having enough insurance to cover it. Over the years, we have found ways to save money on car insurance.

Shop around for the best deal. It’s amazing to me how effective shopping around can be. There can be a huge difference between insurance companies for the same coverage on the same car. When I shopped around for car insurance, I discovered that by switching companies I could save $40/month — a huge savings for a college student.

See if your memberships can get your a good deal. We really saved money with this tip. After doing our regular, semi-annual price shop, we checked our Costco membership and found a policy for about half of what we were paying. We’ve also taken advantage of the free towing and roadside assistance that they offer.

Maintaining your car

My husband and I are thrilled that we don’t have any car payments. We’d like to make this situation last as long as possible, so we’re doing our best to keep our cars in good condition. The good news is that it’s possible to do some minor checkups and car maintenance yourself. Not only will you save some money, you’ll also learn quite a bit about your vehicle.

• Air filters: A clogged air filter can decrease your fuel efficiency, so check it out whenever you get a tune up.
• Clean the car inside and out: Not only does this improve the appearance of the vehicle, but you can use it as a chance to see if there is any rust or other maintenance problems developing. Having a clean car may also help reduce your urge for a new car that you can’t afford.
• Fluids: Checking and filling your fluids yourself is a great way to keep your car running smooth while saving money.
• Tire pressure: This is a common tip for saving gasoline, but it’s not a big win according to Edmunds’ tests. Regardless, underinflation can wear out tires quicker and become a serious safety issue.

If you’re not a handy person, then by all means spend some money on a trustworthy mechanic. Either way, having regular check ups on your car can improve the life of your vehicle and save you money at the pump.

Replacing your car

Eventually, even a well maintained car will break down and you’ll have to find a replacement. Having a car replacement fund allows you to get a car without having expensive financing.

Open a high interest savings account specifically for your car replacement fund. We’ve used ING Direct for our savings for the last couple of years. If you already have an account with them, setting up a sub-account takes less than 5 minutes. Having a separate account reduces the chances of you dipping into it before your next car purchase.

It’s also a good idea to automate a deposit into your car savings account every time you get paid. Have the transfer go from your checking account into your savings account immediately after getting paid. If you don’t, you might spend the money instead of saving it. If you can, aim for saving a car payment ($250-$350) into your fund each month.

Any other suggestions?

I’ve shared some of my favorite tips, and I hope that they help you reduce your car expenses. If you have any tips, please share them as I’m hoping to stretch our transportation dollars even further.

---
Related Articles at fivecentnickel.com:

» The Worst 401(k) Plans
» Stretching Your Savings in Retirement
» How Much to Budget for Car Maintenance?
» Surviving Income Tax Season Without an Audit
» More Online Bank Interest Rate Decreases
» Reducing Our Electrical Usage, Update #2
» My Employer’s Wellness Program
» Navigating the Recession

New customers are eligible for this special offer after opening a new OptionsHouse account with a minimum of $3,000. You must apply for the commission-free trade offer by inputting promotion code FREE100 when opening the account. New accounts receive 100 commission-free trades for each stock or option trade executed within 60 days of funding the new account.

The short version: new customers only, $3000 minimum, promo code = FREE100

After you use up your free trades (or after they expire in 60 days), you can make stock trades for $2.95/each and options trades for $9.95/each. I’ve never used OptionsHouse, so if you have an opinion, I’d love to hear it.

---
Related Articles at fivecentnickel.com:

» Get 100 Free Trades from OptionsHouse Brokerage
» Kiplinger’s Top Discount Brokers
» Best Online Discount Brokers (Updated!)
» Zecco Modifies Commission Structure
» Blockbuster Deal for Switching
» Zecco: Still the Best Online Broker?
» TradeKing $50 Signup Bonus Extended
» Get a $75+ Bonus from Zecco

Getting started

For those that aren’t familiar with Lending Club, I thought I should start from the beginning… Not surprisingly, you get started by logging in. From there, simply click the “Invest” tab along the top.

This will pull up a screen that offers you three different “auto-invest” scenarios: More Conservative, Moderate, or More Aggressive. There are a couple of things to note from this screen…

For starters, you can click on the “More Options” tab to get a slider that gives you access to a continuum of strategies. Next to that is a button labeled “filters.” Click this button gives you access to a wide variety of filters that allow you to set specific investment criteria.

Those options are all well and good if you’re comfortable with auto-investing, but I’m not. If you’re looking for more control, look no further than the “Build a Portfolio from 117 Notes” link over to the left.

Selecting your filters

Once you decide to build your own portfolio, you’ll want to develop a set of custom filters to rule out loans that you deem unacceptable. The good news is that you really only have to do this once, as you can save your filters.

Filters can be accessed over in the sidebar of the “Browse Notes” screen. Though they’re all collapsed, you can see the primary filters that I use in the picture below.

Setting up your filters

If you’re intent on selecting your loans by hand, you’ll need to learn how to effectively filter out the loans that don’t interest you. The following is a rundown of how I set up my filters.

• Inquiries in the last 6 months. This filter can be set from 0-10. I limit it to 3, as I’m not interested in lending money to people who appear desperate to borrow.
• Delinquencies (Last 2 yrs). I set this one to zero. In reality, I won’t lend money to anyone that has a delinquency on their credit report (ever), but Lending Club doesn’t have a “no delinquencies, ever” filter. Thus, I use this one to pre-filter and then I double check by hand.
• Min length of Employment. This can be set between 0-5 years. I’m looking for stability, so I require 3 or more years in their current job.
• Max Debt-to-Income Ratio. Note that this is not a typical DTI calculation in that it doesn’t take housing expenses into account. On the first pass, I typically limit this to 10%, though I’ll sometimes relax it to 15%.
• Exclude loans already invested in. Lending Club loans sometimes take awhile to get completely funded, and I don’t want to accidentally invest in the same one more than once, so I check this box.
• Public Records. I exclude all borrowers with a public record on their credit report. Fortunately, Lending Club has an absolute filter for this one, so I don’t have to review them by hand.
• Month since last Delinquency. As noted above, I don’t want to lend to someone with a delinquency on their record, so I set this to the most stringent setting (60 months or more) to get rid of as many as possible.

Once you have your filters set up, click the “Save” link near the top. You’ll now be able to quickly and easily filter the current crop of loans whenever you come back (by clicking the “Open” link).

Manual review

While the filters above do a good job of filtering out the least attractive loan requests, I next do a quick manual review before investing. Here, I’m looking for two main things…

As noted above, I’m not willing to invest in anyone with a delinquency on their record, no matter how long ago. Thus, I quickly scan through the loan requests and rule out anyone with a delinquency. The good news is that only a few such loans are left after running the filters outlined above.

Next, I compare the monthly payment on the requested loan to the borrowers gross monthly income. If it’s more than 10%, I pass. There’s nothing magic about 10%. It’s just an arbitrary threshold that I’ve selected to make sure the loan payments won’t be a huge burden to the borrower.

While this sounds like a lot of work, it’s really not. If you click on the title of the loan (after filtering), it will expand to reveal more information. In order to efficiently review the loans, I click on each title (one-by-one), eyeball the delinquencies and payment-to-income ratio, and then collapse anything that isn’t acceptable. That leaves me with a slate of expanded, candidate loans from which to select.

Other considerations

In my experience, the above process knocks out the around 75% of the listed loan requests and it only takes a few minutes. From here, I follow my gut. One big thing that I do is to avoid business loans. In general, small businesses have a high rate of failure, and I don’t the added risk.

Other than that, I take look at what the loan is for and ask myself if the details add up. Borrowers are asked to include a loan description. Some do, and some don’t. If they can’t be troubled to explain why they need the money, I pass. If their reasoning doesn’t make sense, I pass. If a lender has asked them a question and the answer doesn’t make sense, or if the borrower has evaded part of the question, I pass.

Another common sense test is whether or not the request is consistent with the available information about the borrower. For example, many people request money to refinance credit card debt. In such cases, I compare that amount to the revolving debt on their credit card. If they’re requesting a bunch of money and don’t have much in the way of revolving debt, I steer clear.

Closing thoughts

While I haven’t been at this for a long time (less than a year), I’ve had a fairly good experience thus far. I’ve had one loan (from my auto-selected, high risk portfolio) go into default. That being said, all of my “low risk” loans are being paid on time, as are all of my manually selected loans.

Could I get away with using the auto-selected portfolios? Quite possibly, but I like having a bit more control, and I’ve managed to streamline my loan selection process to the point that it doesn’t take too much time. If Lending Club added a bit more flexibility to their filters, I could do it in even less time.

---
Related Articles at fivecentnickel.com:

» Lending Club Update – December/January Performance
» Lending Club Update – November 2009 Performance
» Lending Club – August 2009 Performance
» Lending Club Update – October 2009 Performance
» Lending Club – July 2009 Performance
» Lending Club: Invest in Your Friends
» Lending Club $64.62 Signup Bonus
» Lending Club Reduces Interest Rates for Borrowers

We continue to rely on methods of identity verification used by traditional lenders, but in an era of online identity theft, Lending Club is continually redefining industry best practices.

We cannot disclose our exact methodology, practices, or sources of information, as this could simply empower the fraudsters we are trying to disarm. But what we can say is that we use information gathered from social networks to help give us more confidence that a member is in fact who they say they are.

While it makes sense for them not to disclose detail of their approach, it would be fascinating (at least to me) to know how they’re implementing this. Any guesses?

Regardless of how they detect it, when they do find a case of ID theft, they say that they work with the true owner of the identity to track down and prosecute the fraudster, and they also reimburse lenders the unpaid principal balance of loans that involve identity theft.

Have any of you had any experience with a fraudulent Lending Club loan? I’ve had one default thus far, but I’m not aware of any instances of outright fraud.

Source: Lending Club Blog

---
Related Articles at fivecentnickel.com:

» Testimonial From a Peer Lending Borrower
» Lending Club – August 2009 Performance
» Lending Club $100 Giveaway
» Lending Club Reduces Interest Rates for Borrowers
» Prosper Resumes Peer-to-Peer Lending
» Lending Club Update – November 2009 Performance
» Lending Club Update – December/January Performance
» Lending Club $64.62 Signup Bonus