Money Management 101
It's never too late to learn how best to manage your accounts
No matter how old or young you are, there are some basic things you can do to better manage and protect your money.
Here are recommendations from FDIC Consumer News.
Comparison shop for financial services. Just as you would do for any major purchase, look at what is being offered by your bank and a few competitors, then try to find the best deal to meet your needs. For instance, with a mortgage, credit card or other loan, you may be able to negotiate the interest rate and other terms. This can save hundreds or thousands of dollars over several years.
Start by comparing the Annual Percentage Rate (APR) on a loan or credit card. The APR is the cost of credit expressed as a yearly rate, including interest and certain fees. "Many people looking for a loan only focus on the dollars they'd pay each month instead of the APR and, because of that, they don't realize how much the loan will cost and they could pay too much," said Rae-Ann Miller, special advisor on consumer issues in the FDIC's research division. For example, she said, payday loans (unsecured loans that borrowers promise to repay out of their next paycheck or regular income payment) and car-title loans (secured by the borrower's car) "may be quick and easy sources of cash, but they also have an APR as high as 300 to 400 percent."
Also, for a mortgage, consider a fixed-rate loan even if adjustable-rate mortgages (ARMs) carry a lower initial interest rate or lower monthly payments at the start. "If you are thinking about an ARM, before you commit to one, make sure you know how much the monthly payments could go up and be comfortable with those higher payments," cautioned Janet Kincaid, Chief of the FDIC's Consumer Response Center. "Don't let a low teaser rate lure you in; you may be surprised later."
When you consider opening checking and savings accounts, compare the Annual Percentage Yield (APY) offered by several financial institutions. The APY expresses the annual interest rate you will earn on a deposit account, depending on the frequency of compounding. However, keep in mind that fees — such as those for ATM withdrawals, account maintenance and checks returned because of insufficient funds — aren't factored into the APY. Fees can make a big difference in how much you actually earn from money you have on deposit.
Get a free copy of your credit reports. These reports are prepared by companies called credit bureaus. They summarize your history of paying loans, credit cards and other bills. If you apply for a loan, insurance or a job, or you want to rent an apartment, chances are your credit report will be reviewed.
One reason you should be monitoring your credit reports is to correct errors or omissions that can leave bad marks on your credit history. Inaccuracies in your credit report can needlessly reduce your "credit score" and, in turn, may cost you hundreds of dollars each year due to higher interest rates on a loan or credit card. Another reason to review your credit reports is to protect against identity theft. Under federal law, you are entitled to one free credit report every year from each of the nation's three major credit bureaus.
Try to save more and spend less. First, if you don't already have a monthly budget, consider preparing one to get a better handle on your income and expenses for necessities, such as housing, utilities, food and transportation. You can also decide what is appropriate for non-essential expenses, such as entertainment, eating out and the latest electronics. "This is how a budget can help you commit to saving a little money every month and splurging a little less," said Kincaid. She also said that "a budget doesn't have to be complicated or scary," and that while there are budgets you can easily create on a computer, "a notebook and a pencil can be enough to get you started."
Keep banking costs down. With planning, you can sidestep some of the more costly fees and penalties. Examples:
- With credit cards, try to pay the card balance in full each month to avoid interest charges. If you can't pay in full every month, send in as much as possible to keep interest costs to a minimum. "Think twice before accepting an offer from your credit card issuer to skip a payment," said Luke W. Reynolds, Chief of the FDIC's Community Affairs Outreach Section. "It's likely that interest will still be charged, so you'll actually be paying more in interest because you'll carry a higher balance on your card for a longer period of time." In addition, pay your credit card bill on time. One reason is to avoid late fees. Another is that late payments can damage your credit record. If repeated, they could even trigger interest rate increases on your credit cards and loans.
- With your checking account, avoid fees for insufficient funds and bounced checks. "Record every deposit and withdrawal in your checkbook — especially remember your debit card purchases and ATM withdrawals," said Reynolds. "It is important to know how much money you have in your account so you won't overdraw your balance." Your bank may offer various "overdraft protection" services for your checking account, but be aware that these come with their own costs. Reynolds added that one of the least expensive options could be to ask your bank to cover insufficient funds by automatically transferring money from your savings account.
- At the ATM, limit or avoid "surcharges" (access fees) by using your own bank's machines or those owned by institutions that don't charge fees to non-customers. If you definitely need cash when you're out of town or otherwise not near an ATM owned by your bank, consider getting cash back when you use a debit card to make a purchase at a supermarket or another merchant.
- Don't be afraid to ask for a break. Bounce a check or send in a late payment for the first time ever? Think the fees for your mortgage application are a bit steep? Depending on the circumstances, your bank might be willing to reduce or waive a fee or penalty, especially if you've been a good customer and don't have a history as a "repeat offender."
Understand your FDIC insurance coverage so you can be fully protected if your bank fails. If you (or your family) have $100,000 or less in all of your deposit accounts at the same insured bank, you don't need to worry about your insurance coverage.
Your deposits are fully protected under federal law because the basic insurance coverage is $100,000 per depositor per insured institution.
You also may qualify for more than $100,000 in coverage at one insured bank. For example, the money you have in your individually owned accounts (not including your retirement accounts) is insured up to $100,000 separately from your share of any joint accounts at the same bank. Deposits designated to pass to named beneficiaries upon the death of the owner, such as in payable-on-death accounts, also can be insured for more than $100,000 under certain circumstances. And, some retirement accounts (notably Individual Retirement Accounts) are insured up to $250,000.
Remember that investments can lose value. Investment products include stocks, bonds and mutual funds. Over the long term, investments might produce higher returns than bank deposits. However, investments are not deposits, they are not FDIC-insured — not even the ones sold through FDIC-insured institutions — and they can lose value. Because of the risks associated with any investment, always deal with a reputable, licensed salesperson and research the product before making a purchase.
Certain annuities are a type of investment. In general, an annuity is a contract with an insurance company. The consumer makes one or more payments to the insurer, as an investment, and the insurer agrees to make a series of income payments to the consumer as long as he or she lives. Be particularly careful before investing in "variable" annuities, which frequently come with high fees and penalties if you withdraw money early. Especially troubling have been reports of marketers steering people into annuities that are unsuitable for them. The National Association of Insurance Commissioners has published a consumer alert to help consumers, especially seniors, better understand annuities and recognize questionable sales practices.
There also have been reports of marketers making false statements about the FDIC — such as claims that the FDIC doesn't have the financial resources to protect insured deposit accounts — as a way to sell investments or annuities to consumers.
Be cautious when borrowing against the "equity" in your home. If you have property valued at $300,000 and you owe $100,000 on your mortgage, your equity is $200,000. Home equity loans and lines of credit are ways that homeowners can borrow money using their home's value as collateral and gradually pay it back.
Home equity products are relatively low-cost ways to borrow money, but they must be repaid like any other loan. Especially important to remember is that if you cannot pay a home equity loan, you risk losing your home.
Prepare for the unexpected. Have adequate insurance, especially for life, health, disability, personal liability, and coverage of property. Review your coverage annually to ensure that it is up to date. Consult an attorney or another trusted advisor about having a will and/or establishing a formal "trust" to specify how your bank accounts, property and other assets should be distributed upon your death. Periodically review your life insurance policies and retirement accounts — especially after a birth, death, divorce or other major life event — to ensure that the named beneficiaries are correct.
Also build an emergency savings fund, preferably of about three to six months of living expenses, so you have ready resources you can tap to pay your mortgage, insurance or costly home repairs or medical bills. The safest place for emergency savings is a federally insured deposit account.
Simplify your financial life. Have your pay and benefit checks deposited directly into your bank account. Arrange to automatically pay for recurring expenses, such as a mortgage loan, insurance premium or utility bill. Banking and bill paying online or by phone also can be good options.
These and other ideas can help you save time, reduce stress, eliminate clutter, lower the fees you pay, and maybe help you earn a little extra on your savings and investments.
Protect against fraud. Here are basic precautions against identity theft, check fraud and other financial scams:
- Be wary of requests to "update" or "confirm" personal information — especially your Social Security number, bank account numbers, credit card numbers (including security codes), personal identification numbers (PINs), your date of birth or your mother's maiden name — in response to an advertisement or an unsolicited call, letter or e-mail. Your bank won't call or e-mail you to confirm account numbers or passwords it already has.
- If you want to find out if a company is legitimate, look it up using a reliable source. Don't rely on the contact information that was provided to you on a Web site or in an unsolicited call or e-mail.
- Assume that any offer that "sounds too good to be true" — especially one from a stranger or an unfamiliar company — is probably a fraud. Example: You receive a call or letter announcing you've won a lottery or other prize you don't remember signing up for, and you are told to pay "taxes" or "fees" before you can claim your (nonexistent) prize.
- Beware of transactions in which another party sends you a check for more than you are due and then asks you to wire back the difference. "If the check is fraudulent, you could lose a lot of money," said Michael Benardo, manager of the FDIC's financial crimes section.
- Look at your bank statements and credit card bills as soon as they arrive and report any discrepancy or anything suspicious, such as an unauthorized withdrawal or charge.
- Keep bank and credit card statements, tax returns, credit and debit cards and blank checks out of sight, even at home. Also shred sensitive documents before discarding them. Why? Because dishonest relatives, neighbors, workers around the house and other people could use these items to commit identity theft or other crimes.
- Periodically review your credit reports to make sure an identity thief hasn't obtained a credit card or loan in your name. Experts suggest that, to maximize your protection, you request copies from all three credit bureaus but spread out the requests during the course of the year.