Personal Banking E-Newsletter - October 2010

The Rules of Responsible Financial Parenting

Today, many families are concerned about the potentially adverse effect of wealth on the financial values of their younger generations. The goals that many affluent parents and grandparents have set for their children or grandchildren reflect core values, an honest work ethic, and a desire to "give something back" to the greater community.

The skills and knowledge needed to help children adhere to these values should be developed early in life and continue well into adulthood. The following strategies can assist older family members in becoming positive financial role models.

Start early
According to recent research, parents can start talking to children about money by age three. Between four and five, you can explain the importance of good spending habits, and by age six or seven, you can help children open a bank savings account. By the time children reach their mid-teens, they should start seeking after-school and summer employment.

Support education
Personal finance education helps instill such pragmatic money management skills as setting a budget, balancing a checkbook, understanding the role of debt/credit, and developing strategies for funding college. Encourage your child's school to offer personal finance as an elective "life skills" course, send your teen to a community college/adult education class, or tap the many educational resources on the Internet.

Lead by example
Your children will learn their most valuable lessons about money from the examples you set. A few simple rules: Enjoy the fruits of your labor — but don't go overboard. Set a healthy example regarding credit/debt. Pay bills on time. Save and review your savings plan on a regular basis. Above all, be consistent. Grandparents can be especially effective role models by following these suggestions.

Practice incentive planning
To ensure that important life goals remain at the forefront of your children's/heirs' priorities throughout their lifetimes, incorporate the use of incentives in your estate plan. What exactly is an incentive trust? It is an estate planning tool that allows you to reward desired behavior or impose appropriate penalties for undesirable activities. It also provides a way to address the needs of beneficiaries who require special assistance. Common themes guiding incentive trusts are education, moral and family values, and business/vocational choices, as well as charitable and religious opportunities.

Encourage philanthropy
Wealthy families often use philanthropy to convey the message that their success has been the result of hard work and good fortune and that success comes with the responsibility to give something back. If you want to ensure future generations of volunteers and donors, you must teach children how to give of their time, their skills, and their money. Once children understand the scope of their contributions, philanthropy becomes a real and prominent part of their lives.

© 2010 Standard & Poor's Financial Communications. All rights reserved.

For additional information, please contact Shari Hopkins, CFP®/Financial Consultant, at (608) 784-3904.

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Facebook Posts That Put You at Risk

Five common posts that put you in danger

There was a big outcry recently when it was revealed that personal data of Facebook users had been posted to a database open to everyone. Facebook users, naturally, were concerned about their privacy.

Yet, every day Facebook and other social network users publish personal information that could put them at risk without thinking twice. "An awful lot of people think when they get online and communicate with their friends that they are invincible," says Adam Levin, chairman of Identity Theft 911. A seemingly benign post or piece of information could make you a target of identity thieves and traditional crooks. To protect yourself, here are five things you should avoid posting online.

  1. Date of birth. Almost 60% of social networkers post their date of birth, according to a survey by Identity Theft 911. After all, most of us like to be wished a happy birthday. But resist the urge to post your complete birth date -- including the year -- on your Facebook profile just to get a lot of messages on your big day. This is valuable information for identity thieves. I know you're thinking only your friends see what you post. But if someone does a search for your name, that person will see your birth date if it's listed in your profile.
  2. Child's date of birth. When you post "Happy Birthday to my sweet Susie, who turns 5 today," you're giving identity thieves valuable information about your child. When it comes to your kids, resist the urge to post any information about them.
  3. Travel plans. Surely you've seen Facebook posts like this: "We're going to the beach next week. Can't wait." In fact, you may be guilty of it yourself -- 18% of social network users post travel times, according to the Identity Theft 911 survey. Guess what? You've just extended an invitation for people to burglarize your home. Three men in New Hampshire burglarized more than 18 homes by checking Facebook status updates to see when people wouldn't be home.
  4. Address. If your address is on your profile AND you let people know when you're going out of town, well, you know where we're going with this. Nonetheless, 21% of social network users post their address, according to the Identity Theft 911 Survey.
  5. Mother's maiden name. It may seem like common sense not to post your mother's maiden name on a social networking site, but about 11% of the people who responded to the Identity Theft 911 survey said they did. Identity thieves will hit the jackpot if you reveal this bit of information online.

Not only should you avoid posting any of this information, but also you should fix your Facebook settings to control who sees what on your page. Use different passwords for social media sites than you use for financial sites, such as your bank or credit card site. Be careful about clicking on links on Facebook or similar sites because they could contain viruses that will secretly track your passwords, account numbers and other things.

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The New Math of FICO Credit Scores

How your credit score may be affected

Maybe a utility bill went unpaid after you moved and the missed payment went into collections. Or perhaps there are unpaid library fines or parking tickets in collections that are hanging onto your credit history and affecting your FICO credit score, which is widely used.

With the newest version of the FICO credit-scoring system, however, minor delinquencies are now overlooked in calculating creditworthiness.
Under the updated scoring model, called FICO 08, small missed payments lingering in collections with original amounts of $100 or less will no longer do damage to your credit score.

Consumers also are less likely to be penalized for any single delinquency if it occurred two or more years ago -- and if their credit history is otherwise unblemished, says FICO (formerly Fair Isaac), which developed the FICO scoring system.

"There's more flexibility with missing a payment," said Careen Foster, the director of global scoring product management for FICO. "If you have a more habitual pattern of paying accounts late . . . you're more likely to get penalized for that."

If a consumer's credit usage is high, that will be more likely to hurt his or her score with FICO 08. But getting close to your credit-card limits -- even if you always pay on time -- is penalized in some way in every FICO score, not only the recent edition, Foster said.

The new system has been available at all three credit bureaus -- Experian, TransUnion and Equifax -- since August 2010.

The changes were made to provide lenders with a better risk assessment of borrowers, said John Ulzheimer, the president of consumer education for a consumer education and advocacy site.

FICO decided that one small library fine didn't really predict whether a consumer was likely to default, for example.

With the changes, individuals who pose a low credit risk will probably see their scores rise a bit, and those who are high risk could see their scores drop, he adds.

FICO 08 also addresses "piggybacking," a practice used by credit-repair companies to help people improve their scores, Ulzheimer said. In piggybacking, an individual pays to become an authorized user on a stranger's account. The account holder gets paid for allowing the person to be associated with the account, and the new authorized user is able to improve his or her credit score.

"It was a practice to . . . misrepresent what your credit looks like to your bank," Foster said.

FICO 08 aims to single out individuals who are named as authorized sources through deceptive means, Ulzheimer said. Those people won't see their credit scores rise as a result. But the scores of legitimate authorized users will be treated as they always have been.

Not all lenders use the model
Borrowers shouldn't expect their credit to be graded by this new scale on every loan application. Not all lenders have adopted the new model, though more than 400 lenders are using or testing FICO 08, the company said.

In a statement, Equifax said, "Currently, many lenders and businesses are validating the new score within their systems, and adoption will vary by financial institution based on business requirements and market need."

Many credit-card companies, auto lenders, regional banks and credit unions may have already adopted FICO 08, Ulzheimer said. But for mortgages, lenders doing traditional conforming loans backed by Freddie Mac and Fannie Mae likely haven't made the move yet, he said. That's because they're waiting for Freddie and Fannie to approve its use. Freddie Mac and Fannie Mae "are essentially the lender . . . they're the ones that set the underwriting criteria," he said.

Ulzheimer said he expects Freddie and Fannie to adopt FICO 08 by the end of the year.

Be proactive about your credit
While FICO 08 will help consumers' credit scores in some cases, people still should take steps to improve their credit. Granted, it's impossible for consumers to calculate their FICO scores themselves, said Rodney Anderson, of Rodney Anderson Lending Services in Plano, Texas.

"It's almost like the Coca-Cola formula. No one has access to the Coca-Cola formula, no one has access to the FICO formula," he said.

But by being proactive, you can start to work toward a higher score, something that will serve you well every time you apply for a loan.

Some suggestions:

  • Monitor your credit reports and correct errors. Don't just look for negative events on your record; also examine your credit limits to make sure they're accurate. Credit limits that appear lower on the report than they actually are have the potential to hurt your score, Anderson said.
  • Pay bills on time and keep card balances low. Your payment history, and the amount you owe on your accounts as a ratio of the amount of credit you have access to, are important components of your score, Foster said. FICO 08 is more sensitive to high credit usage, and consumers may see a lower score if their reported balance on one or more cards is near the account's limit.
  • Take on new credit only when you need it. Some credit cards come with great offers, including a percentage off your bill if you sign up at the cash register. If you accept, make sure you're getting a big enough benefit to make it worthwhile -- taking on additional credit could end up dinging your score, Foster said.

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Saving on Energy

How much money are you really saving?

Many people make a final pass through their homes before heading to work – turning off lights and, perhaps, unplugging appliances in an effort to conserve energy and save money.

But few actually know how effective this ritual is in saving energy, reports a new study on people's perceptions of energy savings from researchers at Columbia, Ohio State and Carnegie Mellon universities.

But wait, didn't everyone say turning off the lights would save the planet – and our checking accounts? For years, people have been bombarded with ads on television, in print, in train cars and even on the sides of buses that practically promise turning off the lights and unplugging your cell phone charger will help global warming and lower your power bill. And those campaigns, funded in part by utility companies, have largely been successful, with 25% of people in the study reporting they engage in one of those much-touted habits as their primary energy-saving measure.

But, it turns out all that light-switch flipping and unplugging gadgets does little to conserve energy – or save money – for individual households.

What savings that come are small. Lighting accounts for about 11% of a household's energy bill, according to the Department of Energy. And while calculating the exact savings gleaned by flipping a few switches is complicated – light bulbs have different wattages and people use lights for different amounts of time – turning off one 40-watt conventional bulb for eight hours saves about three cents if you're paying the typical rate of 10 cents per kilowatt hour of energy use. That's less than a dollar in savings over 30 days.

Compare that with the savings to be had from insulating a home and sealing its cracks, which improves energy efficiency by up to 20% year round, according to the Alliance to Save Energy. Your savings on heating and cooling bills would be as much as $16 per month — more if you own a larger home.

But marketers rarely tout those stats and instead have largely “used the gateway drug theory that if you can get people to do the little things it will encourage bigger steps,” says Suzanne Shelton, president and chief executive of the Shelton Group, a Knoxville, Tenn.-based advertising agency specializing in energy efficiency and sustainability. Shelton Group's clients include Energy Star, a joint program of the Environmental Protection Agency and the Department of Energy aimed at helping households save money and the environment with energy efficient products and practices.

Shelton says that the lights-off campaign hasn't necessarily led to bigger conservation efforts — or savings. “I don't think we're seeing that,” she says. “I don't want to say we've duped consumers, but maybe we've given them a false sense of accomplishment.”

Con Edison, which serves roughly nine million people in New York City and Westchester County, says it has spent under $10 million this year on advertising, most of it geared toward energy conservation campaigns. The company says it uses ads that both encourage turning off the lights and buying Energy Star appliances. Why bother with some tips that don't save that much energy? “What we really want to do is educate our customers about energy efficiency," says a Con Ed spokeswoman. "It's about whatever peaks a customer's interest."

So why the hype around shutting the lights off? It provides people with the emotional benefit that their action has helped them save money and energy without inconveniencing them and without making them uncomfortable – or requiring them to spend money.

It's true that many of the big energy and money savers will cost more upfront. For example, re-insulating a 2,000-square foot house will cost anywhere from $400 to $800. But most households could recoup those savings within two years.

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Home Maintenance Tips

Ten ways to help reduce your long-term costs

A home costs a lot of money over the years, whether you rent an apartment or buy a house. But the costs go up by a lot if you find yourself having to do major repairs — the bill a plumber or an electrician can send may quickly translate into a heart attack.

But an ounce of prevention really can be worth a pound of cure, just like Ben Franklin said. Putting time and effort into maintenance means that even if there is a problem, you'll see it coming. At the very least, it means you can save up for the repair work you know you'll need to do. Here are 10 tips to help with costs in the long-run:

  1. Get to know the lay of the land: Your yard and surrounding areas can have a major impact on the maintenance your home needs. If, for instance, you have plenty of trees surrounding your house, you'll need to spend more time up on your roof and you may even need to worry about some of your plumbing. It's more than just your own property, though: even if you're living in an apartment, knowing the area around you can give you a head's up if you run risks of flooding or other natural problems.
  2. Do once-overs in the off season: Most people find problems with their furnaces when they turn up the heat on the first cold night of the fall — not a time when you want to be trying to get a HVAC repairman to come out. If you test out your furnace and your air conditioning a month or so before you expect to need them, you can make sure everything's in great shape and avoid the emergency visit fees.
  3. Get an energy audit: Taking a look at where the energy goes in your home can reveal easy fixes to save you money: something as simple as sealing a few cracks can dramatically change your electric bills (and you can take at least some of these steps in a rental). Such steps can also help you make some long-term decisions, like deciding what type of hot water heater you'll buy when the current one is ready to retire.
  4. Cut back on the grass: While a lush, verdant lawn seems to be required in many neighborhoods, it can drive up the time and expense you spend on maintaining your yard. There are a number of strategies that allow you to minimize the amount of grass in your yard, from xeriscaping to focusing on native plants. You'll spend less time behind the mower (maybe even eliminating it entirely) and have a lower water bill.
  5. Share tools with your neighbors: One of the big expenses of doing home maintenance is making sure that you have the right tool for every job. Talking to your neighbors can make a difference. If you can share tools, you won't need to buy them. That can stretch as far as big items like a lawn mower. While only one person may be able to mow their lawn at a time in your neighborhood, the overall cost for buying and maintaining that lawn mower will be next to nothing.
  6. Clean everything on a regular basis: Whether it's a question of sweeping off the side walk or wiping down the air conditioner, keeping things clean reduces wear and tear. Dust can shorten the lifespan of anything with a vent or a filter. Giving appliances and the different parts of your house a regular once over can also help catch small issues before they become big problems. There simply isn't a chance that you'll notice a crack in a wall if you don't go anywhere near that wall, after all.
  7. Look for a handy man: There are certain projects where, when you weigh the value of your time against the cost of hiring a handy man, it simply makes sense to bring in someone who can do it in half the time it might take you to even find the resource that walks you through what to do. Build a long-term relationship with a handyman if you can — he'll be able to point you to the right people for bigger projects and he may even be willing to walk you through routine tasks so you'll be able to handle them on your own.
  8. Create a maintenance schedule: Telling yourself you'll get around to cleaning the gutters is the easiest way to make sure that you'll never actually clean those gutters. Setting a schedule is the easiest way to keep up with each part of your home and, as long as you know what needs to be done, a schedule can help you keep your work load down. The alternative is devoting an entire weekend at a time to keeping up your home. It's also worth creating a long-term plan for items like replacing appliances or remodeling.
  9. Read the manual: Just about everything in your home has a manual, down to the hot water heater. Each of those manuals contain valuable information about recommended maintenance. In some cases, they may even have instructions for fixing common problems, saving you the expense of having someone come out and take a look at something you can manage on your own. If you don't have your own copies of the manuals, you can often find them online with a simple search.
  10. Create a home maintenance fund: Just because maintenance doesn't cost as much as repairs might, planning for the expenses is simply good financial sense. If you budget for your expenses, you can put yourself in a position to bring in a pro for some of those home maintenance projects that you either don't like or aren't comfortable doing. And while you can avoid many repairs, there can be accidents and having savings in place can keep repairs from becoming a major problem.

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