Personal E-Newsletter - April 2013

Money Lessons For Your Kids: What They Should Know By Age 5, 10 & 15

During a lesson on credit one of Stuart Ritter’s college students raised her hand and asked him to clarify what he meant by “carried balance.” He explained that if she were to swipe her credit card for a $10 meal and pay the credit card company $8 that month she’d then receive a bill for the remaining $2, or the carried balance. Her response: What do you mean they send a bill?

 “She didn’t understand that you actually pay for the items you swipe on a credit card with real money,” Ritter says. “Her parents always pay the bill and she was never taught how basic money transactions work.”

That’s an extreme case but indicative of a larger problem kids face: Lack of education on money. Not enough parents are talking to their kids about money early enough, says Ritter, a CFP and senior financial planner at T. Rowe Price.

Teaching kids the mechanics of money is important for their future financial health. Lessons about money should start earlier than high school or college where there is sometimes a brief course taught on financial planning.

How early? “Talk to kids about money as early as 5-years-old, or as soon as they realize that money buys things,” Ritter says.

Basic money vocabulary is a good place to start. By age 5, Ritter recommends teaching your child the following terms:

  • Savings Goal – a savings goal has three elements: (1) what you want to buy, (2) when you want to buy it and (3) how much it will cost at that time
  • Bank – a place that helps us safely store, organize and manage our money
  • Check – a way to pay for items where we write a note asking our bank to send our money to someone to pay for our purchases
  • Bills – notes letting us know how much we owe for our purchases
  • Trade Off  – a decision we have to make when we are considering whether to save for something or spend our money

At age 10:

  • Interest – money you are paid for lending your money or an amount of money that is added to money you borrowed
  • Loan – money that’s borrowed and is expected to be repaid, usually with added interest
  • Time Horizon – the amount of time that you will save for a big purchase
  • Inflation – a general increase in the price of goods and services over time
  • Taxes – money that we pay to the government to help pay for public programs and necessities

By age 15, teach your children the definitions of:

  • Investing – putting money into assets (like stocks, bonds, mutual funds, etc.) to help you reach your financial goals
  • Asset Allocation – how your money is divided among asset classes such as stocks, bonds, and short-term investments
  • Diversification – spreading your money amongst various types of investments within an asset class (different kinds of stocks and different kinds of bonds)
  • Stock – a share of a company that is sold to the public
  • Bonds – an IOU issued by the federal government, state governments, or corporations in which you earn interest, and receive your investment back at a later date

Seem like a lot of information for kids to handle? It’s not. Consider that parents talk to their kids about drugs, sex, internet and personal safety but the topic of money is somehow taboo.

Ritter says you don’t have to tell your kids exactly what’s in your bank account or how much you make, but they should understand that money comes out of an ATM machine only because deposits, like earnings from work, are made into the bank account. Also, that a portion is then used toward things like the mortgage, taxes, credit cards, savings, etc.

The lessons are not taught in a single sit-down talk but rather they’re more effective in real-life situations. Ritter gives an example with his own kids who were squeezed into the backseat of the family car recently. When he asked if they’d like for him to buy a larger car where they could all sit comfortably the answer was a unanimous and enthusiastic, “Yes!” Ritter agreed but mentioned that the money for the new car would come from the family’s vacation savings, and that plans to go on a beach vacation would be put on hold. Suddenly, the crowd became less enthused about the car.

Those kinds of real-life examples illustrate the mechanics of money, values and priorities. “It’s not about saving for the sake of saving. It’s about spending choices and figuring out if you should spend now or spend later. It’s about teaching priorities and trade-offs,” Ritter says.

Those kinds of lessons can pay off later when it’s time to make big decisions like paying for college, for example. With delinquency rates on the rise, student loan debt has become one of the biggest financial concerns in the country. Early money lessons could help your kid make smart financial decisions and avoid burdensome debt they may have otherwise taken on.


ATM Skimming - Tips to Avoid Becoming a Victim

Many consumers know the basics of protecting themselves from identity theft, a common financial scam. They shred documents with sensitive information, check their credit scores and protect their social security numbers. However, many consumers are unaware of another common financial scam that can severely impact their bank accounts: ATM skimming. Here are a few things you need to know in order to protect yourself:

What is ATM skimming?
ATM skimming is a crime in which thieves attach a device to an authentic ATM in order to capture the information stored on the magnetic strip on your bank card. A hidden camera is often installed on or near the ATM to record your PIN number as you enter it. The external device used for skimming is normally only installed for a few hours before the thieves remove it and extract the data it collected. The criminals then combine with the PIN numbers obtained on the video with the stolen data to make online purchases or withdrawals at other ATMs using the bank card information.

You can protect yourself.
By being cautious and aware of your surroundings you can defend yourself against becoming a victim of ATM skimming. The crime depends on consumers using a compromised ATM, so inspect the ATMs you use most often. Watch for signs of tampering, such as new scratches, discolored keys, flashing lights and visible wires. Using the same ATMs on a regular basis will help you notice changes more easily. If you must use a strange ATM, use extra care when inspecting it for signs of skimming. If you suspect an ATM is compromised, notify the bank immediately.

Using ATMs located inside bank branches is also safer, due to the increased security compared to ATMs on the street. Another good habit to get into is shielding your PIN as you enter it. You'll be protecting your PIN from video cameras and potential onlookers, as well. The best protection for your PIN is to change it every few months and avoid using numbers like your birthday, anniversary and your spouse/child's birthday.

What if you've been a victim of ATM skimming?
You should monitor your accounts for suspicious activity, and if you notice withdrawals or purchases that you didn't make, notify your bank right away. Check with your bank to see if they offer a service that will notify you via text or email of unusual purchase activity. In many cases, the sooner you notify the bank there is a potential problem, the more likely you are to be refunded the stolen money.

Source: WBA Consumer Column – March 8, 2013

Managing Your Mortgage: Good Practices for Homeowners

For many Americans who have a mortgage, their house is their primary investment. And just as a home requires routine inspection and maintenance, so does a home mortgage. Here are ways to manage a mortgage and protect your investment in good times and bad.

For Anyone With a Mortgage

Stick to a system for making your mortgage payments on time. Failing to keep current with your payments can be costly in terms of late fees and lower credit scores, which could translate into higher costs when you go to borrow money or purchase insurance.

The easiest solution may be to set up an automatic payment plan, in which you give your mortgage lender the authority to deduct your monthly payment from your bank account on a specific day of the month. Or, you can use your bank's online bill pay services to automatically forward routine payments to your mortgage lender. Either way, you can rest assured your mortgage payment will be made on time without you having to remember to do something.

Save receipts, save money on taxes. You may qualify for tax deductions for certain home improvements, such as energy-efficient windows and appliances, or various costs associated with a home sale, a mortgage refinancing or converting a primary home into an investment property.

Build a rainy-day fund. The idea is to have savings you can tap, if necessary, to make as many as six mortgage payments, plus your property tax payments, when times are tough.

If You're Struggling to Pay Your Mortgage

At the first sign of trouble, ask your lender for help. "If you find yourself about to fall behind on your mortgage payment, perhaps the most important thing you can do is to talk to your lender, when there's still time to turn things around with your lender's help," stressed Glenn Gimble, an FDIC Senior Policy Analyst. "Your mortgage lender has as much interest as you do in finding an early solution because a troubled loan presents significant regulatory and financial concerns for the lender."

In addition to arranging for debt counseling to help get you back on course, your lender may offer one of several solutions to support a payment recovery plan. They include: temporarily reducing your monthly payments to cover only interest; deferring payments altogether and adding the unpaid amounts to the loan balance; increasing the length of the loan to lower the amount of the monthly payment; reducing the loan's interest rate; and perhaps even reducing the balance owed on the loan.

Also be on guard against loan modification scams. For guidance, see the FDIC's foreclosure prevention toolkit. In addition, NeighborWorks America, at the request of Congress and with support from the FDIC and other partners, has launched a public education campaign.

If Paying Your Mortgage Hasn't Been a Problem

Consider paying off your loan faster. While you may be able to lower your total borrowing cost by refinancing your mortgage at a lower interest rate or switching to a shorter term (for example, from a 30-year to a 15-year mortgage), refinancing can be tougher to do in a "down" real estate market. However, you have other ways to save money on your existing mortgage, without refinancing.

"Ask your lender about simple ways to pay off your mortgage faster," said Luke Brown, the FDIC's Associate Director for policy involving bank compliance with consumer regulations. "By adding a little more money to your monthly payment or sending all or part of your payment in sooner than you're scheduled to, you can repay your loan faster and cut your total interest costs by thousands of dollars over the life of the loan."

Voluntary options for gradually accelerating the payoff of your loan may include increasing your payment each month or sending an additional (13th) mortgage payment each year instead of 12. "Be sure to note that the extra payment is to be applied toward principal," added Gimble. "And, if you're willing to commit to a faster payoff, you can even ask your lender if it offers a bi-weekly or other payment program that would accelerate repayment of your loan, preferably with no fee."


7 Unexpected Retirement Expenses

Preparing for retirement is talked about so often before retirement and so little after it that you would think the last day of the daily grind is the endgame. In reality, day one of retirement is just the beginning of another adventure.

You've worked hard all your life, and now it's time to kick back, relax and enjoy the fruits of your labor. But retirement can last for 20, 30 or even 40 years. Before you live it up early in retirement, make sure you thoroughly understand the implications of and plan for these events that can sting your retirement nest egg years down the road:

Extended long-term care could be needed. For most people, long-term care costs hit suddenly and unexpectedly. Some people end up needing temporary aid, while others will need care for a prolonged period of time.

Your parents may require assistance. Advances in medicine are allowing many people to live a longer life, which is wonderful because you might be able to spend more quality time with your parents. But unless they've taken great care with their finances, there may come a time when their nest egg is depleted. You can help them early by assisting with their financial plan, but you should also make a plan for other ways to support them.

Children may still need help. The economy is finally gathering steam, but many young people are still out of work. You may need (or simply want) to help out your children financially.

You may have unexpected travel plans. Not many people budget for one-time travel plans because they are difficult to foresee. But whether it's going to a grandchild's wedding or your best friend's 50-year wedding anniversary party, there are many occasions you won't want to miss.

Will the lottery fund your retirement?

Inflation will sap your purchasing power for decades after retirement. The effects of inflation can be felt long before you quit your day job. This phenomenon that reduces your purchasing power won't stop just because you handed in your resignation letter. In fact, accounting for inflation is even more important for retirees because you won’t be getting salary increases as you did while you were working. Make sure to account for inflation in your retirement budget by assuming that you will need to spend an increasingly higher amount each year.

Moving costs could be a big expense in retirement. You may decide to migrate to a warmer climate soon after retirement, or you could want to stay close to your children whenever they relocate. Further into retirement, you may want to downsize for medical reasons or to spend less time maintaining a big home. Moving could work out great as long as you can afford the relocation costs.

There could be changes in the tax code or entitlement programs. It's almost impossible to predict what will happen to taxes and entitlement programs down the line. The important point to remember is that nothing is certain, so spread your risks by diversifying among pre-tax and post-tax retirement accounts, and don’t rely too much on entitlement programs. You just never know.

Retirement is often a long journey, and you are likely to encounter many unforeseen costs. Make sure there is room in your retirement budget for a few surprises.


Is a Rollover Right for You?

If you've recently changed jobs -- or maybe changed jobs a few times over the years -- you may be juggling multiple retirement plan accounts. While it's certainly acceptable to leave your money in your former employer's plan (as long as your balance is over $5,000, your old employer can't cash you out), in many instances it might be a better idea to consolidate your assets.

Consolidation can help make administering and allocating your assets much simpler.1 Having your entire retirement portfolio summarized on one statement makes it easier to track performance and make changes.

But before you initiate a rollover, be sure to compare the investment options and their associated fees in your old plan with those in your new plan.

  • Were you able to properly diversify your assets in your old plan?1 If your investment choices were limited, you probably want to move your old account into your new account.
  • Are the investment fees higher or lower than those in your current plan? If you were paying more at your old plan, it's a good reason to move your assets to a plan with lower investment fees.
  • Are you satisfied with the investment choices and fees charged in your current plan? If you're not happy with your current plan -- and weren't crazy about your old plan -- you can always roll over your old plan assets into an IRA.

Initiating a roll over isn't difficult. First, check your current plan rules to confirm that rollovers are permissible (the vast majority of plans accommodate this feature). Then contact the administrator of your old plan (you can find their information on your quarterly statement) to get the ball rolling. Some plan providers have a simple online request process, while others require completion of a paper-based rollover form. Your current plan provider or IRA provider may even furnish a rollover service for you.

It's also important to know the difference between a rollover and a distribution. A rollover allows you to transfer your money from one qualified retirement account to another without incurring any tax consequences. A "qualified" account can be either your new employer's plan or a rollover IRA.

A distribution is essentially a withdrawal from your account. If you request a distribution, the account administrator is required by law to withhold 20% of your account balance to pay federal taxes. State taxes, if applicable, are also due. If you are under age 59 1/2, you will probably be hit with an additional 10% federal early withdrawal penalty.

If you have specific questions about your retirement plan distribution options, contact your employer's benefits coordinator or a qualified financial consultant.



1Asset allocation and diversification do not ensure a profit or protect against a loss in a declining market.

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