Callouts

The Credit Score You've Never Heard Of

You’ve been turned down trying to open a checking account. Life happens, and perhaps you’ve gone through some financial ups and downs. If you’ve had accounts in the past, it’s possible that you have a low ChexSystems score, which reflects incidents of bounced checks, insufficient funds, or fraudulent activity. You can get your score and report free once a year at chexsystems.com. If you are rejected, don’t despair. It takes five years for your record to clear; in the meantime, there are other banking options from companies such as GreenDot and Chime. [Back]

Glib Advice

If you read about personal finance, it won’t be long until you come upon such pearls of wisdom as “spend less than you make.” Duh! Yes, there are situations where crazy spending habits and other poor decisions, such as buying too much house, too much car, or running up credit card balances, are the culprits. Financial planning can help with these. There are also situations where life has dealt finances a blow (for example a job loss, illness, or injury) and the numbers don’t work anymore. Planning and learning about money can be part of the solution. But for many people the problem is simply insufficient income. There are no budgeting strategies or investing silver bullets that will make you rich trying to support a family on a minimum wage job. “Financial literacy” is no cure for poverty. Still, understanding the concepts in this book is worthwhile, because unfortunately it’s often when people are struggling that they are most vulnerable to financial missteps and rip-offs. [Back]

Borrowing from Your 401(k)

Most 401(k) plans allow you to take a “loan” of up to half your account balance. This can make sense if you are borrowing for a good reason. The best way to think of it is as a temporary withdrawal of your retirement funds. You commit to putting the money back with some extra to cover the “interest,” usually over up to five years (longer if you are using the money to buy a home).

But there are caveats. First, the money you take out is no longer working for you earning investment income. You are short-changing your retirement kitty. This matters most if you’re shooting for high returns with your retirement funds, usually by investing in stocks. Second, if you leave your job before the loan is repaid, the rest will be due by the time you file your next tax return. If you’ve become unemployed you probably don’t need this extra cash crunch. Third, you run the risk of developing a bad habit. [Back]

Credit Builder "Loans"

The wider use of credit scores has created new ways for financial companies to reach into your pocket, particularly if you're already vulnerable. Enter the “credit builder loan.” Here's how it works. This one is from Self Financial, an on-line company with a millennial feel and a snazzy website: Pay us $35 a month for two years, plus a $9 fee, for a total of $849. In two years, we'll give you $724 of your money back. We keep the rest (info as of 1/4/2021).

Why would anyone take such a terrible deal? The pitch is that if you demonstrate an ability to make regular payments it might improve your credit score. Research suggests that more often than not this doesn't happen. Think about it. Credit builder loans are “loans” where you don't actually get money up-front. There is no risk to the lender that you won't "pay back" the loan. Still, Self charges 15.97% APR on this “loan” (that's the $125 difference between the money you pay and what you get back.) You can find more reasonable rates at other “lenders,” but that doesn't make them a good deal. With these schemes not only are you charged "interest", but you also give up the opportunity to shop around and earn the best interest on the money you pay.

To improve your credit score, it is better to make your periodic payments into a savings account. Once you've accumulated a balance of about $200, use those savings to get a secured credit card. [Back]

Choosing a 529 Plan

There is a cottage industry devoted to helping you find the “best” 529 Plan. Much of this “help” is from salespeople trying to make money. In making your choice, be sure to focus on three things: 1) Having good, low-cost investment selections. Having good options is more important than having a lot of options (see Chapter 14); 2) Taking advantage of any state income tax breaks, usually by choosing a plan sponsored by your state; 3) Choosing a plan with low or no administrative fees. Ideally you should be able to set up automatic contributions and not think about your 529 Plan again until it’s time to withdraw money. The National Association of State Treasurers provides a tool for comparing different state plans. [Back]

Brokerage Account Statements

Brokerage account statements are tedious and confusing. They have separate categories for stocks, fixed income (bonds), ETFs, and mutual funds, as though these were somehow comparable categories. They’re not. With funds you need to know what’s inside them to understand what you own. If the funds you own in turn invest in stocks, they should be added to your stock total; if they own bonds, they should be added to your bond total, if they own a combination, they need to be split between categories.

Fortunately, the websites of the brokerage firms have analyses that “look through” to the underlying investments in any funds. Use these tools instead of account statements to understand what’s in your portfolio. [Back]

How to Invest Your 401(k)

If you have a 401(k) or similar plan at work, it may well be the biggest chunk of your savings. Your investment options will be limited to what’s offered in the plan. If you never elected how to invest your contributions, you may find that your money is in a target date fund based on your age. You could do worse. What you don’t want is having it sit in a money market fund earning next to nothing. So it’s a good idea to review your asset allocation. You can change both how your accumulated savings are invested and how to invest your future contributions.

Use the principles discussed in this chapter to figure out what asset allocation makes sense for you. Choose funds with low expense ratios where possible, which will often be from companies such as Vanguard, Fidelity, and Dimensional Fund Advisors (DFA). Index funds tend to be the lowest cost. Don’t pay attention to how funds did in the past; it does not predict how they will do in the future. Some plans offer a rainbow of options. Don’t be tempted to sample everything. Like colors, mixing more than two or three funds quickly leaves you just with brown. Keep it simple. [Back]

Trading Bugs

Every now and then a new crop of young Turks discovers the stock market. Often it happens when the market looks like it's got nowhere to go but up. But not always: the COVID-19 crisis is the latest example. Apparently people got bored, they were sitting at home, there were no sports to bet on, so they started trading stocks. Exhibit one: the wild ride of GameStop and other “meme” stocks in February of 2021.

Pandemic or not, what if it happens to you? You're getting the hang of this financial stuff. It's kinda cool. Maybe you have a great stock idea? A guaranteed-to-win option strategy? Here's my advice: keep your financial future on track when scratching that itch. Give yourself a budget to work with. Set up a separate brokerage account that can be your “sandbox” for making bets on the market. As long as you don’t have a gambling disorder and are prepared to lose this money, have at it. But do not dip into your retirement fund to do it. [Back]

Got Insurance? Don't File a Claim

Insurers don’t like claims. Don’t submit one unless it’s big and you have to. Companies are apt to increase your premium and may even drop you entirely if you are costing them too much or are too quick to file claims. Switching to another insurer may not help. Any claim you initiate, whether you get paid or not, and sometimes even if you just inquire about making a claim, is reported to the Comprehensive Loss Underwriting Exchange (CLUE). Insurers check your CLUE report when deciding whether to insure you and how much to charge. Claims stay on your CLUE report for seven years. You’re entitled to receive a free copy of your report. Contact LexisNexis® to get one. [Back]

Employee Stock Options

Companies often give stock options to employees as pay. These (call) options might have a strike price equal to the company’s current stock price and be good for ten years. If the stock price increases over that period, the employee can make a profit by “exercising” the option—buying the stock at strike price and then selling it at the higher market price. [Back]