Banking Archives - The Broke Professional

Avoid Stupid Bank Fees

                                                                They’re making a killing off of us.

My first checking account was at the same local bank that my dad used and he helped me sign up for it.  Banks LOVE this since they are hoping to get your business for life and then I will do the same thing with my son.  They’re hoping people don’t catch on that there are great checking and savings options available and you aren’t beholden to your local bank.

Depositing your money into a checking account is the safest way to store your cash.  If you’re not careful, however, the fees can really stack up.  ATM fees, overdraft fees, insufficient balance fees, and even fees for talking to a human.  Navigating around these is essential to your finances, as these fees can really eat up your money and are easily avoidable.

While little account fees have always been there, they have been even more prevalent since the Great Recession of 2008.  Since banks can’t make as much of a killing (they still make a killing though) off of mortgages, they turned to ticky tack fees to make up the difference.

And make up the difference they did.  Chase, Bank of America and Wells Fargo, the three biggest banks in the country, made over $6 billion in 2016 from ATM and overdraft fees.  That’s pure profit for the big banks without providing any service.

And the banks will keep on charging fees since most of the country doesn’t know any better.  But these fees are easy to avoid.

Everything is Negotiable

If a bank tells you that there is now a monthly maintenance fee with your account, find a way to get around it or just ask to have it waived if you have been a long time customer.    Many banks will waive the fee if you sign up for direct deposit of your paycheck, for example.  Also, they will be more likely to change things if you talk with a branch manager.

If negotiating is getting nowhere, tell them you will take your business elsewhere.  And if they still don’t budge, close the account and just go elsewhere.  There are tons of options for bank accounts out there and if the bank you have stuck with for years doesn’t think it’s important to keep you as a customer, then find a bank that does.

One fee that is usually not negotiable is ATM fees.  Either you use your bank’s ATM or you don’t.  But nowadays you don’t have to use cash for pretty much anything.  Even going to the coffee shop is as simple as loading some money from your credit card to your smartphone app.  And you can pay bills and your friends easily through Bill Pay services with your bank or apps like PayPal or Venmo.

But the best way to avoid ATM fees is to switch to a different account altogether.

Consider an Online Bank

Internet only accounts have exploded in the last few years.  If you’re getting a raw deal from your current big bank, switching to a vastly superior online bank has never been easier.

Many online banks provide the same services as the big boys do.  You can direct deposit your check and pay bills easily.  But the most important difference is the lack of fees.

Many online banks will waive ATM fees.  Some are unlimited and some up to a certain amount.  Many of them also allow you to order checks for free, which is something that can cost $20 easily at most big banks.  There really is no reason not to consider an online bank if you’re being hit by fees from your current bank.

My favorite account has always been the checking account offered by Charles Schwab.  It has withstood the test of time and continues to offer unlimited ATM reimbursements, even internationally.  It truly is a no fee checking account that would serve anyone well.

Ally Bank also has a great online checking account that reimburses ATM fees up to a certain amount.  A nice website that will allow you to compare different online banks is Magnify Money.

The days of being beholden to the big banks are over.  While most of the country will probably never catch on to this, you need to.  There are lots of options out there and doing a little bit of research will lead you to find the perfect bank for you.

Share

Standard Deduction or Itemize?

Trust me guys.  Buy a house and your taxes will be so low.

Trust me guys. Buy a house and your taxes will be so low.

Imagine this all too familiar scenario.  A young couple just a few years out of college are living in a small apartment.  It’s not the fanciest place, but it’s nice enough to have guests over and they’re comfortable living there.  It’s in a nice and clean building with front door security.  And if anything goes wrong maintenance wise, they can call on their trusted landlord to fix it up in a day or two.  But after a few years they start to get the “itch”.  They visit a couple of friends who recently got a nice house and it seems that more and more of their peers are buying houses or hunting for them.  It hasn’t really crossed their minds but the latest advice from a well meaning (but uninformed) friend puts them in the hunt:  “You need to buy a house because you get a great deduction on your taxes.”

The couple discuss this and decide it is time to buy.  It’s just the “right” American thing to do.  And besides, they’ll be saving so much money on taxes right?  The hunt begins, and they soon find a nice house not too far from where they both work.  They put in an offer and it’s accepted!  Because they’ve been working for a few years they were able to save up a 20% down payment on their home.  The monthly mortgage payment isn’t much more than their rent was, but with the awesome tax savings that they’ll receive, they will be so far ahead!  They move in, figure out how they want to decorate and they both live happily ever after.

Right?  That is, until they do their taxes and find out the awesome tax deduction isn’t as awesome as they’d thought.  If only they did a little research into the tax implications of the mortgage interest deduction, maybe they would need a more compelling reason to buy a home.  This happens all too often, and many well intentioned people are singing the praises of the home interest deduction without even knowing if it applies.  The issue at heart here is the misunderstanding (or ignorance) between taking the standard deduction or deciding to itemize deductions.

When you prepare your taxes, you have a choice to either take the standard deduction or to itemize your deductions (or neither if you’re a dummy).  When you take the standard deduction, you have your taxable income lowered by a predetermined value set by the almighty IRS.  This is a deduction that everyone gets just for being a US citizen.  See, the IRS ain’t all that bad.  For tax year 2013, the standard deduction for a married couple filing their taxes jointly was $12,200.  That means even if this couple didn’t have any specific deductions to make that year, they would get a $12,200 deduction on their taxable income just for filing their taxes.  Not bad.

If you decide to itemize your deductions, you have to calculate how much those eligible deductions add up to.  If it is more than the standard deduction amount, then you should go ahead and itemize.  Eligible deductions include state taxes, real estate taxes, charitable contributions and, the holy grail, mortgage interest deduction (Here’s a more official list).  If the combination of all of these deductions is more than the standard deduction amount, then you should go ahead and itemize.

So what happened to our happy home buying couple?  When they were living in their cozy apartment, they didn’t even get close to being able to itemize so they got the standard deduction every year.  Now that they own a home and can add the mortgage interest and real estate taxes to the mix, their itemized deductions amounted to $13,000.  They definitely should itemize their deductions but the difference in their deduction is only $800 more than if they took the standard deduction.  So their taxes aren’t reduced by much at all.

Another thing to remember which most people surprisingly don’t get is that a deduction doesn’t reduce your taxes directly but only your taxable income.  If you’re in the 15% tax bracket, that means a $10,000 mortgage interest deduction will save you $1,500 (10,000 x 15%) on your taxes and not reduce it by $10,000 directly.  So in the case of our couple, that $800 extra they could deduct because of mortgage interest only saved them $120 (800 x 15%) on their taxes as opposed to taking the standard deduction.  You could save more by going to Starbucks four days a week instead of five.  So if our couple knew these facts beforehand, they might not have gotten a house so soon.  Or they still might have because there are a lot of reasons to buy a house.  But doing it solely because of the mortgage interest deduction shouldn’t be one of them.

The US tax code is very complex but it pays (literally) to know some of its intricacies.  That’s because it is a tax code that rewards certain behaviors and punishes others.  For example, if you withdraw money too early from your 401k, you’re going to be hit with a penalty.  This is presumably to prevent people from raiding their retirement accounts and putting their future at risk.  If you pay student loan interest, you are rewarded by being able to deduct some of it from your income.  This is presumably because the government likes when citizens get educated (not so sure about this one).

What about itemizing your deductions and, specifically, the mortgage interest deduction?  It seems to favor those in higher tax brackets who have bigger mortgages, unlike our couple who was in a lower tax bracket and had a modest amount of mortgage interest.  So is the government promoting high rollers to buy big houses?  Maybe.  But it is important to know what rules favor what type of behavior so you can pay the least taxes (legally) possible.  This deserves a whole series of posts in itself, so look for that sometime  in the future.

Has the mortgage interest deduction been a big help for you or not so much?  Comment below and join the discussion.

Share

Building a Strong Credit Score

There are so many financial magazines and blogs out there with all different types of advice to save/make money.  Cut down on your lattes!  Get this stock for 2014!  Find cool rocks and give them to people as gifts!  But not everyone drinks lattes, is into the stock market or collects pretty pebbles.  Certain things works for certain people.  But one thing that can time and time again save you the most money possible throughout your entire life is having a good credit score.

The importance of having a good credit score is sometimes overlooked because of two main reasons.  One, it can be boring as heck to read about.  Just hearing the word “credit” can male people eyes glaze over.  Then they wonder what a credit score is, the difference between a credit report and a credit score, followed by the “No way, I have to pay for my score??!!”.  The other reason credit scores can be overlooked is because it takes time to get a credit score.  We’re talking about months to years.  People want results NOW, not a few years from now.

I previously wrote about how quickly a credit score can be ruined.  It is usually harder to build good things than it is to destroy them.  So this post will be for those who have little to no credit history and want to build a nice solid credit score.  For people whose credit is a mess and are on the edge of bankruptcy, this post is not for you.  It’s for those who have a blank credit slate and would like to take the smart move and have a good credit score that will serve them during their whole life.

FICO, the company that determines your credit score, has a neat little chart on their website that tells you what effects your score the most.  Being a credit newbie, the factor that is most against you is your length of credit history.  The longer you have a history of good credit practices, the better your score will be.  But this only makes up 15% of your score, so you still have an opportunity to get yourself a good score rather quickly.  The two major factors, payment history and amounts owed, are something you can work on right away.

The best way to start?  Get a good credit card.  Not one of those secured or student ones with $250 credit limits.  Just do a simple search with Chase or Citi, for example, and find a good solid rewards card to use.  Some rewards cards are usually reserved for high rollers, but if you opt for a simple cash back card with no annual fee like the Chase Freedom or Citibank Dividend, you should have no problem getting approved for one.  Plus you’ll get some cash back for your trouble.  Your credit limit will probably not be that high, but that’s okay.

Once you get approved for the card, just make some everyday purchases like gas and groceries, but watching that you don’t get too close to your credit limit.  You want to keep your “amounts owed” well below 50% of your credit line.  If you have a $1,000 credit line for instance, try not to charge more than $300, or 30% of your total credit.  Now when the bill comes due, make the full payment before the due date.  Rinse, lather and repeat for the next months.  After a while, most companies increase your credit limit.  If you have had 6 months of on time payments and haven’t seen a credit increase, just call and ask for one.

While that pie chart is good as far as telling you what constitutes your credit score, everything else is kind of muddled.  Should you wait 6 months before applying for your next card?  Or a year?  Exactly how many points does a credit inquiry cost you?  It’s almost impossible to find the exact answers to these questions, but if you’re just starting to build your credit, I would err on the side of caution.  Maybe wait 9 months before applying for a new card instead of 6.  Keep that credit utilization ratio at 20% instead of 30%.  A credit score is something that will help you for a lifetime, so it’s worth taking your time with it.

And that’s pretty much it.  Keep making on time payments (and full payments to avoid credit card interest), and you will be on your way to a great credit score.  A final note, there is a little 10% piece of that chart that is for types of credit used.  Essentially, they are saying the more varied types of credit you have (credit cards, mortgages, car loans, student loans etc.), the better your score will be.  This does NOT mean you should go out and finance a car if you can’t afford to.  This is only 10% of your score, so it won’t affect it that much.

The most important thing is to look at the big picture.  Pretty much everyone will have a mortgage or car loan at some point.  They’re not going anywhere anytime soon.  But to get the best rates for a mortgage, you need a good credit score!  So after years of paying your bills on time, check your credit score.  If it’s in the category that will get you the best rate for your mortgage, and if you can afford the mortgage of course, that may be a good time to get one.  The difference in interest paid between an average credit score and a great one can be tens of thousands of dollars!  That is real savings.  So if you keep that credit utilization ratio low and don’t miss any payments, you will be on your way to a great score.

Share

Is your Savings Account Awesome?

There are two ways to get wealthy: Make a boatload of money all at once or consistently save a portion of what you earn.  Most people dream and struggle (but mostly dream) about getting rich with the first method.  You must be EXTREMELY motivated and EXTREMELY lucky for that to happen.  You pretty much have to give up whatever you’re doing right now, and devote your blood, sweat and tears to make this happen.  Now, most people are not willing or able to do this, so the second path to wealth is much more attainable.  Saving a portion of what you make is not only much more attainable for most people, it is downright EASY compared to forming a million dollar business.

Having a good savings account is essential on the path to wealth.  Scratch that, having an AWESOME savings account is even better.  In an ideal situation, savings should be a mix of short and long term savings.  Short term savings includes funds that might have to be used within a year or sooner.  Examples would be an emergency fund or saving for the newest Xbox which you can smash in front of all those people waiting in line on Black Friday (have secretly wanted to do this).  Long term savings include retirement accounts and college savings accounts.  It’s mainly for stuff that is very important when the time comes, but it is a while away.

A savings account is a great place to store short term savings.  Whether they know it or not, pretty much everybody has access to a savings account.  Most people who have a checking account are able to sign up for a savings account with the same bank.  But not all savings accounts are created equal.  In fact, some of them are not really that useful.  Here are some things to look for in a savings account:

-Make sure it is separate from your checking account.  Many people focus on interest rates when it comes to savings accounts.  They are important, but not nearly as important as having your savings account at a different bank from your checking account.  Having it at the same bank would actually defeat the purpose of having a savings account altogether.  Your emergency fund, for example, should be easy to tap in case you need to, but not so easy that you can transfer money out of there in a second.  You want to think about it for a second when you withdraw something from savings.  Having it at a different account gives you about 2-3 business days to think about it.

Having your savings account separate from your checking also makes it easier to save automatically.  Just set up an automatic withdrawal from your checking to your savings every month, and it’s like you never see the money.  This is the key to building up your savings and avoiding lifestyle inflation because if you see the account all the time, you start to think that you can spend it whenever you like.

-Choose one that allows you to easily make sub-category accounts.  Piling your money into a savings account is definitely a good move, but most people have different short term savings needs.  There can be an emergency fund, saving for a laptop, vacation etc.  Being able to make separate savings accounts and have separate goals for each can make it crystal clear how much you have to save.  If you want to save $1,000 for a vacation next year, just set up a vacation account and put in $100/month.  Anything that makes your financial decisions easier and more automatic is a great thing.  Surprisingly, not all savings accounts are able to do this, so find out before you sign up for one.

Interest rates should be taken into consideration as well.  While rates are not as high as they have been in years past, you should still try to get the best rate you can.  Online savings accounts almost always have better rates than big banks.  According to the Bank of America website, their regular savings account has an interest rate of 0.01%.  That’s literally almost nothing!  It would be foolish to use an account like this when you can find an online savings account with rates around .5% (That’s 50 times better).  Because interest rates are at a relative low point, jumping around from account to account to snag the best interest rate is most likely a waste of time.  Find an account you are comfortable using that has a good rate and stick with it.

-Be on the lookout for fees as well.  The Bank of America account I mentioned has a $5 monthly fee and some hoops to jump through to get rid of it.  Don’t bother with that as there are plenty of savings accounts with no minimum deposit requirements or hoops to jump through.  One thing to keep in mind though is that many account limit the amount of withdrawals you can make per month.  If you go past that number, you can be hit with a penalty.  Since you’re saving for things in the future, you shouldn’t have a problem with this.

So does your current savings account have all of these features?  If not, it might be time to switch.  From reading my previous posts, you can probably tell I’m a huge fan of online banking.  Savings accounts are no exception.  In fact, online savings accounts are light years ahead of big bank savings accounts in terms of ease of use and interest rates.  Do yourself a favor and switch to an online savings account.  I’ve had CapitalOne 360 Savings (formerly ING Direct) for years and absolutely love it.  It makes saving super easy and automatic, which is the most important factor.

Share

3 Quick Reasons Online Banks are Better

My first bank account ever was with Bank of America.  And why did I sign up with them?  Because my dad banked with them and he had to co-sign on the account.  Not exactly a compelling reason but I was 15 at the time.  When I finally became a responsibl-ish adult, I stayed with BoA just because I was already with them and I didn’t know better.  And that’s the way they like it.  After doing some research and educating myself, I realized online banks are better in each and every way.  Here are three quick and easy reasons why:

1.  No Fees:  I remember the days of scrambling to find the closest ATM.  I do not remember those days fondly.  One of the most frustrating experiences is finding an ATM that won’t charge you any fees.  Plenty of online banks will refund all of your ATM fees, no questions asked.  This makes your life just a little easier.  Most online banks don’t have account minimum fees or anything weird like that either.  If you want to never worry about fees, switch to an online bank.

2.  Free checks:  I’ve had checking accounts with a few of the big banks and have noticed that they all charge for ordering more checks.  Granted, you can probably pay all of your bills online and not have to worry about checks, but some people still require them and it’s nice to have to not pay for them.  Many online banks don’t have any fees for ordering checks.  Can’t say the same for many big banks.

3.  Great customer service:  You will inevitably run into some type of issue while banking that will require you to get on the phone with them.  I have to say I have only had the most pleasant of experiences with online banks.  I am tempted to just call them just to say hi so I can receive the royal treatment.  Pretty much all of my calls to big banks have resulted in long wait times or a less than helpful representative on the other line.

These are three things you’ll never have to be concerned about if you switch to an online back.  While there are undoubtedly more reasons to switch, these three things tend to provide the most headaches when banking with the big guys.  Do your finances a favor and start banking online.

Share

What makes the ideal checking account?

moniesThe checking account is the one type of account almost everyone in the country has.  Most savings and investment accounts need to be funded from somewhere, and that somewhere is usually a checking account.  It represents the most liquid form of money you have at your disposal and is in some ways the lifeline to your overall finances.  Almost all of your money will at one point or another enter or leave your checking account.  That’s why we need to make sure that we’re using a quality checking account.  Unfortunately many people have checking accounts that actually COST them money.  This is unacceptable and at least some effort should be made to find the ideal checking account.

I’ve been through a number of checking accounts, so over time I’ve come to realize what are the most important things to me when it comes to a quality checking account.  Here are my thoughts on some of the things that make a great checking account:

Reimbursed ATM fees:   Even though I don’t use cash as much anymore, this is still a great perk to have for the inevitable emergency trip to the ATM.  Most banks offer no ATM fee for withdrawing from their own machines, but you’re not always going to be near their machines.  It’s a great piece of mind to know you can withdraw from any ATM and not worry about a fee.  This used to be the most important feature for me but not as much anymore since most of my payments are online or with a credit card.  It’s still a great feature to have and many online banks offer it.

No account minimum fees:  This is a definite fee to avoid because it can really impact your financial health.  Some banks will levy a fee if your account goes under $1,000 for example.  So essentially you need to have $1,000 just sitting in your account doing nothing.  This money could be used to invest, pay off debt or any other financially positive things.  The fact that a bank would charge you a fee for the privilege of just having money in their account is ridiculous.  Try to avoid this fee at all costs.

No check order fee:  Almost all types of financial transactions nowadays can be done with a credit card or an online withdrawal from your checking account.  Most banks have online bill pay which you can use to pay pretty much any type of bill.  Using an actual check is becoming more and more unnecessary nowadays, so it doesn’t make sense to actually pay for them.  You should definitely be able to order them since you probably will need to write a check at some point, but you shouldn’t be charged a fee for that.  It’s nice to find a bank that doesn’t charge for checks or deposit slips.

Rewards/Interest:  Rewards are usually the domain of credit cards, but it is nice to find a checking account that offers some rewards.  Many online banks give some interest on the money in their checking accounts, but it is not much.  Hardly any of the big banks do any type of checking rewards.  The one exception I’ve seen is Citibank which offers ThankYou Points for doing things such as setting up a direct deposit or having an automatic transfer into their savings account.  This can be nice as they can be redeemed for gift cards or cash.  You won’t really hit the mother lode when it comes to checking account rewards, but it is nice if you can find them.

These are the biggest considerations for me when signing up for a checking account.  Most banks have ATM and even mobile deposit so the days of having to wait in a long line just to deposit your check are pretty much gone, so convenience really takes the forefront when it comes to checking.  The only accounts I have seen (and I’ve personally used one of them) that meet all of these criteria are the Schwab Investor Checking account and the Fidelity Cash Management Account.  You have to open some type of investment account with them in order to open the checking account, but you don’t have to use them.  I would highly recommend both of these accounts.

Checking accounts don’t really give you a big bang for your buck, but they are evolving and it makes sense to keep up with the changes and switch to a more convenient option to make your life just a little easier.

Share