Category: A Closer Look

How To Choose An Online Savings Account

If you have a sizable emergency reserve (or a chunk of cash you’re setting aside for a near-term goal) sitting in your savings account, you’ve probably had the thought that you wish it was actually doing something for you besides earning next to nothing.

I get it. Most brick-and-mortar banks offer a 0.01% interest rate on their savings accounts. That translates to earning $5 per year on a $50,000 account balance.

While it may be tempting to invest the money, that’s the last thing you want to do. There is a risk of having a considerable decline when your money is in the market, which could be when you need the money the most.

Fortunately, many online banks are offering high(er)-yield savings accounts that earn more interest than brick-and-mortar banks and still ensures that your money is there when you need it. 

Below are a few tips to finding the online savings account that is right for you.

shop the rates

I would start by comparing the current online savings account yields at http://www.bankrate.com/banking/savings/rates/.

As of writing this, the most well-known institutions (Synchrony, Ally, American Express, and Capital One) are paying about 0.60% interest which equates to roughly $300 in interest paid for a year. A whole lot better than $5 on a $50,000 account, that is for sure!

Speaking of rates, you’ll want to make sure you are using the Annual Percentage Yield (APY) when comparing them.

The APY indicates the total amount of interest you earn on a deposit account over one year, assuming you do not add or withdraw funds for the entire year. APY includes your interest rate and the frequency of compounding interest, which is the interest you earn on your principal plus the interest on your earnings.

APY gives you the most accurate idea of what your money could earn in a year.

insure the risk

The next thing you’ll want to do is look for banks whose deposits are backed by the Federal Deposit Insurance Corp. or credit unions whose deposits are secured by the National Credit Union Administration. Both federal agencies insure balances of up to $250,000 if the bank or credit union fails.

Read the fine print

After you’ve narrowed down the list to a few possible contenders, you’ll want to make sure you read the fine print for each. 

The most common ruse I see institutions use is advertising a higher rate than their peers, but it’s only an introductory rate for the first year. Afterward, it drops below what the other institutions were offering in the first place.

Another thing I always look for are the fees. I generally avoid a bank that imposes a maintenance fee simply because the majority of the banks offering these accounts don’t have them.

You’ll also want to see if there is a minimum balance required to obtain and maintain the rate. If the minimum balance isn’t kept, the rate could dramatically decrease. If you don’t think you’ll be able to stay above the minimum balance, it’s probably worth looking at a bank that doesn‘t have one.

Ease and accessibility

Once you’ve made your choice, you’ll follow the institution’s instructions to open the account. Depending on the bank, this could take less than 10 minutes. 

After your online savings account is opened, I would suggest linking it to your regular bank’s checking or savings account.

This link will allow you to sweep money between the accounts as needed. Just be aware that the transfer can take a few days so keep some money in your regular savings for immediate emergencies. 

Should I Adjust My Portfolio Before The Election?

I’ve been getting asked if people should be making changes to their portfolio in anticipation of the upcoming election.

In case you don’t want to read any further, the short answer is no.

Who is going to get elected?

It seems like everyone is worried about how the results of this election will impact their investments. But here’s the secret, someone voting for the other party is thinking the same exact thing as you, “If my party doesn’t get into office things are going to be terrible!”.

So, does a certain candidate getting elected actually have an impact on the stock markets? In reality, no it doesn’t.

NO impact

Here is a chart that shows the growth of the S&P 500 since 1926. As you might notice, it has been going up regardless of who is in office. Yes, there are dips here and there but that is just normal market cycles at work, not the President.

Now, keep in mind that there will be volatility in the markets for a short period but this is driven because of uncertainty (which the people and markets hate) rather than who is in office.

Don’t let short-term volatility derail your investment strategy though. You likely have years, if not decades, left to invest and it’s important to keep that long-term perspective in mind.

Freeze Your Credit

Criminals only need a few key pieces of information — such as your name, address, Social Security number or credit card number — to steal your identity.

Choosing to place a credit freeze — or not — will depend on how confident you feel that your personal information is safe from criminals.

In a world where data breaches are commonplace, you can hope nothing bad happens to you and ignore it, or you can take action now to protect your credit and financial wellbeing.

how it works

A credit freeze prevents lenders from checking your credit in order to open a new account.

So, if a criminal has your personal information and tries to open a credit card in your name, a credit freeze will stop the lender from checking your credit and they won’t issue the new credit line. Pretty straightforward.

If you have a credit freeze in place, you must remove it to apply for credit.

The process

You’ll need to apply for freezes from all three credit bureaus for full protection. But all you need to do is visit their websites and follow a few simple steps:

I froze on my credit for each of the credit bureaus and the steps to complete the freeze was relatively the same for all three:

  1. Put in contact information
  2. Set up an account with that bureau
  3. Verify identity by answering a few questions that only you would know the answers to

I timed the process to see how long it would take. It only took 20 minutes total for all three credit bureaus.

You’ll get a unique PIN from each buruea that you’ll need to have whenever you want to temporarily lift or permanently remove your credit freeze.

Make sure you keep these PINs in a safe, but easily accessed, place in case you want to apply for a new credit card or loan. You’ll need it!

Keep in mind that freezing your credit will not affect your credit score and it’s totally free!

The only potential downside is the extra time it will take to temporarily un-freeze your credit if you want a new loan.

An inconvenience I’m willing to take for the security a freeze provides.

Freeze your child’s credit too

Parents also have the right to freeze their minor children’s credit too. The process is relatively the same as freezing your own credit, but there are a few more forms to prove that you’re the parent.

Children are cybercriminals number one targets because they have something a lot of us don’t have. A clean slate.

Pair this with the fact that most parents wouldn’t think to run a credit report on a child and you can see how they can be especially vulnerable to identify theft.

There was an expert on cybercrime at a conference I recently attended and they told a story about an 18-year-old they knew who applied for a car loan but was denied because he had $800,000 of debt and 42 credit cards tied to his Social Security number.

It turns out someone stole his identify when he was 2 years old and been using it for over 16 years.

Luckily he and his parents were able to undo the damage, albeit after two years of constantly working with the three credit bureaus.

Continue to monitor

While a credit freeze doesn’t prevent all forms of identity theft, it does add one more layer of protection.

You should still request your free annual credit report to verify the the accounts you already have open and look for any questionable activity.

I also suggest enrolling in a credit protection service and identity theft monitoring service.  The cost of these services is usually very low for the benefits – which typically includes instant alerts of any questionable activities under your identity.

What Happens If I Die Without A Will?

If you don’t have a Last Will and Testament (or more simply known as a Will) in place yet, you’re not alone. I can anecdotally confirm this through my casual observations as a financial planner.

Not having a Will is a problem because it — along with other estate planning documents — is what’s used to inform the courts of how you want your estate divided when you die.

What’s Considered My Estate?

Your estate consists of all the property you own, including real estate, personal property, bank accounts, retirement accounts, and life insurance policies.

Each of these asset types is titled in order to inform the courts how they are legally owned — individually, with someone else, or held in trust — and helps determine how to distribute them at your death.

What Happens When I Die?

When you die, your estate will go into probate, which is a legal process where your property is transferred to your heirs according to how you requested it to in your legal documents. But what if you die without a Will? Or as legal people like to put it “intestate”. Then the court gets to decide how to divvy up your estate.

Every state has different succession rules they follow. To give you a general idea of how it works, here is what it looks like in Indiana.

I am not providing legal advice. This is purely a diagram of my understanding of Indiana’s intestate succession statutes.

You Need A Will. Seriously.

As you can see, things can get complicated in a hurry. Even a simple situation like just a spouse and kids becomes problematic because half of the estate is given to the children outright. As one of my attorney friends puts it, “It’s a freaking mess and a good example for why everyone needs a Will”.

I know thinking and talking about your eventual demise is depressing but seriously, if you haven’t done any estate planning yet, I highly encourage it.

There are numerous resources on the web that can help you draft the basic documents you’ll need, however, nothing beats sitting down with an attorney to craft them with you.

By hiring an estate planning attorney, you’ll be able to avoid the pitfalls and potential headaches of trying to do it yourself. 

Payroll Tax Holiday Farce

About a month ago, I received a text message from a friend with what he thought was good news. President Trump signed an executive order that would provide a payroll tax holiday potentially putting 6.2% of his income back into his pocket.

After a little bit of research into the matter, I had to break the bad news. While the executive order would boost his pay for the remainder of the year, all of that tax would still be due in 2021.

The payroll tax & holiday

Payroll taxes are divided into three main categories: Federal income, Medicare, and Social Security. Trump’s order specifically targets the Social Security tax.

Typically, employees and employers each pay half of the total 12.4% Social Security tax. But under the executive order, employers wouldn’t withhold the 6.2% for Social Security from the employee’s pay. The employer would still contribute their portion.

The payroll tax “holiday,” or suspension period, runs from September 1 through December 31, 2020, and only applies only to those who earn less than $4,000 bi-weekly and less than $104,000 per year.

Some potentially good news is that your employer isn’t required to participate in the payroll tax holiday, which possibly makes the rest of what you are about to read a moot point.

That is unless you work for the Federal government. The U.S. government will implement an across-the-board payroll tax deferral for about 1.3 million federal employees starting in mid-September.

my employer participating, now what?

So what happens if your employer participates in the holiday?

You’ll see an increase in your paycheck over the next few months but come 2021 you are going to have start paying those taxes back and it will roughly double your Social Security tax rate from January 1 to April 30 when they are required to be paid back by.

If you leave employment or just don’t have enough wages to pay it back, the IRS will apply interest and penalties to the amount not paid back which will fall onto your employer to pay. They (the employer) may in turn try to find a way to make you (the employee) pay the interest and penalties. Talk about an uncomfortable situation to be in!

In order to avoid this, I’d suggest setting aside money now (if you can) and then start taking it out to replace the lost wages in January.

Note, there is always a chance that Congress will pass legislation to forgive the deferred taxes but I wouldn’t rely on that.