The End of Overdraft Fees

In the past, if you made a purchase with a debit card or withdrew money from an ATM but didn’t have the funds in your account to cover it, your bank would allow you to “overdraft” your account and charge you a hefty penalty for the privilege of doing so.  This fee has been a cash-cow for the financial services industry – in fact, according to Moebs Services they collected over $30 billion last year in these fees.[1]

 

Those fees range from $10-$35 per transaction (the average is $26), which meant if you were out shopping and purchased several different items from different stores you may have ended up with hundreds of dollars in overdraft fees.

 

Moebs Services noted that while consumers all over the board paid these fees, just 10% of banking customers paid 90% of these fees, and the most concentrated group was consumers with credit scores under 590.  In other words, those who have had other struggles with money (a low credit score is generally due to bankruptcy, missed or late payments and accounts in collections) are the ones paying the fees. 

 

However, according to new federal regulations[2] this all changed on July 1, 2010.  In response to these high fees the Federal Reserve is forcing banks to do away with these automatic charges on ATM withdrawals and debit card purchases.  You now have to “opt-in” to be able to overdraft your account and the fees have to be clearly communicated up-front.  The new law, however, does not apply to checks or recurring payments.

 

Because this is such a profitable fee for financial services companies many of them have started aggressive marketing campaigns to get you to opt-in.  I have received letters from both of my banks recently encouraging me to sign up for this “valuable service” that helps you “avoid the embarrassment” of having your card declined.

 

Some groups[3] are predicting that this change in policy will have repercussions in other areas.  Because these fees represent such a large chunk of profits, companies will seek to make these up in other ways.  The most common concern is that free-checking will disappear unless you have multiple accounts or maintain a minimum balance.  Unfortunately, a monthly service fee will most likely hurt those who paid the majority of overdraft fees in the past.

 

To avoid problems with your bank accounts be sure you don’t spend more than you earn, balance your checkbook on a regular basis and use services such as online banking to check your balance.

 

[1] http://www.moebs.com/AboutUs/Moebsinthenews/tabid/57/ctl/Details/mid/484/ItemID/75/Default.aspx

2 http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20091112a1.pdf

3 http://www.pressdemocrat.com/article/20100620/BUSINESS/6201132

 

 

Ryan H. Law, M.S., AFC

Department of Personal Financial Planning

Office for Financial Success Director

University of Missouri Center on Economic Education Director

 

239E Stanley Hall

University of Missouri

Columbia, MO 65211

 

573.882.9211 (office)

573.884.8389 (fax)

 

---

[1] http://www.moebs.com/AboutUs/Moebsinthenews/tabid/57/ctl/Details/mid/484/ItemID/75/Default.aspx

[2] http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20091112a1.pdf

[3] http://www.pressdemocrat.com/article/20100620/BUSINESS/6201132

Made in China (and Purchased in the USA)

In the fall of 2009, I was invited to Beijing by Tsinghua University to present a keynote address at the first China Consumer Finance Forum.  I was given the liberty to speak freely about my view of our shared world – understanding household economic behavior. It was a personal honor and it presented an opportunity for this Missouri boy to meet some Chinese leaders in the field of finance.  One of the nicest by-products of the trip was to gain access to the first iteration of the Survey of Chinese Consumer Finances, collected by Tsinghua University and funded by Citibank (China) Co., Ltd.  The data provide insights into their culture and, upon reflection, clues about our own.

 

The data were collected from slightly more than 2,000 households residing in fifteen cities within China, all Class-One and Class-Two cities.  The data represent the urban Chinese, having greater wealth and income than their rural counterparts.   Some characteristics of the sample follow with comparable numbers of the United States from the Survey of Consumer Finances for the year 2007. In China, 73% were married, with 59% being married in the Unites States.  Fifty-five percent of the Chinese stopped school with a high-school education or less, while in the United States 46% stopped with a high-school education, or less.  The average annual household income in China, converted to dollars, was $10,220, while it is $84,300 in the United States.  (The median US income is $47,300.)  Average Chinese household assets were found to be $80,619, or about eight times average income, while average household assets in the United States in 2007 were $668,500, also about eight times average income.  For the Chinese, the average level of household debts were $1,702, or 17% of average income, while in the United States, average household debt is $114,511, given an average per capita debt of $43,874 with an average household size of 2.61 persons (Whitehouse, M., “Americans Pare Debt”, Wall Street Journal, March 12, 2010).

 

At face value, the similarities between China and the United States, with respect to relative levels of assets to income, as well as demographics, are remarkable.  The level of debt to average income, however, is not.  The average US household debt is 136% of household income, compared to 17% for the Chinese.   Moreover, if we include federal borrowing, the United States number increases an additional $109,792 per household, to $224,303 per household or 266% of average household income (or, 474% of median household income).   We need to ask the question, “Is this sustainable and, if not, what can I do about it?”

 

What else do we know?

 

In the Chinese sample, we found that while 85% of the sample owned a home but that only 11% carried a mortgage on that property.  In the United States 69% were homeowners in 2007, with 70% of them carrying some debt on the property, either a mortgage or home-equity loan.  Some of this is a result of Chinese employer home purchase plans for employees, in an effort to provide housing while limiting indebtedness.  In the United States, however, mortgage debt is encouraged through a subsidy in our tax code that, in fact, provides the greatest subsidy to those with the largest mortgage and, typically, highest incomes.

  

Less than 1% of urban Chinese use consumer loans to purchase consumer goods, while 47% of all US families have installment loans and 46% carry a credit card balance.  Admittedly, consumer credit is necessary to smooth our consumption stream – shifting income from high periods to periods where it is relatively low.  In fact, a member of the Bank of China confided to me that increasing the borrowing of the younger Chinese is a goal of the Chinese government to enable them “to not be dependent on the west to support our growth”.    

 

Roughly 12% of the Chinese sample owned a car with only 0.7% of the population (6% of the automobile purchasers) borrowing money to purchase a car.  In the United States, depending on your source, from 73% to 91% of new car purchases involve financing.

 

The good news is that, in the United States, credit use is decreasing and savings rates are up.  Revolving Credit decreased at an annual rate of 12% in March and nonrevolving credit decreased at an annual rate of 7%.   In addition, April of 2010 saw a household savings rate of 3.6%, compared to 3.1% in March, and it has remained over 3% since the fourth quarter of 2008; compared to estimates from 25% to 50% for China.  With respect to the question of why China’s saving rate is so high, the answers range from the lack of a social security system, the absence of government provided medical care, a culturally bound ethic in improving the future for their family, and, surprisingly, an excess of males to females.  Whatever it is, we westerners should be grateful for Chinese savings, as it is used to loan money to the United States.  Thus, allowing us to continue down the road our nation has chosen.  Each of us must answer the question, however, as to whether this road leads to our financial success.  

 

 

What Does it Cost to Raise a Child?

Raising children takes a great deal of time, energy and resources.  Parents, educators, organizations and governments may ask, “What does it cost to raise a child?”  The United States Department of Agriculture (USDA) has estimated the annual costs of raising a child from birth to age 17 since 1960 and shares the numbers in the Expenditures on Children by Families report.  The answer varies by household (two-parent or single household), numbers of children in the household and levels of income.

In 1960, a moderate-income, two-parent family spent about $182,857 (in 2009 dollars) to raise a child to age 17. A similar family in 2009 spent about $222,360 (an average of $13,080 per year)—a 22 percent real increase. Expenses include housing, food, transportation, clothing, health care, education/childcare, and other miscellaneous expenses (personal care items, recreation expenses, etc). Costs do not include college expenses or indirect costs (such as a parent taking work leave to raise the child).

Housing costs have been the largest part of total expenses for raising children (31-35 percent of child-rearing expenses). Childcare and education have increased considerably over the years (the report in 1960 did not include childcare).  This category makes up 17-22 percent of what it costs to raise a child.  Expenses on food vary from 17 to 34 percent of child-rearing expenses, depending on a two-parent or single parent household.

Based on 2009 figures, transportation expenses for children were about 15 percent of the total amount spent to raise a child for a two-parent home and 20 percent for a single parent home.  Clothing expenses took up about 5-7 percent of the total amount spent, and healthcare accounted for about 6-8 percent.

How can knowing the costs of raising a child be helpful? The USDA report has three main uses. One is education. Some schools use the information to help teens understand how much raising a child really costs, hoping that teens may wait to have children. Furthermore, families can use the information to set up spending and saving plans. Some families think about saving for college, but do not think about saving for costs of child care, as well. 

A second use is determining child support. In 2007, 26 percent of children lived with a single parent. Many single-parent families are in poverty and child support is one way to reduce poverty. States often consult the Expenditures on Children by Families report in calculating typical costs for children for state child support guidelines.

A third purpose of the report is to determine foster care rates. By the end of the federal fiscal year 2009, about 463,000 children were in foster care. About half the states use the USDA report to set the levels of foster care rates.

USDA bases child-rearing expense estimates on the Consumer Expenditure Survey. They estimate expenses for children by age of child, household income level, number of children in the family, and geographic area. The expenses for the budget categories represent what is actually spent rather than what should be spent.  The costs to raise a child are highest in the urban northeast and lowest in the urban south and rural areas.

For more details on child-rearing expenses by types of households or levels of income, please see the 2009 Expenditures on Children by Families report at http://www.cnpp.usda.gov/expendituresonchildrenbyfamilies.htm.

You can also use an interactive calculator to estimate child-rearing expenses for your household at http://www.cnpp.usda.gov/expendituresonchildrenbyfamilies.htm. 
 

References:

 

U.S. Census News Release. 50 Million Children Lived with Married Parents in 2007. Retrieved July 28, 2008, from http://www.census.gov/Press-Release/www/releases/archives/marital_status_living_arrangements/012437.html.

 

U.S. Department of Health and Human Services. (2009). Trends in Foster Care and Adoption. Retrieved June 15, 2010, from http://www.acf.hhs.gov/programs/cb/stats_research/.

 

USDA. (2009). Expenditures on Children by Families. Retrieved June 15, 2010, from

http://www.cnpp.usda.gov/expendituresonchildrenbyfamilies.htm.

 

 

 

Lucy Schrader, MA Educational and Counseling Psychology
University of Missouri Extension, HES Extension Associate State Specialist

Learning to Fly

My youngest graduated from high school last Saturday.  It was a celebration of the beginning of his voyage as an adult, growing in independence and responsibility.  We hosted a party for his friends, as well as ours, as is the local custom.   As expected, many mentioned that we are entering the “empty nest” stage of life and wondered how we were going to adapt.  Others interjected with the cry, “I wish ours would empty!  (Enter child’s name) moved back after (enter college name) and we cannot get him/her to leave.  We want our life back!”  I have no doubt that you know one acquaintance that could be either a parent, saying the above, or the child it describes.  How can we, as parents, help young people prepare?  Or, if we’re young, what can we do to spread our wings and leave the comfort of our parents’ nest? 

 

Parents:

·         Financial independence is a process that begins when the child is young.  Rear your children with a sense of independence and self-sufficiency.  Have them take a course in personal finance. Involve them in family discussions about money.  Empower them to make good decisions.

·         Help them establish a credit rating.  They need one to sign a lease, contracts with utility companies, and others.  Current credit legislation requires parents to co-sign on a credit card, if your child is less than 21 years old. Yes, you will be responsible for their charges, if they do not pay.  Moreover, the card cannot be switched to solely the student’s name when they turn 21. They have to apply for their own credit card and the cosigned card needs to be canceled.  An alternative is to apply for a college card, using summer or school earnings as evidence of capacity.  Finally, have the student authorized as a user of the parents’ card, stipulating they pay their charges.  These all help create a credit score.

·         Set a deadline for how long they can be on your insurance policies.  Health care legislation now allows coverage on the child, through their parents’ policy, until the age of 26.  Most automobile policies require the child to be enrolled in school to continue on their parents’ policy.  Set a goal for their independence.

·         The same goes for cell-phones, except there is no age limit.  The parents, therefore, must set a point in time when their beneficence ends.  Encourage your child to share a plan with roommates or friends to reduce costs, in order to help the transition.

·         Reduce the advantages of your child remaining at home.  It may seem harsh to ask them to pay rent, utilities, or part of the food bill.  It may be difficult to get them to take on the responsibilities of home; such as cooking, cleaning, and maintenance.  Yet, if you have to push them out of the nest, you must.  Make sure you live your lives and stop centering your lives on your adult children.

·         For gifts, purchase productive durables for them; toasters, microwaves, coffee makers, knife sets, dishes, and other items required to set up a residence.  They’ll get the hint, while a barrier is removed.

Children:

·         Get a job.  Get a job.  Get a job.  Write your resume and share it, in order to improve it.  Target your resume toward each job opportunity. 

·         Do internships in your field, in order to establish a professional identity.  Ask the members of your university faculty if there is a course you can enroll in for credit.  They may have a list of internship providers that can speed you on your quest.

·         Purchase renter’s insurance, if your property and liability loss exposures are not covered under your parents’ homeowners’ policy.  This will help establish your credit.

·         Establish a budget and a personal net-worth statement to demonstrate the business-like management of your life and to motivate taking control of your life.  Being able to demonstrate your business-like character is important when you apply for credit.

·         If you are not living on your own, begin saving two- to three-months rent payments.  This will provide the liquidity needed to pay your damage deposit, as well as your first and last month’s rent payments.

·         Choose your roommates carefully, while making sure you are a quality roommate.  The inability for roommates to adequately address financial issues, stemming from a myriad of causes, can create a negative financial situation that is a potential blemish on your record.  

·         Make sure you learn how to prepare meals, to reduce the costs of living on your own.  Eating out is nice, yet it is an expensive way to obtain calories, especially the calories we drink.

·         Learn where and how to shop.  It may not be where you are accustomed to seeing your parents shop.  Check out vintage clothing shops and thrift stores, particularly in well-to-do towns.  Use coupons to save money on the things you typically purchase.

In closing, I know that children often need a place to transition between life’s chapters and parents will continue as the residence of choice.   Regardless, parents’ sights should be set on creating a generation who have a life of financial success, thus enabling the parents to have a chance to live theirs.

 

-          Robert O. Weagley,  Ph.D., CFP(r)

How Long to Keep Financial Documents

Financial paperwork – if you are like most people you have stacks of it sitting around – in spare file drawers, in stacks on various desks, in boxes in spare bedrooms or in the dreaded “junk drawer.”  How long do you need to keep those documents?  Do you still need that bank statement from 1978 from the account you closed 8 years ago? (The answer is no.)  While today’s list is not a comprehensive list, and not all suggestions will apply to all situations, hopefully these guidelines will get you started.

A couple of notes before we look at specific documents:

·         When you are ready to get rid of ANY financial document DO NOT just throw it away!  It needs to be destroyed.  My parents would burn all of their documents in their fireplace.  I use a cross-cut shredder.  Either method works and destroys the document completely.  A shredder that just cuts things into long strips can be put back together, so that is not sufficient.

·         If you like to store things electronically then get a good paper-feed scanner (not flat bed) that will convert a document to PDF.  This essentially makes the question of “how long do I keep things” irrelevant.  You will want to back this folder up on a regular basis (either using an online backup service or drive you don’t keep in the home).  You may also want to password protect the folder and not label it obviously (i.e. Financial Documents is probably not a good name to call it).

·         If you get electronic statements don’t count on the institution to maintain a copy of it.  You want to download a copy to your computer.

With those notes in mind, let’s jump to documents.

Keep Forever

There are some documents that you should keep forever.  They should be kept in a fire-proof box or safety deposit box.  These may include (but are not limited to):

·         Birth & Death Certificates

·         Adoption papers

·         Citizenship papers

·         Military records

·         Marriage & divorce papers

·         Immunization records

·         Wills, estate plans, living trusts, Power of Attorney, etc.

·         Child support agreements

·         Deeds

·         Titles

Three months

There are a number of documents you should keep a 3-month, running file of.  These include:

·         Bank statements

·         Mortgage statements

·         Credit card statements

·         Utility statements

On any of the above documents – if you are disputing an item be sure to keep that statement until it is completely resolved.

Other Guidelines

·         Paystubs: Keep the current year until the end of the year when you can match it to the year-end statement.  Keep the year-end statement for 3 years.

·         Property repair bills (i.e. for auto, home, boat, etc): Keep as long as you own the property, and pass on to the new owner when sold.

·         Warranty documents: You can get rid of these when you get rid of the item or when the warranty expires.

·         Insurance documents: Keep at least 5 years or until you get a new policy

·         Taxes:  A number of different sites recommend different ideas about how long to keep taxes.  The general rule is to keep them for seven years, as well as all supporting documentation.  Other sites recommend keeping tax returns forever.  IRS Publication 552 (available from www.irs.ustreas.gov) discusses how long to keep them.

·         Financial documents (mutual fund, IRA statements, retirement plan statements, etc): You don’t need to keep privacy notices, address confirmations and the like.  You need to keep proof of ownership for as long as you own it.  Keep statements until the end of the year when you get the year-end statement and can reconcile it.

·         Non-deductible IRA contributions: You may need proof that you made a non-deductible contribution when you withdraw the money at retirement, so hold on to it at least until then.  You will want to hang on to it as long as you hold on to your tax return for that year as well.

Do you have additional suggestions for how long to keep documents or how to be organized with your financial documents?  Please join us on our blog (http://mufinancialtip.blogspot.com) and add your comments.  Just click Comments at the bottom of the article.  We look forward to hearing from you!