Finding The Right Checking Account For You

Picking a checking account seems like an easy process. With so many financial institutions pleading for your attention there have never been so many options. From your local neighborhood credit union, big banks, small banks, and even completely online banks, the choice is yours, and there is almost no wrong decision. With all these choices, however, picking the right checking account for you and your family’s individual needs can be overwhelming and confusing.  With only slight differences between the institutions and so many types of accounts available to us now, there are a few things to consider in order to choose the right account for you. The key to choosing a checking account for you is to narrow your options by financial institution and then by the services you need or will need in the future.  

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Start your journey by narrowing down your options. Review your prospective banks and credit unions reputations. Consider how these institutions treat their customers through different review platforms like the Better Business Bureau, their geographic footprint, and the ease of access to your money such as through free world wide ATM’s. Once you have a few institutions in mind, review the services that they provide, keeping in mind your financial goals and priorities, as well as the institutions’ discounts, incentives, and fees.  

It will be useful to know a little more about discounts and incentives. Many financial institutions offer discounts to customers when their business also banks with them or when they set up direct deposit, maintain higher balances, or have a combination of products and services, which may include direct deposit, multiple accounts, investments, and/or loans. Sometimes incentives and discounts include fee waivers or favorable interest rates.

It is also important to understand the fees that could be accessed to your checking account and how much each of these fees may cost you. Some of the most common fees that are accessed to checking accounts include:

Overdraft fees: These fees are charged when a payment or withdrawal exceeds the available balance in your account and when the payment or withdrawal is covered by the bank despite the lack of funds.

Monthly service fees: These fees are charged when you do not meet one or more of the minimum requirements outlined in your contract. These can include, but are in no way limited to, a required direct deposit, a stated number of debit card transactions, or a select number of products or services required with the financial institution.  

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Minimum balance requirement fees: These fees may be assessed every time the account drops below a certain dollar amount or when the average monthly balance falls below a specified amount.

These are not the only fees out there but only a few of the most common fees associated with checking accounts. It is important to know what fees could be charged prior to entering into a contract with a financial institution and how to avoid them.

Your checking account should be used only to hold the money you are using for paying bills and making your daily transactions. Any excess money that you have sitting in your checking account is money that is not working for you. You may qualify for additional discounts on your checking account by also opening a savings account adding to your overall average balances. At the same time, putting the rest of the money that you’re not planning on spending into a savings or money market account will provide you with instant access to your funds while also allowing your money to grow. Even with interest rates at an all-time low, your money can grow more if you separate it from your everyday checking funds. Plus, as you see your savings grow you may be more inclined to rethink  and forego unnecessary purchases.

It’s important to know all that you can about your account when you open it. It is also important to pay close attention to the emails and letters that you may receive about changes to your account. Just because you fully understood what you signed up for doesn’t mean that the financial institution won’t change the terms and conditions at some time in the future.

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When it comes to our finances, each of us is unique. Take the time to educate yourself and find the best account for meeting your needs, and talk with your financial representative to help you find the best fit.

Tell me your stories and your thoughts by leaving a comment below. Let’s have a better money conversation.

Dollar Cost Averaging to Build Your Wealth.

The strategy behind dollar cost averaging consists in making regular contributions of a set dollar amount towards the same fund or stock over a long period of time regardless of the market conditions in contrast to investing a lump sum all at once. Many of us are already doing this in our retirement plans, as we are setting aside a percentage of our income towards our retirements. That money is then invested in the funds that you or your plan administrator has selected for you inside your retirement plan. This form of investing allows you to purchase more shares when prices are low and fewer shares when prices are high, averaging out the cost of your investment.

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DatePrice Per ShareSharesCost
April 1st$20.0050$1,000.00
May 1st$15.0066.66$1,000.00
June 1st$10.00100$1,000.00
July 1st$1855.55$1,000.00
Total:272.22$4,000.00
Average Price Per Share:$14.69

Let’s see how it works. Consider investing $1,000.00 per month over the next four months into a fund with relative volatility. The first month you invest $1,000.00 at $20.00 per share purchasing 50 shares, the second month the price is down to $15.00 per share where your $1,000.00 purchases 66.66 shares, the third month the price is down to $10.00 per share and you obtain 100 shares, the fourth month the price is now $18.00 per share and your $1,000.00 equates to 55.55 shares. In total over the four months you have purchased 272.22 shares spending a total of $4,000.00, dividing the cost by the total number of shares your average price per share is $14.69. See further examples with dollar cost averaging the S&P 500.

Broad diversification of your investment portfolio being one of the most important things that you can do for your investments, think of dollar cost averaging as the diversification of time. By diversifying your investment over a select time period, it reduces the risk that you’re investing at an inopportune period of the market.

If you are thinking that it would just be better having purchased all the shares at the $10.00 value, you are right it would have been. However timing the market for the average investor is a sucker’s game, even with all of the information available these days there is no way to know when the market will go up or down and by how much. Dollar cost averaging may not be the most effective investment strategy when looking for total return verse that of investing a lump sum at one moment but most of the world does not have large cash reserves sitting around to invest in one lump sum. Dollar cost averaging is one investment strategy to adopt to ensure that some of your savings goes to work for you.

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Most importantly, the practice of dollar cost averaging creates a good habit of investing for your future. Every dollar that can work for us in the longer time horizon the more secure we will be in the future when we need the money. Leave a comment below and let’s start a better money discussion.

Demystifying your 401(k), IRA, and Roth IRA

With so many options and so much noise when looking at different retirement programs let’s take a look at demystifying the three of the most common types of retirement accounts. Not so fun facts: According to Northwestern Mutual 1 in 3 Americans have less than $5,000 in retirement savings with one in five having no retirement savings what-so-ever.  Most advisors will recommend that during retirement you will need seventy to eighty percent of our preretirement earnings to maintain our current way of life before entering into retirement. The largest consideration of that number is if you have your home paid for or not. To avoid working, literally, for the rest of your life it is important to know where you can put your money to help you prepare for the golden years ahead.  

Traditional 401(k):

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The most popular form is a “defined contribution” retirement plan, more generally speaking this is a retirement plan where the employee, employer, and or both parties contribute a specific percentage or dollar amount of their income towards the employee’s retirement. Contributions are excluded from the employee’s gross income on a pre-tax basis, that is before taxes are accounted for on your check, and grow tax deferred until the funds are withdrawn during retirement, so you do not pay taxes on the money until you start collecting your retirement.

This should be the first place that you place your money when this option is available to you as part of your employer’s benefits, plus you will have the money come directly out of your paycheck and that is making savings automatic and easy for you.  On top of that, most employers offer a match of a certain percentage of your income and you should always contribute enough to participate in the full match. Let’s repeat that, if you are not able to contribute the maximum amount to your 401(k), contribute at least the amount that your employer is matching. If you are not participating to the full match you are giving up free money. For example, if you are making $48,000 per year and your employer matches 3% per check, getting paid twice a month at $2000, your employer is giving you $1,440 per year as long as you are putting at least that much in your 401(k) as well. Over time those funds will compound and grow.

For the 2020 tax year the IRS limits of contributions to your 401(k) plan are capped at $19,500 and $26,000 for those 50. The difference over 50 is called catch-up contributions, and regardless of how much you have saved, that limit is available for all individuals over 50 participating in their employer’s 401(k) plan. It’s important to remember that even a little bit of savings helps and if your employer is offering a 401(k) plan, participate.

IRA:

IRAs were made to encourage individuals with earned income to save for retirement in addition to other retirement plans they have. Also known as traditional IRA accounts, all deposits made to your IRA are made on a pre-tax basis and grow tax deferred until the funds are withdrawn during retirement, age 59 ½ or older, similar to that of your traditional 401(k) plan. The funds placed into an IRA account are still available to you should you not wait to retire however, there is a ten percent additional tax penalty for early withdrawal prior to age 59 ½ with a few exceptions.

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For the 2020 tax year the IRS limits of contributions to your IRA are capped at $6,000 or the amount equal to your taxable compensation for the year if less than $6,000. However if you are age 50 or older you are eligible to add an additional $1,000 “catch-up” deposit to your annual contributions. The good news is this year as of the 2020 tax year, there is no longer an age limit on making contributions to your IRA as long as you are still having earned income, however you must begin taking minimum required distributions the calendar year in which you turn 70 1/2, you are born before July 1, 1949 and 72 ½, if you are born after June 30, 1949.

There are several different choices in investment vehicles within your IRA depending on what type of account you opened and your risk profile. Most banks and investment institutions have basic IRA savings accounts or CD’s where your retirement money can sit in FDIC insured accounts or brokerage accounts that will allow you to invest. Whichever way you choose is right for you, but please seek the advice of a professional and educate yourself in your choices.

Roth IRA:

A Roth IRA allows the same contributions amounts as the traditional IRA. The total maximum amount that you can deposit to your IRAs, traditional and Roth is capped at $6,000 and $7,000 for those 50 and older total combined.  

The difference between the two comes in the timing of the tax benefits. Opposed to the traditional IRA pre-tax dollars that lower your taxable income this year growing tax deferred, the Roth IRA is funded with post taxed dollars that are not taxed at the time of withdrawal during retirement.

Roth IRAs have no required minimum distribution at any age at this time, but there are limits to the income that you make to if you can contribute. The income eligibility as of the 2020 tax year if single, head of house has income limits of less than $124,000 and if married filing jointly less than $196,000. This is a great vehicle for your money as well when saving for retirement, especially if you believe that your taxes will increase in your retirement years.

Not one or all of these are created to be your only tool for retirement, remember saving now will allow you to enjoy retirement latter. Saving as much as you can now will give your funds more time to grow, taking advantage of compounding interest and market growth.

Regardless of your approach, tell me how it is going and let’s start a better money discussion. 

Your Interest Rate Doesn’t Matter. It’s All About That APR

Interest rates have seen a steady decline of the past year and with the recent cut by the Federal Reserve they are now hovering around the lowest rates in history. With rates being at an unprecedented low in the United States and around the world, borrowing is at an all-time high as individuals rush to purchase and refinance large items at today’s record low rates. If you are considering purchasing or refinancing a large item that you must finance it is important to know the difference between interest rate and annual percentage rate (APR) to get the best loan available to you.

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Interest Rate is the annual cost of borrowing the principal amount of the loan. Most often this will be the advertised rate that you will see lenders providing to the public in large bold numbers. However, when reviewing you loan documents you will often find a different rate, that of the APR.

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The APR is calculated separately of the interest rate and is the combined cost of interest on the principal plus the cost of other fees that you might be paying as well. For example: most mortgage companies have an array of fees that often are reflected in your APR but not your interest rate such as a loan origination fee, documentation fees, discount points, closing cost, and borrower paid mortgage insurance. These fees must be displayed in the APR according to The Truth in Lending Act. The APR is a more true reflection of the total loan cost and will allow you to shop loans in a more apples to apples comparison being a more precise means of determining the accurate cost of a loan.

You must be diligent when shopping for a loan, many times you will hear a lender quote the interest rate or even quote a discounted interest rate only to fine large fees or “points” hidden to get you that super low interest rate that they quoted you. When comparing loans pay close attention and compare the APR to decide the least expensive loan.

Please leave a comment below, I would love to hear your stories, answer your questions, and have better money conversations.

Put Your Returns To Use

It’s that time of year again and with returns coming in the millions every day so are those returns being sent back to you. With the average return at $3,200.00 so far this year as of February 28th, according to the IRS.gov, what can you do to get your best return on investment with your tax return?  However you approach your tax situation, if you are getting something back this year you should view the money as an unexpected windfall that you were not expecting and put the money to use for you.  Three great strategies include:

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Paying of your high interest debt:

The more debt that you carry, the more money you are taking away from your future self, if that is six months from now or forty years, if you are carrying balances month over month you are depriving yourself of future resources.  Using this year’s tax returns to pay off your high interest debt should be your number one priority. Not only will paying off your higher interest debit provide your future self more financial stability, it could help improve your overall credit score by reducing your revolving available or credit utilization. With a better credit rating you can help yourself to lower loan rates in the future as well. 

Funding your emergency savings fund:

In basic financial advising we learn that clients should establish an emergency savings fund equal to three to six months of their living expenses.  Savings for your emergency fund is one of the most important concepts in financial advising.  Too often, an individual’s finances are ruled by their emotions and biases, we often overlook the boring future of saving for a rainy day when we can get instant gratification (something now). Unfortunately, no one can predict when an emergency situation might pop up, from the car breaking down to a medical emergency of yourself or a loved one; and if you don’t have the money set aside you may have to charge the expense on high interest credit cards or shuffle other bills around so that you can get back to work to pay those expenses off. Putting your taxes towards your individual emergency saving fund is a great idea.

Contributing to your retirement:

Funding your retirement each year is probably the most important thing your can do for your future self financially. Since you are treating your tax return as an unexpected windfall, using that money to contribute to your retirement will have your future self reflecting on how smart you truly are. While rates of return may fluctuate on your retirement account, the sooner you start, the more your money will compound, leaving you a bigger pile of money when the time comes to retire. With so many different types of retirement plans available to you it is important to do your research and talk with a professional advisor or your accountant when starting out to help find the right plan for you. 

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Keeping your long term goals in mind when making financial decisions is imperative, how you plan and prepare for your future is essential to creating a better outcome. Create and follow your budget and set your goals.

Regardless of your approach, tell me how you approach you taxes and your returns. Start a conversation and lets have a better money discussion.