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Mobile payments: Avoid impulse buying

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NEW YORK (10/21/14)--At the dawn of a "frictionless payment" revolution, many consumer advocates are worrying these new technologies could lead to more people sliding further into debt. Already Americans struggle to control credit card debt.
 
One landmark 2001 study showed that people who pay with credit cards, in some situations, are likely to spend twice as much as they would have if they were paying with cash, in part because the pain of actually handing over hard-earned money for the item is delayed (The New York Times Oct. 10).
 
Multiple studies since then have confirmed that credit cards encourage people to spend more than they would if they were paying with cash.
 
With the new Apple Pay system, iPhone owners won't even need to get out a credit card to buy something in the estimated 220,000 stores currently equipped to accept this payment method: Paying will be as simple as hovering their smartphone near contactless readers. If iPhone owners are shopping online or in an app, a single touch can buy anything they see.
 
Credit cards transformed the way consumers spend, and new mobile-payment platforms are poised to do the same. With phones being transformed into computers, GPS locators and now payment methods, companies will have unprecedented opportunities to encourage consumers to spend (Slate Oct. 9).
 
These payment platforms make sense for companies like Apple and Amazon that are offering them, because it gives them access to reams of consumer spending data. But for consumers, they could encourage unprecedented levels of overspending by widening the gulf separating shoppers and the physical act of spending money.
 
If anything you see in real life or encounter online can be purchased in a split second, saying no will be harder than ever. So if you're excited about ditching your wallet and embracing a new smartphone-based payment platform, take precautions to avoid overspending:
  • Use technology. Exert impulse control with apps that help you stick to a budget and meet savings goals. Your credit union might offer its own money management app;
     
  • Check your balance. The reason paying with your phone is dangerous is because it takes the sting out of spending money, but a smartphone also makes seeing your balance easier than ever, too. Before making a purchase, take a second to log into your checking account and remind yourself that whatever you buy, you'll eventually have to pay for; and
     
  • Commit to a waiting period before any major purchase. Saving and delaying a purchase cannot only help you make a better decision, but it often results in a more satisfying experience.
For related information, read "Gotta Have It? Check Impulse Spending" in the Home & Family Finance Resource Center.

Easy money: Take advantage of 401(k)

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McLEAN, Va. (10/14/14)--Long gone are the days of traditional pensions. With many companies offering 401(k) plans, how successful you are in saving for retirement is up to you (USAToday.com Oct. 8).
 
Here's advice to help you engage in your 401(k) and how to maximize this opportunity:
  • Take advantage of your company match. Contribute at least as much as you need to get your employer's match. If you don't, it's like leaving free money on the table.
     
  • Play catch up. If you're age 50 or older, take advantage of the catch-up provision which lets you contribute an additional $5,500 into your plan each year.
     
  • Increase your contribution each year. Even by increasing your contribution by 1%, this amount will add up quickly. Also consider bumping up your contribution percentage each time you get a raise or a bonus.
     
  • Don't forget about 401(k)s at former employers. If you leave your job you have several paths you can take with your 401(k): Leave savings with your former employer, roll over your plan to a traditional or Roth IRA (individual retirement account), move savings to your new employer's plan, or cash out and pay taxes. Each scenario will require research to determine what's best for you. Cash out your plan only as a last resort.
     
  • Don't take early withdrawals. Experts advise not borrowing from your 401(k). Think about whether you'll be able to contribute to your 401(k) while you're paying back your loan. If you can't, this is derailing your savings even more. If you leave your job, you're responsible for paying back the loan usually within 60 days. If you can't pay it back you'll be subject to taxes and penalties. A better alternate for borrowing money is getting a low-interest loan from your credit union.
     
  • If you delay retirement, keep your 401(k). Once you turn 70 1/2 you have to start withdrawing a minimum distribution. If you're still working you don't have to take the distribution until you actually retire.
     
  • Aim to save 10%-13% of your gross pay. This includes your employer match if you get one. If you're already saving enough in your employer's retirement plan to get the company match, consider opening a traditional or Roth IRA at your credit union as well.
For related information, read "Did You Leave a Retirement Plan at a Former Job?" in the Home & Family Finance Resource Center.

Use Social Security statements to help with financial planning

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ST. PAUL, Minn. (10/7/14)--Don't miss the personalized Social Security benefit estimate that will arrive in your mailbox this fall. Take these steps to learn how to understand the statement, understand how to use it as a financial planning document and how to fix mistakes (NextAvenue Sept. 25).
  • Understand the benefit statement. Your statement estimates retirement benefits at various ages, how much you could collect if you were to become disabled before retirement age, and monthly survivor benefits for your children and spouse if you die this year.

    The statement is a snapshot in time. The projections are smaller than what you likely will receive when you actually start collecting benefits because they're calculated on today's dollars, aren't adjusted for inflation, don't take into consideration cost-of-living increases and assume that you'll keep making the same amount of money until you start receiving benefits.

    In addition to benefit estimates, the statement provides your complete earnings history and the total payroll taxes you paid on those earnings throughout your career.
  • Use your benefit statement as a financial planning document. By estimating how much you can expect to receive if you start taking Social Security benefits at different ages, your statement can help you decide when to apply and how much you'll need to save on your own for retirement.

    If you take Social Security benefits at age 62 (early retirement age), they'll be smaller than if you wait until you reach what Social Security calls full retirement age. If you were born between 1943 and 1954, full retirement age is 66 and it gradually rises to 67 for people born in 1960 or later. If you wait to retire until age 70, you'll get the largest benefit possible. You won't receive additional benefit increases after age 70.

    Calculate the difference in estimated benefit amounts taken at different ages to help you plan different retirement scenarios. For a wage earner who was born, for example, Jan. 1, 1955, and is earning $60,000 at the time of retirement, the annual benefit can vary by as much as $14,000 depending on your age when you apply for benefits.
  • Look for errors. Check the earnings record in your statement and make sure all the employment figures are correct.

    Your earnings history is the basis for future Social Security benefits. If it's wrong, you might not receive all the benefits you're entitled to. If you see years with zeros in them, check whether or not you paid into Social Security during those years.

    If you find errors, contact your former employer for copies of W-2 forms or look at tax returns for the years in error. Once you can document the errors, call the Social Security Administration at 800-772-1213, or send correspondence to Office of Earnings Operations, P.O. Box 33026, Baltimore, MD 21290-3026.
  • Review your statement regularly. If you're older than age 60, you'll receive a statement in the mail every year. If you're a taxpayer age 25 and older, you'll receive a paper mailing every five years unless you register for a "my Social Security" online account. By registering online, you'll no longer get a paper statement.
For related information, use the calculator: "How Long Will Retirement Savings Last?" and read "How to Calculate Your Retirement Needs" in the Home & Family Finance Resource Center.

Divorcing? Pay attention to financial details

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SAN FRANCISCO (9/30/14)--If you didn't play a role in managing family finances during your marriage, you could be at a disadvantage if you're going through a divorce (USAToday.com Sept. 23).
 
It's important for both spouses to understand their current financial situation and postdivorce needs. Address these items to stay on top of your money situation:
  • Cash flow. Understand immediate cash-flow needs; if you'll need access to cash right away, look at liquid assets such as stocks, bonds, and mutual funds. If you won't need cash immediately, look at long-term assets such as retirement plan accounts.
  • Insurance coverage. Check for coverage gaps and ways to cut costs. Don't find out after a disaster that coverage was cancelled for lack of payments by your spouse. Remove your former spouse from your auto policy to protect yourself from liability if he or she is involved in an accident and is sued. Consider life insurance as part of the final divorce decree to cover financial obligations. If the spouse providing alimony and child support dies, this may mean a significant loss of income.
  • Taxes. Review the tax impact of investments. Even if two assets or accounts have equal value, their economic values could be very different once you factor in taxes. Keep unrealized capital gains on taxable investments in mind, since taxes will be due someday. Review the past three years to five years of taxes you filed as a married couple. This shows combined incomes and if there are tax assets that need to be considered in divorce negotiations. Tax assets, such as charitable contribution carry-forwards, provide a reduction in future taxes and should be considered an asset when splitting the marital estate.
  • Retirement assets. Handle these transfers with care. The divorce decree should classify these items in a specific way. Consult a tax adviser for assistance.
  • Account passwords. Make sure you have information for all financial accounts. You and your spouse eventually will have separate accounts for most items, but you still might need access to accounts such as college savings plans for children.
  • Joint liabilities. Cancel jointly held credit cards, pay outstanding tax liabilities and refinance your mortgage if possible. Settle all liabilities before your divorce is final by either paying them off or by transferring them to the spouse taking responsibility for the debt.
  • Beneficiaries. Check your will, all insurance policies, and financial accounts such as pensions and 401(k)s to change beneficiaries.
  • Digital assets. Though some of these assets might not have financial value, they have emotional value. If you and your spouse shared profiles on social networking sites, now's the time to create individual ones. Make sure you have passwords to access the sites in the meantime. If you have an estate plan for digital assets if you die, change the digital executor if needed.
For related information, read "Breaking Up: Your Finances in a Legal Separation" and "Life Changes Trigger Financial Changes" in the Home & Family Finance Resource Center.
 

Use your gift cards, avoid wasted money

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AUSTIN, Texas (9/23/14)--When you give someone a gift card, there's a good chance at least a portion of your gift will go unused.
 
Every year close to $1 billion worth of gift cards is lost, due either to the card being misplaced or to the balance going so low it's merely forgotten (CreditCards.com Sept. 17). The Credit CARD Act of 2009 made it more difficult for retailers to run down the card value through inactivity fees or to cancel unused cards--but that doesn't protect consumers from themselves.
 
So here are some tips from CreditCards.com to ensure you get the full value of your gift card.
  • Put all your gift cards in one place. You can organize them physically or scan them all into an app on your phone.
     
  • Know the penalties. A company can't charge an inactivity fee for at least a year or deactivate a card sooner than five years. That's a generous window--just don't let it close.
     
  • Plan your shopping around gift cards. If you know how you're going to spend the gift card before you go shopping, you're more likely to use it.
     
  • Sell it or swap it. If you know you'll never use the card, there are multiple sites, such as cardpool.com or swapagift.com, where you can exchange it for cash or another gift card, though you might not get full face value.
     
  • Consider giving low-end gift cards. Research shows cards to fast food and retailers like Target are used more quickly than cards for higher-end shops.
     
  • Beware general-purpose gift cards. Credit card companies offer gift cards you can use anywhere, but they often come with fees and use-by dates, after which you have to call customer service to request a new card if you want to use the remaining balance.
     
  • Donate your card. Websites like Charity Choice and Gift Card Give collect low-balance gift cards and combine them into higher-balance cards to give to the needy.
     
  • As a last resort, check unclaimed property. Many states require inactive gift cards with a remaining balance be turned over to the state's lost property department after a certain amount of time has passed. If you can prove the card was yours, you may be able to retrieve it there.  
For related information, read "Fee Money or Free Money? Claiming Unclaimed Assets" and "Plan Now for Holiday Success" in the Home & Family Finance Resource Center.

Millennials: Rethink credit vs. debit

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NEW YORK (9/16/14)--There is a generational divide when it comes to shopping: A CreditCards.com survey indicates that boomers and millennials both choose plastic, but for the older cohort the word is "credit" and for the younger, it is "debit" (MarketWatch.com Sept. 2).
 
Both systems work well but boomers might point out to their juniors that using debit to the exclusion of credit has its handicaps. Millennials prefer debit over credit by a ratio of nearly 3 to 1, according to the survey, even though debit cards offer fewer protections and rewards and don't help young people build credit.
 
Matt Schulz, senior industry analyst at CreditCards.com, suggests that psychology may be a factor in the decision; consumers may be trying to limit spending to the money they have by using a debit card, which pulls money directly from a checking account. But if a scammer gets hold of a debit card, the consumer could be liable for unauthorized charges of $500 or more. Credit card holders are only responsible for up to $50 and can report a bogus purchase as fraud.
 
"If your debit card information gets stolen, somebody can take real money out of your account that you won't be able to use to make a car payment or a doctor's bill," Schulz says. "That money may be gone for a week or two."
 
Credit Union National Association Center for Personal Finance editors point out that, by choosing "debit" and entering a personal identification number, your transaction is treated as an ATM transaction.
 
The editors advise, "Instead, when you're making retail purchases with your debit/ATM card, choose 'credit.' You'll bypass any potential fees--and the funds still come out of your share draft/checking account."
 
Another good reason: Credit transactions require a signature, which helps guard against fraud.

For related information, read "Gotta Have It? Check Impulse Spending" and "What Will EMV (Chip) Credit and Debit Cards Mean for You?" in the Home & Family Finance Resource Center.

Suss out features of college-payment strategies

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WASHINGTON (9/9/14)--College students who borrow to attend college graduate with a debt load equivalent to a new-car purchase or a down payment on a house, averaging $25,000. Some borrowing might be inevitable, but also explore the features of other college payment strategies (Kiplinger Aug. 26).
 
529 savings plans
  • Pros: Your savings grow tax-free and earnings escape federal tax if you use withdrawals for qualified college expenses. Your state might give you a tax break for contributions; you may invest in other states' 529 plans.
  • Cons: If you use the money for non-college expenses you'll have to pay taxes and a penalty on earnings. A state-appointed firm manages the account you so lose direct control.
Prepaid tuition plans
  • Pros: You can lock in tuition at in-state public colleges years in advance. The tax benefits are the same as for a 529 savings plan. If your student goes to an out-of-state or private school instead, you can transfer the value of the account or get a refund.
  • Cons: Not all states participate. If you use the money for non-college expenses you'll have to pay taxes and a penalty on earnings.
Coverdell education savings accounts
  • Pros: The tax benefits are the same as for a 529 savings plan, and Coverdells expand the definition of "qualified" to include tuition at private elementary schools and high schools.
  • Cons: Your contributions can't exceed $2,000 a year and the beneficiary must be younger than 18; contributions are limited by your modified adjusted gross income.
Roth IRAs
  • Pros: The money in a Roth grows tax-free. Withdrawals are not limited to qualified education expenses. You can avoid taxes on withdrawals as long as they don't exceed your contributions; you can avoid a 10% early withdrawal penalty on earnings if you use the money for educational expenses.
  • Cons: If you are younger than age 59 1/2, you will owe tax on any earnings you withdraw. If you are 59 1/2 or older you must have held the account for five years to avoid taxes on earnings you withdraw. The ability to contribute to a Roth IRA is governed by modified adjusted gross income limits.
Custodial accounts
  • Pros: You manage the account until the child reaches 18 or 21, depending on your state. After that your adult child owns the account (this could be a con). There are no limits on how the money can be used. There's no limit on how much a parent can put into a custodial account. Full-time students younger than age 24 pay no tax on the first $950 of unearned income and pay the child's rate on the next $950. Earnings above $1,900 are taxed at the parents' marginal rate. Investment choices aren't restricted.
  • Cons: If your contributions surpass $13,000 a year you'll have to pay a gift tax. Large balances in a custodial account can hurt chances for financial aid.
Private scholarships
  • Pros: The money is free, and many scholarships are awarded to students based on need or special interests.
  • Cons: Schools might reduce aid if scholarships and aid combined are more than a student's calculated need.
With soaring tuitions, borrowing is often necessary even after accounting for savings and scholarship money. Investigate government-sponsored loans, federal work-study programs, state programs, and institutional aid with the Free Application for Federal Student Aid form. Consider federal PLUS loans as well as a private loan from your credit union. Private student loans come into play after all other resources are exhausted.
 
For related information, read "Parental Income Dings a Student's Financial Aid" and "Parents: Borrow for Kids' College, Jeopardize Retirement" in the Home & Family Finance Resource Center.