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Financial gifts can improve well-being

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McLEAN, Va. (11/24/14)--If you really want to give a meaningful holiday gift this year, think beyond traditional items such as clothing and gift cards. A recent survey conducted for Charles Schwab shows that more than half (53%) of those surveyed say cash to help pay off credit card bills would be their top choice as an unexpected holiday gift (USA Today Nov. 12).
A holiday gift to pay down debt can help someone save on interest payments as well as help the recipient feel more financially secure as he or she grapples with debt.
Other financial gifts to consider:
  • Piggy bank. This simple gift can go a long way toward educating even the youngest children about money. They quickly learn the concept of putting coins in the bank, then using the coins to make a purchase later. Buy a cute bank and fill with coins or a few dollars. Some banks electronically add up coins each time a new one is deposited--seeing the amount grow can be motivating to kids. Another idea: Buy a small three-drawer container and set up a drawer each for saving, spending, and sharing;
  • Sessions with a financial adviser. Paying for a sit-down with a financial planner, if only for one or two sessions, can help someone learn personal finance basics and give him or her the groundwork for starting to invest. To locate a fee-only financial planner, visit the National Association of Personal Financial Advisors at;
  • Cash toward a Roth IRA (individual retirement account). "In addition to using cash to pay off credit card debt, another smart way to use holiday gift money is to encourage a working recipient to put the money into a Roth IRA," said Michelle Dosher, managing editor, Credit Union National Association Market Research and Consumer Education. "Roth IRAs can be really beneficial, especially when people start them at a young age," Dosher said;
  • Electronic gadgets. Gadgets such as tablets and smartphones are popular gifts, but you can add a financially savvy twist with personal finance apps, many of which are free or inexpensive. "If you're going to give someone a gadget, also give suggestions of financial apps that could help teach money management skills. Also encourage recipients to download their credit union's mobile banking app," Dosher added. This is a gift that teens and tweens can appreciate as well;
  • Books. Help family members and friends learn to manage money by giving them a book about the topic. One idea is "Money Rules: The Simple Path to Lifelong Security" by Jean Chatzky. It's an easy read, broken up into sections about making and saving money, spending wisely, and investing;
  • A financial jumpstart. Maybe you know a new grad or someone just getting back on his or her feet. You could help by offering your home as a place to stay for a month or two or by helping to pay a security deposit or first month's rent. This would be a great gift for parents to give young adult children as they learn financial independence; and
  • Credit union membership. Let family members know that because you're a credit union member they can be members. Tell them about the benefits of credit union membership and about the ease of using automatic deposits, payments and transfers, and online and mobile banking.
For related information, read "Holidays are Rich With Teachable Money Moments" in the Home & Family Finance Resource Center.

Longer car loans detrimental to consumers' finances

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WASHINGTON (11/18/14)--A longer-term loan can make even the most expensive car look affordable.
By stretching out the loan over many years, your monthly payment is likely lower, but you could end up paying a lot more in interest. Still, many people find such loans attractive. 
The average new car loan is now 67 months, according to second-highest average term on record (Washington Post Nov. 12). Almost 25% of vehicle loans made in the second quarter of 2014 were for 73 to 84 months, according to Experian.
That's well above the standard three- to four-year loan that used to be typical for new car purchases. Here are some of the problems with taking out a longer car loan:
  • The longer the term of the loan, the worse your interest is likely to be. Shorter-term loans generally qualify shoppers for a better rate;
  • There's a greater chance you'll end up underwater. Without a substantial down payment, if you total the car or need to sell it, you could up receiving less than you owe on the loan; and
  • You're stuck with the car even if you don't want it anymore. If you want to buy a different vehicle, you likely won't be able to trade in your car because of the difference between what you owe and what the dealer is willing to pay for it.
If you need a longer car loan just so you can afford to buy the car, that's probably a good sign that you can't afford the car in the first place. Keep your loan at 48 months, and visit your credit union for preapproval on a loan before you even begin shopping.
That way you know exactly how much you can afford, and you can avoid taking out a loan that's going to be a financial burden long after the new car smell has evaporated.
If you have an auto loan from another financial institution, your credit union can help you refinance to a shorter term but still help you stay with an affordable payment.
For related information, read "Keep Your Old Car Running Longer" in the Home & Family Finance Resource Center.

In 2015, save with tax-advantaged accounts

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NEW YORK (11/12/14)--Next year you can put an extra $50 in your health care flexible spending account bringing the total to $2,550. Meanwhile the contribution limit for dependent care remains fixed at $5,000 where it's been stuck since 1986 when Congress originally set it.
While both accounts are employer-sponsored, the flex account for health care is adjusted each year for inflation. The account to help employees pay for day care is not. If it was, the contribution limit should now be at a robust $10, 859.08 (The New York Times Nov. 7).
For a long time, the government didn't even cap flexible spending accounts for health care--though employers usually limited annual savings to $5,000--but the Affordable Care Act capped it at $2,500 while allowing for future inflation adjustments. Next year will be the first time it's risen since the cap was put in place.
Still, these caps shouldn't stop you from contributing, because the savings can be significant. Here's what you need to know about the various tax-advantaged accounts and their new limits for 2015:
  • Health care flexible spending account, $2,550 cap. Your employer takes set aside pre-tax money out of your paycheck and puts into a separate account for health care expenses;
  • Dependent care flexible spending account, $5,000 cap. Works the same as the health care account, except the money is set aside for child care expenses for children 12 and under or, in some cases, a disabled spouse or aging parent who lives with you. If your employer doesn't offer this, you can use the dependent care tax credit;
  • Commuter expense account, $130 cap for public transportation, $250 for parking. Works the same as other flex spending accounts but is used for commuting expenses;
  • Individual retirement account, $5,500 cap, plus extra $1,000 for people age 50 and older. How it works depends on where you open the account, but most people are eligible for a $5,500 federal tax deduction for contributing; and
  • 401(k) and 403(b), $18,000 limit, plus an extra $6,000 for people age 50 and older. Your employer takes pre-tax money from your paycheck and places it into an investment account. You pay taxes on the money when you withdraw it in retirement.
For related information, read "Everybody's Money Matters: Benefits of Health Savings Accounts" in the Home & Family Finance Resource Center.

Pre-retirees: Avoid these 5 real estate mistakes

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SAN FRANCISCO (11/4/2014)--When heading into retirement, many people make the decision to downsize, relocate to a different community, or renovate an existing home. The thought of moving or making major home improvements often carries a lot of emotional attachment that can make these processes overwhelming. Here are five common mistakes to avoid (MarketWatch Oct. 22):
  • Waiting to downsize. You can miss out on a lot of savings by waiting for your last child to get out of college before you downsize. Lots of people wait until the kids graduate and then discover that the kids already are back, and sometimes with children of their own. It could be an eight- to 10-year extension on your time in a larger house;
  • Spending the windfall. If you're able to downsize and get cash out at the same time, don't look at it as found money that you can spend quickly. Carefully consider what you will do with it. For some people, it will be best to live on the equity and leave retirement funds alone for a while, allowing Social Security benefits to increase;
  • Moving sight unseen. Before you move, research the locale. Find out about taxes, the cost of living, access to the activities you enjoy, and health-care options for the future. Make sure the community you're considering moving to is what you have imagined it to be;
  • Maintaining two households. Maybe your plan is to live part time in two locations. Make sure you can afford the time and cost of payments, taxes, maintenance, and so forth for two homes. Maybe you think you'll save money by buying a house at today's prices and moving when you retire. Factor in the cost of running two homes to see exactly how much you'll gain--or lose; and
  • Holding a mortgage in retirement. Weigh the advantages and disadvantages of paying off your mortgage before retirement. You might be able to use that freed-up money to delay taking Social Security. Keep in mind that your tax deduction will not be significant like it was at the start of the mortgage. If you're thinking of taking on a new mortgage just before retiring because of today's low rates, consider a short-term mortgage such as a 10-year mortgage. You probably don't want to be paying a mortgage when you're in your 80s.
For related information, read "Move or Remodel: What Calculation Works for You?" in the Home & Family Finance Resource Center.

Millennials and housing: What you need to know

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WASHINGTON, D.C. (10/28/14)--Almost half of young adults with student loan debt say that debt is hindering them from buying a house, according to a survey by NeighborWorks America (Oct. 22).
While student loan debt can be a concern for many, another new study shows that that for some it isn't interfering with their home-buying plans at all. Four out of 10 millennials still plan to purchase a house within five years (Origination News Oct. 22).
If you're looking to purchase your first home you should understand:
  • The difference between being prequalified and preapproved. Prequalification simply involves a rough calculation of the mortgage payment you can afford. Your credit union lender can help you with this. Preapproval means you're essentially good to go. You formally apply for the mortgage and pay an application fee. The lender determines that you are eligible for a mortgage of a certain amount. It's called preapproval, rather than approval because, before making a final commitment to you, your lender must verify your information regarding employment and salary;
  • The difference between a fixed-rate mortgage and an adjustable-rate mortgage.With a fixed-rate mortgage the interest rate stays the same throughout the life of the loan, typically 15, 20 or 30 years. Your monthly payment will remain the same during that time. With an adjustable-rate mortgage the interest starts at a lower level and then may go up or down at specified intervals. A lender at your credit union can suggest the best option for you;
  • The difference between an appraisal and inspection. An appraisal determines a property's market value. An objective appraisal assures the lender that the property's value is at least equal to the mortgage amount. Note that a real estate agent's market valuation is not equivalent to a formal appraisal. A home inspection examines the condition of the house and its mechanicals. The purpose is to protect you, the buyer, from nasty surprises. Hire a professional inspector and ask for references;
  • Closing costs. No later than three days before closing, your lender will provide a statement showing you the final figure and a breakdown of all the costs (you got an estimate shortly after your loan was approved). Look over the statement to be sure all is in order. Usually, you'll need to provide a cashier's or certified check for the closing amount (plus the down payment) at the closing; and
  • Insurance needs. If you own a home, you have the potential to suffer property damage or liability loss. Ask your credit union lender and insurance agent about: homeowners' insurance, private mortgage insurance, title insurance, mortgage life insurance, and flood insurance. Insurance needs will vary for each individual homeowner.
For related information, read "$50 Winner: What Newbie Homeowners Need to Know" in the Home & Family Finance Resource Center.

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 ( 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.