Cash Money Life

I went to the bank last Friday to deposit a check and I noticed a couple of the tellers huddling off to the side. The branch manager was walking back and forth between the customer and the tellers and her office, where apparently she was on the phone with someone with more authority than she had. I don’t know all the details, but from what I could gather while waiting in line, the customer wanted to withdraw the contents of his account.

I’m not privy to the details of the transaction and perhaps I shouldn’t have even been paying attention. But my impression was that the customer was withdrawing his cash and closing his account because he was scared of the current economic situation.

But there was no need to worry. The bank was a member of the FDIC and his money was safe.

FDIC Insurance has you covered

The Federal Deposit Insurance Corporation (FDIC) was founded during the Great Depression to keep people form making runs on bank deposits. FDIC insurance protects depositors against the loss of their funds if a bank fails. FDIC insurance is backed by the full faith and credit of the United States government, and since it was established, no depositor has ever lost any FDIC-insured funds.

FDIC insurance covers funds in deposit accounts, including checking and savings accounts, money market deposit accounts and certificates of deposit (CDs). FDIC insurance does not cover other financial products and services that insured banks may offer, such as stocks, bonds, mutual fund shares, life insurance policies, annuities or municipal securities.

FDIC coverage is automatic. Coverage is automatic up to the limits and the banks pay the insurance premiums, not the customers.

New FDIC Insurance Limits

The new FDIC limits took effect October 3rd, 2008 and last through December 31st, 2009, unless they are extended by another bill. The new limit is $250,000 and covers single accounts, IRAs and other retirement accounts, and trust accounts. Joint accounts are covered $250,000 per co-owner. For example, my wife and I could theoretically have $1million in FDIC insured funds in one bank - each with an individual account and a joint account.

To guarantee your entire account is covered, just keep your deposits under the limit. If you need additional coverage, open another account with the same bank, or another bank.

Don’t make a run on the bank - your money is safe

Withdrawing your money out of fear is the wrong thing to do. What the customer may not have realized is that his money was safe and he could be setting up himself or the bank for failure. When you withdraw your money, not only are you not earning interest, but you have no protection for your money. You have no recourse if your money is lost, stolen, or destroyed. Withdrawing money from the banks also reduces their amount of deposited funds. This limits the amount of money banks are able to lend, which is how they stay in business. One person withdrawing their funds won’t hurt a bank, but hundreds of account closures in a short period can.

Is your bank covered? Most banks in the US are covered by the FDIC, and if yours isn’t covered, I would recommend finding one that is. To find out if your bank is covered, contact your bank or use the FDIC insured bank search.

From CNN.

My wife and I participated in a community garage sale this weekend. It was a great opportunity for us to clear some room and make a little money on the side. The garage sale was scheduled for Friday and Saturday, but we could only participate on Saturday because we both work M-F. We ended up clearing a lot of space and made a profit of $98.50. Since we live in a relatively secluded area with no thru-traffic, I consider this a success. More important than the money though, was clearing out unnecessary STUFF! We plan on documenting what we didn’t sell and donating it to a charity this week. We just don’t want to store things that aren’t being used. Oh, and the end of the year is coming soon, which means the time left ot max tax-deductible donations is running short!

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This week’s carnivals:

• 160th Carnival Of Debt Reduction - Bailout Edition was hosted at The Happy Rock.
• Carnival of Twenty Something Finances for October 6 was hosted at lava.
• 33th Money Hacks Carnival Oktober Fest Edition was held at Fix My Personal Finance.
• 19th Finance Fiesta - Oktoberfest was hosted by Living Almost Large.

This past week my workplace was abuzz with conversations regarding how much money people lost in their 401(k) plans. I’m sure similar conversations were going on just about everywhere. With the recent difficulties in the market place and the worldwide economy, it’s almost inevitable that you lost some money in your retirement accounts. I’ve lost quite a bit! But I’m not overly concerned about it right now (partly because I have about 30 years until retirement). I know that corrections and even major drops like this will happen. I plan on staying the course and continuing to invest for my retirement. I

What you should do with your 401(k) in this market

Don’t panic. Panic is never a good thing. Panic causes people to make irrational and often detrimental decisions. Look at your situation and assess your options.

Look at your asset allocation. If your retirement holdings are properly allocated, you are in a good position to weather the storm. Generally, the closer you are to retirement, the more conservative you want to be with your investments. The further out you are, the more flexibility you have in regard to risk. You may find that you need to make a few adjustments after the dust settles, but maintaining a good allocation will make it easier to get your portfolio back on track.

Don’t withdraw your funds. Even though you may have lost money in your account, it’s  better to leave your money in your 401(k) plan, otherwise you may face stiff early withdrawal penalties that will compound your current losses. Rebalancing your portfolio now and moving assets from equities into fixed return assets could be a case of selling low - which is the wrong thing to do.

Continue your contributing to your 401(k). If you are uncomfortable putting your money into the stock market right now, then consider making your contributions into a cash or money market fund if you have one available. You can also consider maintaining your contributions in their current funds. Remember, with dollar cost averaging you will buy more shares when prices are low which is a good thing when it comes time to sell. It’s true that the markets may continue to drop, but you never now when or how much. The more money you get in at lower prices, the more money you can potentially make when the markets increase.

I’m holding steady

I’ve lost quite a bit of money in the last few weeks - and it hurts to look at accounts that are 40% lower than they were just a couple months ago. But I’m looking at my 401(k) account (and my IRAs and other accounts) for what they are - retirement accounts. I have 30 years before I will be eligible to make withdrawals and I know that between now and then the markets are bound to recover. My job now is to make sure I stick to my game plan and maintain a solid asset allocation. The more money I pump into my retirement accounts now, the easier my life should be when I reach retirement age. And I know that old me will thank young me for sticking to the game plan, even when it looked like the sky was falling.

Ever wonder why credit card companies offer different versions of the same credit card? And what’s the difference between gold and platinum anyway… prestige and bragging rights? Not really. No one cares about the credit card in your wallet unless it is the American Express Centurion Card, and then people only care because they are superficial or they think you’re silly for spending several grand in annual fees. But I digress… The short answer is the difference between the green, gold, and platinum cards is service and benefits.

American Express Green, Gold, and Platinum Benefits

The main benefit of these cards is the service and perks they provide. There are many common features among them, and some that are exclusive to a particular card, such as the Gold Card events or the concierge service available only to American Express® Platinum Card holders.

Membership Rewards program. These cards all come with free membership to the Membership Rewards program for no additional fee. Cardholders earn one point per dollar spent on all purchases, and the rewards can be redeemed for gift cards, items, or transferred to airline or hotel miles. There is no limit to the amount of points that can be earned, and points never expire.

Here are just some of the perks you expect with these cards (click on the picture of the card for more benefit details).

Feature
Fraud Protection	X	X	X
Purchase Protection	X	X	X
Extended Warranties	X	X	X
Auto Rental Insurance	X	X	X
Use points for airline/hotel miles	X	X	X
Identity Theft Assistance	-	X	X
Access to Gold Card Events	-	X	X
Complimentary Airport Club Access	-	-	X
Concierge Service	-	-	X
Travel Accident Insurance	$100k	$100k	$500k
Business Version	Yes	Yes	Yes
Sign-up Bonus - redeem points for:	$50 Gift Card	$100 Gift Card	Round Trip Airline Ticket
Apply	Apply	Apply	Apply

Sign-Up Bonuses for American Express Cards

These American Express Cards each come with a sign up bonus.

Preferred Rewards Green Card - Earn 5,000 Membership Rewards® Bonus Points When You Spend $500 in 3 Months - Redeemable for a $50 Gift

Preferred Rewards Gold Card - Earn 10,000 Membership Rewards® Bonus Points When You Spend $500 in 3 Months - Redeemable for a $100 Gift

American Express® Platinum - 25,000 Membership Rewards® Bonus Points When You Spend $1,000 in 3 Months - Redeemable for One Domestic Round-Trip Airline Ticket.

Fees

These American Express cards offer generous benefits, but they come at a price. Each of these cards carries an annual fee (waived for the first year for Green and Gold). Annual fees are never fun, but they are typically easy to negotiate and often earn the card holder rewards points upon renewal. I recently renewed my American Express Business Gold Card and received 10,000 bonus points for renewal. This is equivalent to a $100 gift card. The renewal fee was $125. To make the renewal decision, I only had to ask myself if carrying the card was worth paying $25 for the next year. The Green Card carries a $95 renewal fee, and the Platinum Card has an annual fee of $450.

Who Should Use These American Express Cards

These three cards are charge cards not credit credit cards, which means the bill must be paid in full each month. The target audience for these cards is a person who regularly spends a lot of money each month, has the ability to pay the bill in full, and wants to take advantage of the excellent benefits and services - particularly those of the Gold and Platinum Cards. The higher annual fees make the Gold and Platinum Cards a better deal for those who will take advantage of the many services and discounts and plan to spend several thousand dollars a month with their card.

Dollar-cost averaging is a common investment strategy where you invest the same amount of money at set intervals. This takes the guesswork out of market timing and you don’t need to worry about trying to “time the market.”

Because the amount you invest remains constant, you are able to buy more shares when the price is low and fewer shares at a higher price. The goal is to buy more shares at a lower average cost per share over time.

This sounds like a great way to invest, and it can be. But there are times when there are better ways of investing than dollar cost averaging. For example, many experts believe that lump sum investing can result in better returns than investing a little bit over time. The idea behind lump sum investing is that the longer you have your money in the market, the more money you will make. Lump sum investing works best if you have a large amount of money to invest at one time.

Lump sum investing vs. dollar cost averaging. Here is an online tool that calculates actual returns using dollar cost averaging vs. investing in a lump sum. If you play with the tool for a few minutes, you will find examples where lump sum investing wins out, and examples when dollar cost averaging brings better returns.

Even though lump sum investing can result in better returns over the long run, let’s look at an example of dollar cost averaging and why it makes sense to invest that way.

Dollar Cost Averaging Example

Let’s take a look at using dollar cost averaging to max out a Roth IRA. The max you can invest in a Roth IRA in 2008 is $5,000. Many people don’t have $5,000 to put down at once, but they may be able to break it down into monthly payments.

Here is how dollar cost averaging would look if you broke down an IRA investment over 12 months (The numbers represent a fictional fund):

In this example, you can see that as the price per share goes up you can buy fewer shares, and as the price per share goes down you buy more shares. Note that the average share price is $30.46, which is less than the share price during January. In this example, dollar cost averaging comes out ahead of investing in a lump sum, but it could very well come out with the opposite result.

Pros of Dollar Cost Averaging

Affordability. Dollar cost averaging is more affordable and allows people to treat investing like paying a bill. It is difficult for most people to invest a $5,000 lump sum to max out a Roth IRA or Traditional IRA. However, many people may be able to afford a monthly installment of $416.66, which will put them on pace to max out their IRA for the year.

A similar example is investing in a 401(k) plan, which is deducted directly from your paycheck. Even if you could afford to invest the $15,500 limit at the beginning of the year from your cash savings, your paycheck wouldn’t be large enough to cover that. Most people also rely upon their paycheck to pay bills throughout the month. A 401(k) plan forces the participant to use dollar cost averaging.

Convenience. It is easy to set up dollar cost averaging as a monthly payment and incorporate it into your budget.

Cons of Dollar Cost Averaging

Lump sum investing can result in better returns. Lump sum investing can often result in better returns because you have your money in the market longer. This is based on the idea that the longer you have your money in the market, the better your returns are over the long run.

More fees. Dollar cost averaging also means making more transactions, which can result in higher brokerage fees. You won’t pay these fees if you are investing in a 401(k), but you could if you were making monthly purchases of a stock or mutual fund. You can mitigate these fees by investing quarterly or semi-annually.

Conclusion

The point of dollar cost averaging is not to try and time the market - it is to save or invest with amounts of money you can afford. The amount you can invest could be as low as $25 a month or into the thousands. The point is to get into the habit of investing, and dollar cost averaging provides investors with an easy and affordable way to invest money on a regular basis.