Could You Use a Short Sale for Your Home?

One of the difficulties that many homeowners still face is the fact that low home values make it harder to sell a home. Even now, with home prices rising a little bit, it’s still difficult to get what you paid in some cases.

If you need to sell your home, you might be able to get your lender to agree to a short sale.

What is a Short Sale?

A short sale is fairly straightforward. It takes place when the lender allows you to sell your home for less than you owe on your mortgage. In many cases, the lender absorbs the loss, forgiving you of the remaining debt.

Short sales have been increasingly popular since they usually cost the lender less than a foreclosure, and the lender can often sell a short sale property for more than a foreclosure property. It’s an arrangement where both parties can limit some of the unpleasant effects associated with not being able to sell a home for the mortgage balance.

How Can You Get a Short Sale?

Lenders have to decide whether or not to sign on to a short sale. Usually, you are required to demonstrate financial hardship before you can receive approval for a short sale. On top of that, some lenders like to see that you have tried to sell the home for a higher price first. Often, you won’t be approved for a short sale unless your home is on the market for at least 90 days.

Realize, too, that having a second mortgage can complicate matters – especially if that second mortgage is from a different lender.

Consequences of a Short Sale

Because a short sale is seen as a form of debt forgiveness, there are consequences to taking this action. Your credit score is going to take a hit as a result of your short sale. In some cases, depending on how the lender reports the short sale, your credit score can be impacted almost as much as if you had gone through foreclosure.

Be prepared for a lower credit score, which could result in a higher interest rate on your next loan. A lower credit score might also cause other problems. And, while you can still get another mortgage after a short sale, you might have some difficulty finding a lender to agree.

Another consequence might have to do with taxes. Right now, the Mortgage Forgiveness Debt Relief Act of 2007 is still in effect. It was going to expire at the end of 2012, but it has been extended to the end of 2013. Normally, a short sale results in the amount forgiven being taxed as income by the IRS. However, with the extension of the Mortgage Forgiveness law in place, you avoid taxes on the forgiven debt.

Realize that the Act might not be extended another year, so it might make sense, if you are going to attempt a short sale, to take care of it this year.

What If You Can’t Get a Short Sale Approved?

In some cases, you might not be able to complete a short sale. The lender may not agree to it. In those cases, you ned to decide what you will do next. Some of your options include:

• Continue trying to sell the house: You can leave the home on the market for what you owe on the mortgage, and hope that someone eventually buys.
  
• Rent the home: Another option is to move out of the home and then rent it out. You can have the new tenants essentially pay the cost of the mortgage. Then, when home values rise, you can decide to sell.
• Make up the difference: If you have the resources, you can make up the difference between what you can sell the house for, and what you still owe.
• Strategic default: For many homeowners, this is the solution of last resort. However, if nothing else works, you always have the option to just walk away.

What do you think? How would handle the situation if you needed to sell your home but were underwater? Leave a comment!

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How to Prepare for a Career Setback

We live in an increasingly uncertain world. Jobs are no longer offering the long-term security that our grandparents experienced. Instead, your career is likely to be a series of different jobs.

Along the way, you are likely to experience setbacks. Your hours might be cut, or you might not get that raise or promotion you hoped for. You might even be laid off.

In the current environment, it helps to be prepared for any career setback. You need to be ready for what’s next. Here are some things to keep in mind as you continue to make yourself more marketable:

1. Develop in-demand skills.

Don’t assume that you won’t need another skill set just because you have a job right now. You never know when your current job will no longer suffice. Instead, research different skills to find out what can make you more valuable as an employee. The better your skills, the less likely you will be among the first let go.

If you have a technical job, keep up with the changing environment. Pay attention to recent developments in your field, and take the time to get certified in new programs.

You can also work at self-improvement and developing soft skills that are in demand. Presentation, written communication, leadership, and problem solving are all skills that most employers prize. If you can develop these traits, you will be more likely to receive promotion – or be able to get a better position at a different company.

2. Keep your resume current.

Don’t wait until the crisis to update your resume. Every few months, review your resume and make changes. Add new skills that you are acquiring, and polish for keywords. You can also change descriptions using active language, and update descriptions and accomplishments.

If you keep your resume up to date, as well as create a template cover letter (that can be customized according to position later), you will have less work to do later. You can spend time applying for new positions, rather than try to get your resume in order on the fly.

3. Maintain your professional network.

One of the best things you can do is maintain your professional network. Make it a point to develop connections to others in your industry, or even in other industries that you have an interest in. Make sure to keep in touch with the members of your network on a regular basis so that you can call on them when you need help finding a new position.

While you don’t have to be best friends with your professional network, you should be in touch with them semi-regularly. Be willing to offer help to them, and when you are in a tight spot, they will be ready to help you in return.

Having a professional network can provide you with resources that can let you know when there are job openings suited to what you’re already doing. Members of your network can even become potential business partners or clients if you decide to take up a new business venture.

4. Be financially prepared.

You also need to be financially prepared. What would you do if your hours were suddenly cut? Do you have an emergency fund to fall back on? Do you have a side gig that provides another source of revenue?

Consider your current financial situation, and do what you can to shore it up. Emergency resources, alternative income streams, and a knowledge of which items you can immediately cut from your budget are important things to consider when preparing for a career setback.

What are you doing to prepare for the unexpected in your career?

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Why You Should Be Careful Using Online Tax Advice

Now is the time of year when nearly every website and blog on the world wide web is offering income tax advice. With the April 15th filing date approaching fast, it’s easy enough to see why. Everyone is looking for tax advice right now, and the preference is always to get it for free. The web will do that for you.

But as a semi-retired tax preparer from a CPA firm, I’m here to tell you to tread lightly in getting and fully accepting tax advice online. It’s not that the information given is faulty – quite the opposite – it’s usually pretty solid. The real problem is that it may not apply to your own particular tax situation.

Every Tax Situation is Different

It’s important to understand that the tax information being given out on the web is generic in scope. It represents the typical requirements that apply to the largest number of taxpayers. That doesn’t mean that the advice applies specifically to your situation. A change in a single variable could invalidate the advice as it applies to you.

If your tax situation is simple, online tax advice could work for you. But the more complex your tax profile is, the less likely it is that you can rely on general advice. In fact, doing so could increase the risk of making a major mistake and inviting closer attention from the IRS.

There are Dozens of Loopholes and Exceptions

Apart from the fact that your own tax situation might not accommodate general tax advice, the federal tax code is so riddled with loopholes and exceptions that it might even be impossible to rely on standard information.

Not only is there an exception – usually a great deal of them – in connection with nearly every provision of the tax law, but most of them require some sort of research just to be in full compliance. The tax code contains many thousands of pages of regulations that go worlds beyond basic advice.

It is even possible that trying to exploit a particular loophole in the federal tax code could be offset by an entirely different set of provisions in your state income tax code (a decrease in federal taxes could cause state income tax liability to increase). Unless you are aware of the big picture of tax preparation, you may not be able to take tax advice at face value.

Use a CPA if You Have Any Doubts

Making a single significant mistake on your income taxes can create a large tax liability, not to mention penalties and interest. If you have any doubt about a particular tax issue, you should consult a CPA or even a tax attorney. Some situations are simple, but others are incredibly complex. No matter how simple the financial media might attempt to portray it, income tax preparation is not the best place for the do-it-yourself crowd.

This is especially true if you are high income ($200,000 plus), self-employed, or own either rental property or various investment partnerships or S corporations.

The Proper Use of Online Tax Advice

Online sources can be a good starting point for tax questions. You can use them to provide sources from which you can follow up for more information. Many blogs provide excellent information on very specific tax issues. Just make sure that you also understand that changes in how you report an income source or deduction could have an impact on your overall tax situation in ways you may not fully understand.

If you ever hit on a tax question where either the answer is unclear, or it starts to look downright mysterious, it’s time to turn it over to the professionals. Tax preparation is not for amateurs! The IRS will not let you off the hook because you tried and failed. They will assess you the same charges as if your improper income and expense classifications were intentional.

Website and blog tax discussions – in addition to the growing number of income tax preparation software packages – are making tax preparation seem simpler than it is. Take the advice as general tips, and not as something specific to your own income taxes. And never do anything on your tax return that makes you the least bit uncomfortable.

Have you ever relied on web-based tax advice and later found that it didn’t apply in your situation? Leave a comment!

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5 Ways to Save Money to Buy a House

Saving money to buy a house can be difficult if you are not a saver by nature. And it’s usually not a small amount of money either. Unfortunately, down payment requirements are higher now than they were a few years ago. If you’re purchasing a house for $200,000, a 5% down payment will mean $10,000. A 20% down payment will mean $40,000.

And that’s not all.

You may also be required to pay some or all of the closing costs on the purchase, as well as to establish escrow accounts for taxes and insurance. In addition, mortgage lenders typically require that you have cash reserves after closing. The requirement will generally be for an amount equal to anywhere from two to six months of house payments on the new home.

Taken together, a 5% down payment ($10,000), $3,000 in closing costs, plus $2,000 to establish your escrow account, plus $3,000 in cash reserves will mean that you will need $18,000 in total.

For most people, that’s serious money, and it will take an effort on multiple fronts. Here are some suggestions . . . .

1. Live on one paycheck – bank the other.

If you are the typical two income household, this can be the most effective way to save a lot of money in a hurry. You can live on the larger of the two incomes, and use the smaller for saving up your down payment. Let’s say that the smaller income produces a net of $2,000 per month; if your goal is to save $18,000, you will reach it in nine months using this method.

Obviously you won’t be able to do this without making substantial changes in your cost of living. You will need to cut costs wherever you can, and even then you may find that you will be unable to bank the entire second paycheck. If that’s the case, you’ll have to use other methods in addition, depending on what your time frame is for reaching your goal.

2. Sell everything that isn’t absolutely necessary.

One way to fast-forward your savings is to sell as many personal possessions as you can. This can mean selling furniture, recreational equipment, fitness equipment and even jewelry and other personal possessions. You can also sell smaller items through periodic garage sales.

3. Cut every expense that isn’t absolutely necessary.

This is an excellent time to begin cutting as many expenses as you can. Most of us have ongoing expenses that we can get rid of. Cable TV is one example, so are landline telephones, gym memberships, unlimited cell phone service and any other ongoing service that you don’t absolutely need.

At best you may only be able save $200-$300 per month, but over the course of a full year that will add up to a minimum $2,400. That will be a nice supplement to other efforts.

4. Bank tax refunds and bonus checks.

Since the average income tax refund is over $3,000, putting it straight into savings is one of the best ways to reach your goal faster.

You can also plan to save any other major lump-sum payments you receive, such as bonuses. If you have a nice profit on some stocks you’re holding – and they’re not in a tax-sheltered retirement plan – now might be a good time to sell them. Even if you believe they will continue to rise in price, since you’ll be using the proceeds to buy a house, think of it as moving your money from one investment to another.

5. Get a second job and direct deposit your pay into savings.

If you aren’t in a two income household, this may become a necessary option. After you’ve cut all the corners that you can and liquidated everything that isn’t tied down, sometimes you still need to find an additional income source to build up your savings.

A part-time job that provides $500 per month will enable you to save an additional $3,000 in six months, or $6,000 in 12 months.

Bonus Tip: Give yourself plenty of time.

One of the reasons people find it so difficult to save money to buy a house is that they don’t allow themselves enough time to do it. Be sure that you give yourself a reasonable amount of time to accumulate the money you need so that you aren’t breaking open cookie jars, pawning family heirlooms, or getting loans from relatives at the last minute.

In today’s tighter mortgage market there’s an even better reason to not wait until the last-minute. Mortgage lenders are very suspicious of money that shows up only days or weeks before the loan application. They will assume that this money has been borrowed – and that it will require a repayment that isn’t disclosed on the loan application. That is, unless you can prove otherwise (not always so easy!).

In the mortgage world, this is referred to as “source of funds” documentation. If you do get money from family members, or sell off any personal assets, you’ll need to have a very specific paper trail proving that that is exactly what happened. This process can be very tedious, and is one of the biggest reasons why people believe they are being worked over by a mortgage lender.

You can avoid the entire hassle by making sure that you’ve completed your most significant money moves at least 60 days before you make your mortgage application.

What are you doing to save money for the down payment on a house? Or what did you do to make the down payment on the house you already own?

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4 Investment Alternatives to Equities

In general, many investors are reactionary. They tend to pull out of investments after the bottom has dropped out of them, or buy into something that has already had a pretty good run.

These last six months are perfect example. Pre-election, many investors felt skittish and moved to cash with part or all of their portfolio. There was a bit of dip with the post-election low for the Dow showing on November 15^th at 12,542. However, the market closed on February 21, 2013 at 13,880. The cash is flowing back into the markets, but is it too late?

The clichéd line is: “Time in the market, not timing the market.” While an obvious hedge against the equity market is fixed income, there are other ideas that help investors protect against the down-side of the market because of their non-correlation to equities.

1. Commodities

While recent history would say otherwise, commodities over time have been a great non-correlator. The running price on oil has been a major driver in this, but there are Broad Basket commodity investments in both mutual fund and ETF form that spread over the entire spectrum. These investments allow you to invest in everything from grains to coffee, gas and oil, all the way to orange juice. There are also sector-specific investments if you would like to bet on a certain idea.

2. Currencies/Precious Metals

Gold has been a hot topic for as long as anybody can remember, but every time someone thinks it has lost steam, it goes on another run. It can be purchased by buying the actual bullion, gold ETFs, ETFs for the mining companies that retrieve it, etc. Silver, while not nearly as lucrative as gold, has also done pretty well over the last few years. There are precious metals ETFs and mutual funds that let you take advantage of these two as well as others like copper and platinum.

While currencies have been an investment for countries and institutions for years, it is becoming more and more accessible to the retail investor. PIMCO, the world’s largest bond company just launched a new currency ETF for those that want to bet against the weakening dollar. There are other investments out there like this, so if it interests you, do some research to see which one is the best fit.

3. Long-Short

Long/Short investing has long been a staple of hedge funds. The idea is to go “long” or buy a security that you think will increase in value, while also selling “short” other equities that you believe will go down (Selling short is selling a stock you do not actually own with the idea of buying it later at a lower price. The danger is if that stock does not go down, at some point you will have to buy it back to cover the short position at a price higher than where you sold it). If you look around, you will find hedge fund companies that have gotten into the ETF and mutual fund business. This strategy is now available to the retail investor without having to place the short sales themselves.

4. REITs

REITs, or Real Estate Investment Trusts, have left a bad taste in many investors’ mouths. Some have been taken advantage of by financial advisors, who sold them an illiquid investment they are stuck with. Others have seen the real estate market plummet more than the stock market, giving them a one-two knockout punch to their retirement savings. If one were to think about global REITs where other countries are seeing success, this may not be a bad idea for the right portfolio.

These four ideas are in no way a replacement for an entire portfolio. Used strategically, they can help protect in a volatile market. They are not right for all investors, but if one does intrigue you, do some research to find the best investment that fits your need. A little research can go a long way. Good luck!

Which investment alternative are you most interested in? Leave a comment!

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Can Shopping Really Help You Alleviate Sadness?

We hear a lot about “retail therapy,” and how shopping can help you alleviate feelings of sadness and even stress.

But does retail therapy really work? A recent study from the University of Michigan indicates that retail therapy may be a real thing – and looks at why retail therapy is effective.

Reducing Sadness with Retail Therapy

According to The Benefits of Retail Therapy: Choosing to Buy Reduces Residual Sadness, just the act of choosing between products can help you feel better. It’s not so much the spending of money (although spending money on other people can make you happy), as it is making the decision.

Sadness, the study authors contend, is often the result of feeling out of control. However, being able to shop, and choose between different products, picking the one you like best, restores some of those feelings of control and reduces the sadness you feel.

One of the interesting results of the study was an indication that shopping does not reduce feelings of anger. Study authors believe that residual anger is an emotion that is more related to control, so retail therapy doesn’t help get rid of that emotion. However, the control exerted during shopping can alleviate some of the sadness felt.

So, if you are sad, or if you feel your life is spiraling out of control, doing a little shopping can help you feel better.

Should Retail Therapy Be the Solution to Your Problem?

What the study doesn’t address is the effects of retail therapy down the road. For many people, shopping to alleviate feelings of sadness, or to regain a feeling of control, can result in debt. Long-term, it might be reasonable to assume that regular retail therapy could eventually have the opposite effect.

After all, debt is one of the things in life that causes most people to feel most out of control. So, while shopping therapy might work in the short term, once it’s over, and you look at the pile of debt, it might intensify the feelings that led to the need for retail therapy in the first place.

That’s a study that I would be interested in seeing. Is there a vicious cycle created by shopping therapy? As you continue to shop to get rid of feelings of sadness and lack of control, the mounting debt could actually prompt even greater feelings of sadness and lack of control. With those rising feelings, more shopping therapy might be needed, resulting in even more debt. Is that something measurable with a study?

Emotions and Money

More and more, we see evidence that our emotions are tied to our financial decisions. Whether we go shopping to reduce the amount of sadness we feel, or whether we let fear rule our investment decisions, emotion can be a powerful force in our finances.

One of the best things you can do to keep on top of your situation is to take stock of the triggers that lead you to spend, or that encourage you to make poor financial decisions. Once you understand these issues, you will be more likely to gain control of your emotions, step back, make better financial decisions, and even cure your shopping addiction.

Have you found yourself shopping solely to alleviate sadness? Leave a comment!

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5 Investing Mistakes to Avoid with Your Retirement Portfolio

For most “regular” folks, investing is done through a retirement account. Investments in a tax-advantaged retirement account like a 401(k) or an IRA can be a smart move. You see your money grow with the help of compound interest, and it grows even more efficiently since there is a tax break involved.

When your retirement account is involved, it’s common to put your contributions on automatic, and then forget about them. In some cases, workers might not pay attention to what the plan entails. As you build your retirement portfolio, consider avoiding the following 5 investing mistakes:

1. Too Much Company Stock

One of the biggest pitfalls of many employer-provided retirement plans is that a great deal of company stock is often included in the portfolio. This was a problem my dad saw a few years back. If the company runs into trouble, an account overburdened with company stock can lose a great deal of value.

Your retirement account should be properly diversified. If possible, add other investments to the mix, reducing the impact of company stock.

2. Missing the Company Match

There are still some employers that offer their workers a company match. This means that, up to a certain amount, your employer will match your contributions. This is free money that can be used for your benefit. Often, you have to work for the company for a certain number of years in order to be fully vested with the match. Even so, it’s still a good deal. Try to contribute at least enough to get the full company match.

3. Paying High Fees

Unfortunately, some employer retirement plans come with high fees. There might be high-fee funds in the default portfolio, or the plan administrator might be charging quite a bit. In any case, it is worth an examination, since high fees can eat away at your returns.

It’s possible, if your retirement plan comes with high fees, to look into other options. Find out if you can choose funds with lower expenses, or ask your employer to look out for another plan administrator. If all else fails, you can contribute just enough to qualify for your match, and then open an IRA and invest in lower-cost choices.

4. Insufficient Diversification

This goes beyond just investing in company stock. You also need to make sure that you have the right diversification across asset classes (stocks, bonds, real estate, etc.) and even in different sectors and industries. Consider your overall diversification, and change things up according to your risk appetite. A little more diversification with an asset allocation that reflects your needs can protect your retirement effectively.

5. Not Contributing Enough

Along with asset allocation, one of the most important things for your retirement account is the amount of money you set aside. The reality is that, unless you began contributing to a retirement account (probably an IRA) with your first job as a teenager, $100 or $200 a month just isn’t going to be enough to build a nest egg. Consider strategies for boosting your retirement account contributions so that you know you will have enough.

It’s also possible to find ways to create a variety of income streams to help you sustain a set income in retirement. With a combination of strategies, you should be able to create a retirement that is more comfortable for you, maximizing your gains and minimizing the money leaks.

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Chase Sapphire Preferred vs. Amex Green

Does it make good sense to have a credit card with a high annual fee? For many people, it can. If the card offers rewards and benefits that far outweigh its annual fee, than it is a good strategy to hold such a card. Both Chase and American Express offer cards aimed at travelers with a $95 annual fee. Chase’s Sapphire Preferred and the American Express Green Card each offer a robust reward programs that appeal to frequent travelers. But in addition, these premium cards are chock full of additional features and benefits. Let’s put these two products head to head and see which one comes out on top.

American Express Green Card

First, let’s get one thing straight; the Green Card is not a credit card, it is a charge card. That means that all cardholders are required to pay their entire balance in full and on time. This is the best way to manage your credit regardless of which type of card you use, but it is the only way you should manage a rewards card. Think of credit card rewards and the free loan you receive between your purchase and your payment as a gift you earned for handling your finances so well.

That said, the American Express iconic Green Card still offers plenty of value. First, it offers one point in its Membership Rewards program for each dollar spent along with double points when you book travel trough an American Express travel agent. Once earned, these points can be redeemed directly for merchandise or travel rewards, or transferred to frequent flier miles with any of 16 different airlines.

Beyond rewards for spending, this card features a compliment of other benefits. For example, it comes with a roadside assistance program that will pay up to $50 in towing expenses up to four times a year. Its baggage insurance program covers you for loss, theft, or damages for up to $1,250 for a carry on bag and up to $500 for checked luggage. The Green Card also comes with purchase protection, extended warranty, and return protection policies covering any items charged to this card.

The $95 annual fee is waived the first year with most offers but regrettably, American Express still insists on charging its indefensible 2.7% surcharge on all foreign transactions.

Insider tip: Membership Rewards points can be redeemed for one cent each towards airfare, rental cars, hotels, or cruises. But reward travel enthusiasts have learned that the airline mileage transfer option returns the most value. For example, points can be transferred to the British Airways program for use on it partner American Airlines. This option allows you to make round trip flights of under 650 miles for a mere 9,000 points. Other options include redeeming 100,000 points on various carriers for a business class ticket to Europe, worth 4-8 cents per point used.

Chase Sapphire Preferred

A few years ago, Chase seemed to have decided that it wanted to compete with American Express in the high end reward card market. It even seems clear that Chase created its Ultimate Rewards program as a way to one-up American Express’s Membership Rewards program. Like Membership Rewards, Ultimate Rewards points can be redeemed for one cent each toward a variety of gift card, merchandise, or cash back rewards. But when use points to book travel directly though Chase’s travel agency, Sapphire Preferred cardholders realize 1.25 cents in value per point.

Holders of this card can also transfer points to airline miles or hotel programs. Although Ultimate Rewards only features four different airlines, their options are almost as good as what American Express offers. The program features Southwest as well as United, British, and Korean Airlines. The key factor is that each of these last three airlines is partners with US Airways, American Airlines, and Delta respectively. So cardholders can find a way to use their points for free flights on all major domestic carriers.

Earning points with Sapphire Preferred is also a bit easier. One point is earned per dollar spent on most purchases, with double points for dining and travel expenses. Three points per dollar are earned when you use your card to book travel through Chase’s travel agency. And finally, Chase offers an additional 7% points bonus each year.

Instead of offering travel insurance and purchase protection policies, this card boasts direct access to service advisers. Cardholders have a dedicated line that they can use to immediately reach a human. And while the Green Card looks like something your father (or grandfather) carried in his wallet when you were growing up, the Sapphire Preferred is made of some kind of plastic and metal sandwich that looks and feels futuristic.

Like the Green Card, there is a $95 annual fee for this card that is waived the first year. This is a traditional credit card and its interest rates are reasonable, but not great for those who choose to carry a balance. Finally, kudos to Chase for not having any foreign transaction fees.

Insider tip: Like many credit card issuers, Chase has an online shopping mall where you can earn extra points for purchases from selected merchants. In fact, their Ultimate Rewards mall features some great deals. I have earned hundreds of points by purchasing software that is free after rebates, and I earned a total of six points per dollar recently when I booked a room though Hotels.com; two points per dollar for all travel purchases and an additional 4 points per dollar by going to Hotels.com through the Ultimate Rewards portal.

The Verdict

The Green Card is an excellent product that has been around for a long time. Its Membership Rewards program features more airline point transfer options than newer Chase’s Ultimate Rewards, and it offers more travel insurance and purchase protection policies than the Sapphire Preferred. But I find the opportunities to earn bonus points with the Sapphire Preferred to be much more valuable. In addition, I don’t like cards marketed to frequent travelers that charge foreign transaction fees. The bottom line is that I earn more points, which are more valuable with the Sapphire Preferred card than I would with the Green Card. And value is always the number one consideration when choosing a premium rewards card.

Which card to you like? Leave a comment!

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Dwolla Review: A PayPal Alternative?

Have you ever been ripped off by eBay or PayPal? Or simply tried to resolve an issue after using one of their services? For many the experience is a nightmare that results in account freezes, lost funds, or outright fraud that results in you shipping an item and never being paid for it. Even if you have had a successful transaction on eBay or PayPal, you’ve lost a lot of money in fees. PayPal charges 2.9% plus 30 cents on every single transaction.

Isn’t there a better way?

Before now, not really. The major payment processors all charge about 2.75% to 3% for every transaction.

Enter Dwolla.

What is Dwolla?

Dwolla is a new website that aims to eliminate the problem of expensive transactions online. The firm is targeting the likes of PayPal and other money brokers with high fees. Instead of charging you 3% on every transaction you pay a flat fee of $0.25. (And any transactions under $10 are free.) This is an incredible deal that definitely should encourage you to learn more about the company.

The company likes to say it is a cash-based financial network. This means you can’t load your account or pay for items using your credit or debit card. (More on this in a minute.) However, you can link your bank account to load your account and transfer funds through the network that way.

Why Can’t I Use My Credit or Debit Card on Dwolla?

Dwolla does not allow the use of any “antiquated” (in their terms) plastic.

Why?

It increases the cost for everyone. The company claims that credit or debit card acceptance increases cost anywhere from 2% to 7%. I think the upper number is a bit inflated, but they do have a point. The credit card companies do charge swipe fees and the like, and that increases costs for everyone. Dwolla wants to eliminate that fee, charge an insignificantly small fee, and make money in the process.

How Does Dwolla Work?

Dwolla works like most other payment processors, just without the ability to accept plastic.

You can:

• Spend money at a retailer that accepts Dwolla
• Give donations to a charity that accepts Dwolla
• Send money to friends that have Dwolla accounts
• Purchase items at online retailers that accept Dwolla

It sounds a lot like PayPal, right? There are some significant differences.

First, like PayPal, you can only use Dwolla at retailers that accept it. The company provides a list of companies so you know where you can use your Dwolla account.

Another key differentiator is you can send money to friends via social payment. That means you can send money over Facebook and Twitter. (If they don’t have a Dwolla account they will get a notification to open up an account.) Otherwise the money will be immediately transferred to them.

Lastly, many payment companies have delays built into their business when transferring money. When you transfer from your bank account to the payment company you experience a 2-4 day delay. When you transfer funds from the payment company back to your bank, you experience another delay.

Dwolla does not immediately wipe out the delays, but does a great job of explaining how long transfers will take. They have the normal delays that other payment processors have – unless your bank uses something called FiSync. Without getting into the technical details, FiSync is something your bank signs up for that immediately transfers funds between financial institutions. Dwolla participates in FiSync so if your bank has it as well you get immediate transfers between your bank and your Dwolla account. (They have a graphical explanation on their great transaction timing page.)

How Does Dwolla Handle Fraud?

Most of the articles on the web about Dwolla from both professional journalists and small-time bloggers rave about the concept of the company. All of the fees involved with processing a simple payment do add up to 2-3% for merchants, plus they have to wait up to a week to get paid. Cutting out those costs seems like a great deal for merchants, and assuming they pass some of those cost savings on, for consumers as well.

But part of those costs are used for fraud protection for consumers. And Dwolla talks a lot about how they are safer than using credit cards. But there are not a lot of specifics as to how they handle fraud, chargebacks, and the like. What happens if someone gets access to my Dwolla account and drains it of funds? Or worse, I have a FiSync bank account and they drain not only my Dwolla account but also my checking account, too? I’d like to see a dedicated page that explains how they handle fraud rather than some vague talk about security.

Can Dwolla Replace PayPal?

For small, trusted transactions then I would absolutely use Dwolla over PayPal. PayPal has a terrible reputation in part because they are so big, you can’t handle fraud calls on a massive scale very easily. If you aren’t worried about fraud then it comes down to a 25 cent fee (or $0 if the amount transferred is less than $10) compared to about 3% with PayPal. That’s a no brainer.

For large payments, I’m not 100% convinced Dwolla is ready. I’d like to see better data about fraud situations before I jump in full force. One way to protect yourself would be to have a separate bank account that you only keep small amounts of money in to transfer to and from your Dwolla account. That way if your account is somehow compromised you don’t stand to have your entire checking account wiped out.

So what do you think? Are you going to give Dwolla a whirl? Leave a comment and let us know!

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6 Things You Can Learn From Your 401(k) Statement

Your 401(k) statement is an incredibly useful document that can be confusing when you first look at it. It is several pages long, is full of tiny print, and has percentages and basic charts on it. If you take the time to look at it before you file it away with the rest of your financial documents you might be surprised at what you find.

6 Important Pieces of Information in Your 401(k) Statement

Here are six key pieces of information you can find inside your 401(k) statement.

1. Current Investment Allocation

One of the first pieces of information you will find is your current asset allocation. Asset allocation shows what percentage of your current invested assets (money) are in the specific fund categories you selected. Alternatively it will show what percentage of your assets are in certain asset classes ranging from large to small and growth to value companies.

Usually there will be a comparison to your current investment selections. For example, if you wanted 50% in Fund A and 50% in Fund B, but your current performance has 60% of your assets in Fund A and 40% in Fund B, it would show that difference between your current allocation and what you selected. This is to let you know if you need to sell some of your winners to buy some of your losers.

2. Investment Expense Ratios

Next you should look for your investment expense ratios. This is the fee the mutual fund charges you to hold and invest your money. The industry average is about 1%, but in my eyes that is far too costly. You can get great index funds for 0.20% and ETFs for even less than that. Saving 0.80% every year on expenses will add up over the years. You will be able to find the expense ratios not only on your current investment selections, but on others available to you as well.

3. Your Gain or Loss for the Quarter

You would think this was pretty simple, but some companies mess it up. All I need to know is what the difference is between my investment cost basis and what the current value of my assets is. Some companies will include your contributions in the “gain” section, but that doesn’t show you how that money performed. It really isn’t a gain, it is a contribution. Nonetheless you should be able to get an idea as to whether you made or lost money this quarter.

What’s interesting to me is this: Your quarterly gain or loss doesn’t really matter unless you’re making sure all of your contributions went through and to insure someone didn’t withdraw funds without your approval.

4. Your Personal Return for the Quarter

Likewise you can find your personal return for the quarter. Your fund prospectus statements say it all over and in several ways that their stated performance and your individual performance will not necessarily match. You contribute funds throughout the quarter as the fund price goes up and down. But it is good to see how your funds performed overall. (This is still similar to the gain/loss of the quarter; it is the long term performance that matters and not the quarter to quarter. Don’t stress over this.)

5. Investment Options and Performance History

There should be a listing for every single mutual fund you have access to invest in along with its performance history. Most companies will remind you multiple times that past performance is not indicative of future results, then turn around and market to you based on that performance. They will normally show a 1, 3, and 5-year history as well as since the fund was created. Ideally you are investing in index funds and don’t need to worry about whether or not your fund outperformed an index or not.

6. Contribution Amount, Dividends, and Interest Paid

Lastly you should be able to verify your contributions for the quarter (and likely year to make sure you aren’t contributing too much) as well as any dividends or interest paid to you.

What are some other things you can learn from your 401(k) statement? Leave a comment!

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