Index Fund Investing Overview

Investing in index funds is a pretty basic investing strategy but we wanted to cover it for two reason:

1) There are many people who are not expert investors and need this information.
2) Regardless of how experienced you are, this is a legitimate technique, especially for people who do not have the time or resources to monitor their own portfolios.

What Are Index Funds?

Index mutual funds are funds that mirror a specific “index.” For example, an S&P 500 Index Fund consists of the 500 individual stocks and their weightings in the index itself. If you invest in the fund and check the financials, whatever happens to the index in terms of performance, happens to your fund.

Index Fund Benefits

Index funds are “passively managed.” This means that compared to other mutual funds where portfolio managers make decisions on when to buy and sell holdings, a passively managed fund can only make investment changes when the index itself changes. Index funds have very low turnover rates because the indexes do not change all that often.

This makes this type of investment more tax efficient than actively managed funds. Index funds also have much lower expenses than actively managed funds. Index funds typically have 0.1%-0.35% in management expenses compared to 1%-2.5% for actively managed funds.

Index Fund Returns

Now some of you will say the goal is not to get index-like returns. The goal is to beat them. What most people don’t realize is that roughly two-thirds of all actively managed mutual funds fail to match the investment returns of index funds.

Index Fund Examples

So how do you use this information? What kind of funds should you use for a portfolio? Here are some examples of index funds you could use in your portfolio:

Vanguard Total Stock Market Index (VTSMX) – This fund is more than just the S&P 500 index. This fund encompasses the entire US stock market. This will give an investor exposure in both mid-cap & small-cap funds as well.

Vanguard Total International Stock Index (VGTSX) – Full international exposure in one fund.

Vanguard Total Bond Market Index (VBMFX) – Tracks the Barclays US Aggregate Bond Index, gives exposure to the bond market.

Vanguard Intermediate-Term Tax Exempt (VWITX) – This fund invests in high-quality municipal bonds, and is a good option for taxable accounts.

These funds could also be used as a starting point for people who want to combine index funds with other investments. Like any other investment though, these index funds should be treated as long-term investments.

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What Do You Need For Your Blog?

I don’t talk much about what goes on behind the scenes of this site because I know your main interest is personal finance, not all the reasons why I’m still up at 4 AM working on this blog post. However, today we’re going to take a break from personal finance and I’ll start with a short story.

Once upon a time there was a blogger named Ben who’s blog post sometimes took twice as long to write as they should because he was also writing code for his website. There was also a programmer named Ben who sometimes took twice as long writing code because he was working on new blog posts. If you haven’t already guessed, these are both the same guy – me.

Financial Bloggers Conference

This Fall, “programmer Ben” is going to lead a session at the Financial Blogger conference in Chicago about custom WordPress plugins. If that topic sounds foreign to you, just think of it as a way to make websites do cool and useful things that they weren’t originally designed for. There’s a wide range of topics that’ll be covered at the conference and I’m going to be speaking along with some people who have done some pretty cool things, you can check out the list of speakers here.

If Only I Had a …

Have you ever been working on a project and said to yourself, “If I only had a tool that did xyz”?  I found myself in that position several years ago when I was writing roundup articles for this site and wanted a faster way to collect good blog posts from the week into a summary article.

I wrote my first plugin to help out, it wasn’t pretty but got the job done.  Over the years I’ve created a variety of plugins for a wide range of purposes and each one has gotten a little better than the last.  I’ve written plugins to make me more efficient, to manage data, and recently have put out a few that show graphical representations of data.

For example, recently I wrote a Groupon Deals map that shows all the current deals that are going on in all the US and Canada. 

I like this one because your email inbox can get pretty crowded with all the daily Groupon deals.  Instead I can check the map for my city and get an overview of all the deals in one view.

Another example of a recent plugin is a tool that lets you compare data in charts and tables.  So far I’ve used it for these credit card bonus pie charts and a comparison table for credit card offers.

The pie chart you see here is a snaphot of the one comparing annual fees.   There are always bonus offers going on and frequently the main thing people focus on is the amount of cash or number of points that you earn.  I created some charts and tables that look at things like annual fees and the required amount of spending to earn the bonus.

As you can see, there are a wide variety of things you can do with a plugin and they can really add value to your site and articles.  There are also many “behind the scenes” types of things you can use a plugin to help with that aren’t as easy to show in a screen shot.

The reason I’m going on about the different things you can do with a plugin is that I want you to tell me what kind of thing you’d like to see a plugin for.

What Do You Need? 

If you don’t own or run a website then this won’t mean much to you.  However, if you have a site that runs on WordPress I’d like to hear from you.  I want to know what you need or want your website to do that you think a plugin could help with.

The reason I’m asking is that I’m going to build a plugin before the conference this fall and use it as the basis of my session on custom WordPress plugins.  In a way, it’s kind of like insurance for my presentation.  Even if I crash and burn, people will hopefully still like it because they get a plugin to take home with them!

Rather than build a plugin that exists purely for demonstration purposes, I want to create something that is practical and that attendees can put to use.  So leave a comment below about what kind of plugin you’d like to see, or you can let me know through my contact form.

I need to get started on the plugin relatively soon since the conference date is getting closer so I’ll put a deadline of this Wednesday on the ideas.

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Mutual Fund Investing Terms Defined

When it comes to mutual fund investing, all of the terms and acronyms can start to get a little confusing. Whenever you invest in anything, you should understand how it works, as well as know the terms associated with the investment. Mutual funds are fairly straightforward in their operation, but you should know the investment fees that are charged, and understand the terms you might come across. Here are some of the common investment terms associated with mutual fund investing:

12b-1: These are fees that come out of the fund assets to cover the cost of selling fund shares, and to cover expenses related to marketing. “Shareholder service fees” might also be included in 12b-1 fees. These are fees that cover the costs related to providing you with information about your investments. 12b-1 fees are also sometimes called “distribution fees.”

Back-end Load: You pay this sales charge when you sell mutual fund fees. Sometimes, a back-end load is called a “deferred sales charge.” You might also see a contingent deferred sales load. This type of back-end load decreases over time; the longer you are invested in the fund, the lower the load.

Class: A class of mutual fund shares similar investment objectives and policies. Each class (i.e. Class A, Class B, etc.) also has its own fees and distribution policies. Often, results vary according to class.

Closed-End Fund: Shares in this type of fund are not offered continuously to the public. Instead, a fixed number of shares are sold at once, and then the shares are sold on the secondary market. Also called a “closed-end company.”

Exchange Fee: If you transfer from one fund to another in the same group, you might be charged this fee.

Expense Ratio: A percentage that expresses the total operating expenses of the fund in relation to the fund’s average net assets.

Front-end Load: The fee you might pay up front to make a purchase. This fee is usually used to compensate brokers. It is taken out of the amount you are investing, reducing the amount of your principal investment.

Management Fee: A fee paid for the management of the fund. This is the fee paid to those managing the portfolio. It might also be an administrative fee that doesn’t fall under the category of “Other Expenses.”

NAV: This is the “net asset value.” Each day, the fund has to calculate the NAV at least once, per SEC rules. The NAV per share is the funds liabilities subtracted from the assets, with the result divided by the outstanding shares.

No-load Fund: Sales loads aren’t charged on these funds, often (but not always) reducing what you pay for investing. However, it is important to note that other fees are usually charged, so you aren’t investing for “free.”

Open-end Company: A mutual fund is legally referred to an “open-end” company. This type of investment company offers public shares continuously.

Operating Expenses: Costs associated with running a mutual fund. You usually pay a fee to help cover operatin expenses.

Prospectus: This is a publication that describes the mutual fund. It should include information on present and past performance, risks involved in investing, fees and costs, as well as the objectives of the fund.

Purchase Fee: A fee associated with the purchase of shares. This is not a load fee, and it might be charged on top of the load.

Redemption Fee: You pay this fee, sometimes, when you sell your shares. It is not the same as the back-end load, and might be charged in addition.

Sales Charge: Another term for “load.”

SAI: This is the “statement of additional information.” This is information about the fund that might be useful or interesting, but is usually not needed for investors to make an informed decision. You often have to request the SAI if you want to read it.

Total Annual Fund Operating Expenses: A percentage is used to express the total expenses as a portion of the total fund assets.

Of course, this doesn’t cover all the different acronyms and terms regarding mutual funds but at least it’s a start.  Are there any investing terms or concepts that you’ve mentioned that you’d like to know more about?

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5 Secrets to Surviving a Short Sale

Thanks to Neal for this guest post on things he learned about surviving a short sale. A generation ago a “short sale” was a special on Capri pants at and the local department store. A decade ago a “short sale” was a stock transaction that bet on failure.And now, it’s something completely different, and depressingly omnipresent.

A short sale is a way for you to get out from under your upsidedown mortgage and lessen the blow of foreclosure. At least, it offers a way to have to admit that you were foreclosed upon. We all know what the term “short sale” means these days. Many folks know less about what it involves, and more alarmingly, what it feels like to be on the receiving end of that short stick.

5 Secrets to Survive a Short Sale

Here are five little nuances that, if you’re just now considering this, you may not yet have been told, all of them something you need to weigh.

1. In comparing a short sale to a foreclosure, you’re basically trading one pain for another. Because in either case the bank won’t like you, and in return will send the credit bureaus a smear campaign with your name on it. Foreclosure will mercilessly ruin your credit for seven years. A short sale, if you can pull it off, will put a black mark next to your name for two, and give you quicker access to credit-rebuilding programs, which are suddenly all the rage.

But don’t sign up yet. Because your credit score isn’t the only variable involved.

2. Foreclosure is relatively easy. You just stop making mortgage payments, and then one day you get notified that you need to be out the door by a specific date. Which may or may not be the date you really need to be out of the house (some folks have been known to squat in their own home for up to year after a foreclosure notice).

When the real date arrives, you just pack your stuff and go. Simple.

3. By comparison, a short sale is like taking out your own appendix versus going to the emergency room. Nothing easy about it, and orders of magnitude more painful. First, you have to stop making your payments completely or the bank won’t even talk to you about a short sale. Don’t even thing about making a partial payment because, after all, you’re one of the good guys, it’ll back-fire on you.

What they will do, however, is turn your account over to a collection agency who will call you with some of the nastiest, most confrontational rants you’ve ever heard. Best advice here, if you truly are heading toward a short sale: don’t answer the phone. Instead, call your bank (not the collection agency) yourself every six weeks or so and tell them – yes, tell them – that you’ve chosen to do a short sale on the house, and you’re ready when they are, and in the meantime, no further payments are forthcoming.)

It gets worse from there. Once the short sale fuse has been lit, the bank will have a market appraisal done on your house, and your ego won’t like the number. They’ll want the highest price they can get, which is contrary to your desire to sell the house as quickly as possible. And by the way, at this point you are completely out of the conversation, on any and all issues. Just sit back and let your real estate agent handle the chaos.

Which brings us to the next little secret.

4. You absolutely need to work with an experienced short sale real estate professional. Ask for references and credentials. Anybody with a business card with the words “real estate” on it will say they can do it, but only a fraction actually specialize in it. Why do you need a specialists? Because the runaround you’re in for is astounding, and you need someone who can cut through the crap the bank will throw down in this process.

An attorney is a good idea, too, but that’s no secret.

5. There’s no such thing as a free lunch or a completely scott-free mortgage forgiveness, according to the I.R.S. You will receive a Form 1099-S in an amount equal to the amount of the loan forgiveness that results from a completed short sale. There are ways around actually claiming this income on your tax return, including the possible extension of Obama-generated tax breaks based on certain factors that you, your CPA and your attorney need to kick around.

But exempting this “income” from taxes is not remotely a sure thing, making this the dirty little secret of short selling.

6. There’s help out there. Go online and search for “short sale advice,” as well as “government programs for foreclosure avoidance.” The programs have income thresholds and expiring timelines, and this landscape is shifting constantly.

The banks, for example, have an incentive to help you apply for a kickback of up to $3000 — because they get a kickback of their own from taxpayers, which means you should thank all your neighbors for the help if you go this route – as part of the matrix-like cluster-bomb of paperwork and closing costs you’ll encounter.

Remember, while you may feel alone with your problems, you’re not.

Short sales are at an all-time high, and banks are resigning themselves to it as an alternative to foreclosure, which is the epitome of a pain-in-the-asset where they are concerned.

Just remember, though, that the short sale buyer is a close DNA match with the common shark, and they’re on your porch smelling blood for the sole purpose of capitalizing on your misfortune. Thus, coffee and cookies during showing are not expected… save the five bucks and buy yourself a sandwich. Just don’t tell your bank that’s how you’re spending your money, because they’re looking for any reason at all to tell you no.

Nolan Hoffman is the lead writer for onlinebanks.com and also blogs about his short sale experiences at debtkid.com.

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6 Investing Mistakes I Regret

The first time I tried my hand at investing in the stock market was a huge disaster, where I lost at least 50-75% of the money I invested. Today I’ll share the investing mistakes I made – hopefully my beginners mistakes will help you if you’re new to investing or are thinking about getting started.

Investing Failure #1: Listening to Advice from Amateur Investors

When I was eighteen years old, I was very excited about the idea of investing money in the stock market. I had long wanted to invest, but my parents always forbid me from doing so. Once I was 18, I couldn’t wait to take the few thousand dollars I had saved up from high school jobs and invest it in the stock market. The problem was, I didn’t have a clue about how to invest – I barely even understood how the stock market worked.

I spoke with a friend of my parents who often talked about investing. He was part of a stock club, and investing was a big hobby of his. I asked him about investing and he provided some good information about how investing and the stock market worked. Then I asked him for a “stock tip.” This of course, sounded like an adult thing to ask. He told me he thought General Electric was a good stock to buy at the time.

Perhaps (ok, likely) misinterpreting our conversation, I went out and put all of my money into General Electric. Now again, in my defense I was 18 years old at the time. I had never heard of terms like “diversify.” I barely knew what a mutual fund was. I don’t think General Electric even lost me all that much money, but it was clearly a risky stock buying strategy.

Investing Failure #2 – Getting Impatient

After a while, I got bored with keeping all of my money in General Electric stock. I started to put money into other individual stocks (again–not smart for someone who didn’t understand the market or the companies I was investing in). I spent a ton of money in transaction fees. I gambled on penny stocks that always lost me money. I was like the world’s worst day-trader. Ever.

Buy and hold was boring to my 18 year old mind. I wanted to prove my parents wrong and show that I was ready to invest. But I wasn’t taking the time to learn about how to invest. I was too proud to ask my parents for advice and too dumb to go read about it. I was actually proving that my parents fears were warranted, but I couldn’t admit it. Meanwhile, my losses were starting to pile up–thanks mostly to fees lost with all of the buying and selling.

Investing Failure #3: Not Researching Investments 

Like a degenerate gambler, I decided I needed a “big score,” to “at least get back to even” with the money I had lost in the market. I had started with around $3,000 and was now done to about $1,500, if I remember correctly. Shortly after 9/11, I had read in the Philadelphia Inquirer, that one of the local airlines (American Airlines I believe) had filed for bankruptcy protection.

I figured that a major airline would always stay in business (not studying about the deregulation of airlines or looking into the finances of the airline in any way). I sold all of my other stocks and put it all into American Airlines. I figured the stock couldn’t fall any further, since they had already filed for bankruptcy, – unfortunately I was wrong.

Investing Failure #4: Selling at the Bottom

I then compounded the problem by selling at the bottom, when the shares were basically valueless anyway. At that point in time, I turned my “paper losses” into “real losses.” I think I cashed out about $700-$800 of the $3,000 I originally invested.

Investing Failure #5: The Great Depression Attitude

I had started out as an enthusiastic investor and had been stung pretty badly. “Screw the stock market. It’s just legalized gambling,” I thought. I started hiding the remainder of my savings underneath my mattress, like some Great Depression Survivor who no longer trusted the banks. I missed out on the boom-time that followed.

Investing Failure #6: Lack of Knowledge

Underlying all of these mistakes, was a lack of knowledge. I had failed to take the time to thoroughly understand the system. I failed to comprehend even basic terms such as diversification or risk tolerance. More complex terms such as price to earnings (P/E) ratio were completely foreign to me at the time. I had been beaten and battered by the market; and at the time, I was convinced that I would never invest again.

My Investing Mistakes

Investing in the stock market shouldn’t be taken lightly. Even the most intelligent of investors can suffer huge losses in the stock market. I hope that by reading about my investing failures, you will be better equipped to make smart decisions. Or at the very least, more intelligent decisions than I made.

In an upcoming post on investing successes, I will tell the story of the second time I went into the market. It was several years later when I was finishing up college. Unlike my first venture into the stock market, I have had since had some successes along the way.

How about you what investing mistakes have you made? Do you have any stories of making epic mistakes when it comes to investing in the stock market?  

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Credit Card Offers – Cash Bonus Comparison

Credit card offers can be tough to compare because the terms of the bonus vary from card to card. While the cash bonus is probably what catches your eye there are other factors to consider, like what you have to spend in order to earn the bonus and whether the card has an annual fee or not.

Something else that can be tricky is that the credit card offers usually change over time.  It’s not typically in a matter of days but they can change relatively quickly – just a week after I wrote about comparing the credit card bonus offers available several of them had changed.

Comparing Card Offers

I put together the table below that shows the bonus amount, minimum required spend, and annual fee of all the current cash bonus offers.  You can click any of the columns to sort the offers – so you can check out the ones with the highest cash bonus values, then sort again to find the lowest annual fees. As you compare credit card offers you can click the card image for all the details about the card or you can click any of the fields for more info about the bonus offers. If you’re reading this in a reader or email you’ll need to visit the site to see the charts.

[chart_edge id=”card_bonus_dollars_table” chart_type=”table” chart_title=”Cash Bonuses” chart_width=”automatic” chart_height=”automatic” chart_col=”Card” chart_col_type=”string” chart_col_2=”Cash Bonus” chart_col_2_type=”number” chart_col_3=”Req Spend” chart_col_3_type=”number” chart_col_4=”Annual Fee” chart_col_4_type=”number” height=”400px” width=”550px” chart_col_2_format=”dollar” chart_col_3_format=”dollar” chart_col_4_format=”dollar” chart_sort_col=”1″ ]

Changing Card Offers

As an example of the changing terms I mentioned earlier, the Chase Freedom card cash bonus offer updated its terms for the minimum spend and the timeframe you have to earn the bonus after opening a card.  The dollar amount of the offer stayed the same but the minimum spend amount required was cut by a third.  Although the amount of time you had to hit the bonus limit was cut in half, the amount you had to spend per month was cut by about $100.

[chart_edge id=”card_bonus_dollars” align=”right” chart_title=”Cash Bonuses”]

The third card with changes, the Southwest Airlines Rapid Rewards actually offered a rewards points bonus and a cash bonus.  It’s a good example of how offers have multiple criteria you should examine. 

As part of the changes the cash bonus was removed and the annual fee went up by $30. However, the total amount of the rewards points bonus more than doubled.  If you looked at only the removal of the cash bonus or the increase in fee you might think the offer became less attractive.  However, if take into consideration the big jump in bonus rewards points and you’re looking to buy a plane ticket then maybe the offer improved.

The chart on this page is only for cash bonus offers but I’ll put together more charts in the future that compare rewards points bonuses and airline miles offers.

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Weekend Investing Roundup

We’ve written a lot about investing over the last few weeks.  So far we’ve tried to address questions that you might have about investing your money.  Some of the most popular ones have been about getting started as an investor, with topics like:

• How to Set Investing Goals
• Investing on a Budget
• Where to Invest Your Money
• How to Track Your Investments

Since we all work hard for our money we’re obviously concerned about the safety of the money we invest.  We don’t want to see it go up in smoke the second we put it into the market.  Although there’s no guarantee that you won’t lose all your money in the market, there are steps you can take to help reduce the risk of a big loss.  Since losing money and risk is such a big concern for many investors we talked about a few:

• Investment Asset Allocation 101
• IRA Investment Allocations
• Investment Risks & Your Money
• How to Invest Without Wetting Your Pants

Another concern many of you have is about your retirement funds and having enough money to pay your bills and medical costs later in life.  There’s obviously a lot more to retirement than just putting money into an IRA so we’ve only scratched the surface with a few retirement related topics like IRA’s and 401k accounts.

• 401k Investment Alternatives
• IRA vs Roth IRA
• Roth 401k vs Traditional 401k

One of the next topics that we’re going to cover has to do with the costs of investing.  Anytime you put money into the market, you’re paying some form of fee, sometimes more than you realize.   We’ll look at things like this AARP survey that help take a look at what it costs to invest your money.  You’ll find there can be a balance between level of service and the amount of fees you pay.  I’ve heard from several readers who picked an investment company or brokerage that promised a higher level of service but charged higher fees.  Not all of them have been happy with their decision so we’ll talk about considerations and options when moving your investments around between different brokers and also different retirement vehicles.

Of course, the opposite has been true as well.  Some people go with the low cost broker based only on trading fees alone but then later wish they’d chosen someone with better customer service or more investing options.  One thing I’ve noticed over the years is that the more money you have invested, the more people are willing to answer your questions and the more options you’re offered as part of your account. So the right place for your money can vary from person to person and your investing situation – we’ll look at how to evaluate your options.  We’ll talk about mutual fund companies, online brokerages, and some newer investing options like a tool called Betterment.  We’ll also touch on investing advice services and a tools like MarketRiders that help you design and manage a portfolio of ETFs.

So, I hope you’ve gotten something out of the recent investing series and now you know what to look forward to in the coming weeks.  Here are s few investing articles from around the web and some personal finance ones to check out as well.

Investing

• Are You Still Bullish on Investing in the Long Term? @ Lazy Man & Money
• How To Measure Investment Volatility @ The Digerati Life
• A Primer on Money Market Funds @ Million Dollar Journey
• Disadvantages of Direct Stock Purchase Plans @ Cash Money Life
• Why I Don’t Overweight Small-Cap or Value Stocks @ The Oblivious Investor

Personal Finance

• How to Avoid Fights About Money in Marriage @ Generation X Finance
• Beware The Lure Of Zero Percent Financing Deals @ Suns Financial Diary
• Biking vs. Driving Calculator @ Get Rich Slowly
• Should You Liquidate Savings to Pay off Debt? @ My Dollar Plan
• what if no one was watching @ Brip Blap
• Buying a New Hybrid to Save on Gas: Smart Move or Financial Folly @ Frugal Dad
• Save Money on Groceries by Shopping on Wednesday @ Free Money Finance
• How Big Should Your Emergency Fund Be? @ Moolanomy
• 17 Easy Ways to Save Energy at Home This Summer @ My Two Dollars

Thanks to these sites for including our articles in the Carnival of Personal Finance:

• Where to Invest Your Money @ Stupid Cents
• Investing on a Budget @ Canadian Personal Finance

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Credit Card Bonus Comparison Charts

[chart_edge id=”card_bonus_dollars” align=”left” chart_title=”Cash Bonuses”]

Credit card bonuses seem to be popping up all over the place, every time I open a credit card offer in the mail or visit a site online it seems like I read about a new cash bonus for opening a card. If you’re thinking about applying for a credit card, it can be hard to keep track of the offers and compare the bonuses since they seem to be constantly changing.

[Hover and click charts for details] The interactive charts you see in this article should help you compare the various features of the credit cards that are running introductory offers for signing up.  Each slice of a pie chart represents a credit card, to keep it readable each one just show the numbers  – like the amount of the cash bonus, annual fees, etc.  If you hover over a card slice you’ll see the name of the card and you can click on any of them to show more detail about the offer and more information about that card.

You can compare the cards with a chart for cash bonuses, rewards points bonus, miles bonus, required bonus spend, bonus spend months, 0% balance transfer intro periods, and annual fees.  You’ll notice some of the charts have more slices than others, if a credit card doesn’t meet the criteria for a particular chart then it won’t appear. For example, not all cards have annual fees so only some cards appear in that chart. (If you’re reading this in a reader you’ll have to visit the site to see the charts).

[chart_edge id=”card_bonus_min_spend” align=”right” chart_title=”Bonus Spend Required”]

The first chart looks at the cash bonus you earn from signing up for a new card. Some cards offer points instead of cash for becoming a new member, if they list the cash equivalent of the points I’ve included them in this chart as well. Some of these cards give you a credit on your statement, others give you credit towards a gift card, and others give you cash towards a travel purchase so pay attention to how you’re paid the cash bonus.

Many of the cards that have a bonus but no annual fee require a minimum amount of spending in a certain period of time in order to qualify for the reward. To compare those across cards I’ve included a chart that shows the amount of spending required and another with the number of months you have to make your purchases. As I mentioned, if you don’t see a card on a particular pie chart that means it has a value of zero for the feature we’re comparing it on. So in the case of the minimum amount of spending required, it’s good if a card’s not on the chart – that means you get the bonus regardless of purchases.

[chart_edge id=”card_bonus_spend_mos” align=”left” chart_title=”Bonus Spend Months”]

Having a set amount of time to make your initial purchases could be no problem or could make it tough for you to earn the bonus, depending on what’s going on in your life right now. For example, last year we spent a big chunk of money in one months time remodeling our house, so a card that required I spend a certain amount in a month would have made sense. So if you have some big purchases coming up you might want to hold off on applying for a card until right before you buy so you get your minimum spend within the window. Just leave enough time to get approved and have the card shipped to you.

One method used by Discover for some cards is to give you a certain number of bonus points each month you use the card, up to a certain number of months.  I kind of like that approach because you don’t have to put a bunch of purchases on a card all at once.  In cases like those, in order to come up with the “bonus spend required” I assumed that you’d be putting at least $5 a month on your card for the duration of the bonus period. Here’s the chart that compares the number of months you have to spend your minimum in order to qualify for the credit card bonus.

[chart_edge id=”card_bonus_points” align=”right” chart_title=”Rewards Points Bonuses”]

Credit card rewards can be tricky to figure out when you’re dealing in points because every credit card company has their own rewards program and pays out their rewards points a little differently. You have the Chase Ultimate Rewards program, Citi ThankYou Rewards, American Express Membership Rewards, etc. 

You’re also comparing hotel programs, some airline programs, travel programs, and general rewards programs.  So if it’s an airline credit card like SouthWest Rapid Rewards a given number of points will equal a free flight, whereas a travel rewards card like Chase Sapphire has different options. After seeing all the CapitalOne commercials a few months ago I visited their site and saw a chart where they compare their Venture card with many of the other top travel cards.  I imagine most credit card companies have a comparison of some sort on their sites but it’s still tough to compare apples and oranges.

So although comparing the number of points isn’t as exact as comparing cash bonuses, I guess it gives you a general idea about which cards offer the highest points bonuses and which have below average amounts.  If you see some that catch your eye, you can drill down into the details of those two or three and see how they compare.

[chart_edge id=”card_bonus_miles” align=”left” chart_title=”Airline Miles Bonuses”]

With airline cards you have two main choices 1) go with a card specific to a carrier like Delta, Southwest, United, Continental, etc – or 2) use an airline rewards card that lets you redeem your points across multiple airlines. 

If you’re a fan of a certain airline then the decision is pretty easy, as long as they have a decent rewards program.  It also makes a difference how much you fly.  Many of the airline specific credit cards pay the highest rewards when you use the card to buy one of their tickets.  If you frequent the airline then you might get the most rewards for your dollar with the carrier specific card. 

On the flip side, some of these carrier cards only offer 1 mile for every dollar spent on non-ticket purchases.  Right now you can earn double that on airline independent cards so if you put a lot of purchases on your card that aren’t flights then you might earn more miles and have the flexibility of choosing the airline when you do decide to fly.

Either way, check out this chart that shows the current airline credit card promotions to see what they offer.  Of course, the bonus miles don’t make or break the card so you don’t want to choose solely based on how many miles you get for signing up.

[chart_edge id=”card_bonus_balance_transfers” align=”right” chart_title=”0% Interest Balance Transfers”]

Some cards will also include a 0% balance transfer promotion that lets you pay no interest on balances you transfer over to the new card from an existing card. It seems as though Citibank and Discover usually have the most 0% interest offers, keep your eye on them if you’re interested in transferring a balance.

One of the main factors to consider for the 0% interest offers is the amount of time the promotional interest rate lasts. We all know that paying interest on a big balance can put a dent in your checking account, so getting a break from interest payments lets you put your money towards the balance. The longer you’re not paying interest on the balance the faster you can pay off the card. Here’s a chart that shows the number of months that various 0% balance transfer offers last.

[chart_edge id=”card_bonus_annual_fees” align=”left” chart_title=”Annual Fees”]

Some of the credit cards that offer bonuses don’t have an annual fee but others do.  This next chart takes a look at the annual fees charged by the rewards cards that we’ve been covering, if it’s not listed in the chart then it doesn’t have a fee.

It’s not always the case but typically cards that charge a fee try to offer more benefits to make the fee worthwhile. Depending on what the card offers and how you use it, paying a fee every year might or might not make sense. For whatever reason, it seems like the travel and airline cards seem to be more likely to have an annual fee.

One thing I’ve noticed with airline rewards cards is that their annual fee tends to be lower when the card first launches. After the card’s been around for a while the annual fee seems to go up, so if you’re going for an airline rewards card then it might make sense to sign up for one soon after they’re launched. 

One common thing that’s nice about many of the cards with fees is that they’ll waive the fee for the first year you have the card. Obviously the benefit of this approach is that you get to try out the card and see how you can use it for rewards before committing to pay anything – basically a rewards free trial. Not every card will waive the first year fee so be sure to check the details of a card if you’re thinking about applying.

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401k Loans 101

If you’ve been setting investing goals and decided your 401k was a good place to invest your money then you probably have some money built up in your retirement account.  What if you discover you need that money you’ve been putting aside before retirement?

You may be able to take a 401k loan, where you can borrow against the money you’ve accumulated in your retirement account.  If you find yourself in a tough situation where you need money quickly a 401k loan might be tempting but be aware there are some potential risks.  Today we’ll look at the pros and cons of a 401k loan and some frequently asked questions.

401k Loan Rules

How does a 401k loan work? Your best resource is your plan sponsor. Each employer-sponsored plan can be different, and your plan is not required to allow you to take a loan.

If your plan does allow you to borrow from your 401k plan, these rules apply:

• you may only borrow a maximum of 50% of your vested account balance, with a cap of $50,000
• unless you are buying a home, you must repay the loan within 5 years of borrowing the funds
• you must make consistent payments (at minimum, one per quarter) until the debt is repaid

Upside to borrowing From Your 401k

It seems like a pretty good deal. You can borrow from yourself, and the interest you pay back on the loan goes back into your retirement pocket. You don’t end up losing money by paying interest to a bank or credit card. The interest you pay goes from your checking account to your retirement account. It stays under your control. That is a major benefit of borrowing from your 401k plan.

A second benefit is no credit check is required. There are no qualifications set in place. You don’t have to have a certain credit score: the money is yours to borrow as needed.

Risks of Taking a 401k Loan

As nice as paying yourself interest sounds, there are some significant risks to consider with this type of borrowing. The first major concern is that any change in your job status normally means you must repay the loan within 60 days. That means if you lose your job or willingly leave the company, you must have funds available to repay the loan almost immediately. If you’ve just lost your job it might be difficult to repay the loan that fast.

If you can’t repay the loan, whether through job loss or not, your initial withdrawal of the funds will be treated as a taxable distribution. You will then owe income tax on the funds you borrowed plus a 10% fee to the IRS assuming you are under age 59 and a half. Even if you can eventually repay the loan, you will pay an origination fee and potentially a maintenance fee tacked on top of it. Your “free loan” to yourself probably won’t be exactly free.

Another risk is the potential loss of investment gain from removing funds from your portfolio. It would be great to avoid a market crash if you could time the market (something that is impossible to really do), but what if your portfolio grows 50% over that maximum 5 year loan period? The investment gains you leave behind can make other forms of borrowing look inexpensive in comparison.

An additional consideration is borrowing when times get tough sets up a bad habit of borrowing. When your expenses go up, your income goes down, or both, the last resort is to borrow money. A better course of action is to cut back on your expenses or find a way to increase your income again. Borrowing from your 401k is a risky, but easy “out” in this situation.

Alternatives to Borrowing From Your Retirement Plan

As mentioned above the best alternative to borrowing from your financial future is to cut back, sell items you own, or grow your income. Borrowing shouldn’t be your first option.

You could consider taking a home equity loan or utilizing a home equity line of credit, but in doing so you will be paying interest to the lender rather than to yourself. The upside to a HELOC over a 401k loan is the loan does not instantly become due if you change or lose your job.

In recent years a new credit market has emerged that offers person-to-person loans.  There are a few P2P lending companies like Lending Club and Prosper that let you apply for loans that are funded by a group of other people.  You still have to go through a loan application process and they evaluate your credit but the fees and rates can be less than going through a bank.

If you need money for a short period of time and don’t mind increasing your risk, you may be able to swing a 0% financing deal with a new credit card. Of course the credit card company is willing to take this risk on the assumption that you will slip up at some point in the future, and owe them a lot in fees and interest charges.

401k Loan Frequently Asked Questions

Q: How much can I borrow from my 401k?

A: Up to 50% of your total vested account balance to a maximum of $50,000. You could borrow $50,000 only if your account had at least $100,000 in it.

Q: Is borrowing from my 401k tax deductible?

A: No.

Q: How quickly do I have to repay the loan?

A: Within 5 years of borrowing unless you leave the company or lose your job. Your 401k loan cannot be rolled over to a new plan, and your loan may be due within 60 days of a job status change. (If you borrow to finance a home purchase, your terms can be longer — up to 15 years.)

Q: What fees will I incur with a 401k loan?

A: You will owe yourself interest, and pay an origination fee to the plan sponsor. You may also pay a maintenance fee. If you cannot repay the loan it will be treated as a non-qualified distribution and you will owe the IRS a 10% fee plus income tax on the amount borrowed.

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Prenups & Beyond: 6 Tips for Money and Divorce

When you go through a divorce, you not only endure emotional bankruptcy, you could face financial bankruptcy as well.  Divorce is actually a common cause for bankruptcy in the US, more often for women than men. 

Although divorce is the probably the last thing on your mind when you get engaged and get married there a few things to keep in mind before you start merging your finances with your new husband or wife.  Since almost half of marriages in this country end in a divorce (many of them due to problems or fights over money) it’s worth your time to think these money issues through.  Obviously I’m not a lawyer so this isn’t legal advice, just a few things to be aware of before you get married or if you find yourself contemplating divorce.

Prenuptial Agreements
Prenuptial Agreements are a step some people consider before getting married. They tend to only protect what you come into a marriage with–so anything earned during the marriage likely will still be subject to marital division. However, since each jurisdiction likely has different laws and regulations, you should seek an appropriate expert in your jurisdiction. Many people find prenuptial agreements somewhat unsavory and some might be insulted if you ask them to sign one. I think the obvious reason is that people probably don’t want to start a marriage already contemplating the possibility of divorce.

Debt
When you get married it’s best to have a plan as to how you will pay your individual debts. Some people will decide that the debt they enter a marriage with should never become a joint responsibility. Others will jump right in and commingle their debt. It’s really a potential problem, however, when there exists a great disparity in each party to the marriage’s debt load. The same goes for money brought into a marriage. Sometimes it can be easiest to get married when you’re both young and poor : )

If you’re not careful, you might end up like my friend who’s wife brought 50K of credit card debt into their marriage, convinced him to pay it off with a second mortgage in his name, then left him shortly after.

Inheritance, Gifts, Family Money
This is another issue that can cause problems in a marriage or during a divorce. Do you decide to commingle your inheritance or do you intend keep it separate to perhaps protect it in the event of a marital breakdown? When your parents put the down payment on a house are they still alright with that arrangement if your marriage doesn’t work out?

Wills
What about your will? Have you made sure you have kept it up to date both when you get married and afterwards in the event that you divorce?

Paperwork
Are you both familiar with how the bills are paid, the state of your finances, and how to access the money? People tend to get hostile or suspicious during a divorce. You’re both going to want to know where the marital funds have been kept and that neither party is hiding money from the other.

Attitude
I have an acquittance who’s a divorce lawyer and he says the most costly thing in a divorce is the parties dislike of each other. He’s seen clients waste a lot of money rather then settling–and they pay out of their anger. Having a great attitude and trying to stay friends even after a divorce can make both parenting and your finances easier to deal with post-separation.

Divorce and Money
Divorce is a difficult subject to write about, and I know it’s not the most fun topic to read about either. However, I’ve seen friends go through a divorce and think it’s important that anyone who is married or contemplating marriage at least know some of the issues that could come in to play if later on the marriage doesn’t work out.

Everyone says “that would never happen to me,” and I hope it doesn’t, but it may save both of you a ton of time and money in divorce legal fees if you have an idea of these types of considerations even when your marriage is going great. I should mention again that I’m no expert in law so I’d suggest getting expert/legal advice if you’re facing a divorce.

That said, I hope this will help you understand some of the issues in this oftentimes sad but still important part of personal finance. What are your thoughts and experiences on money and divorce?  Did you/would you ask for a pre-nup?

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