KerPlunk!

Credit: Paul Brentnall

“KerPlunk”, “Wham”, and “Splat” are all good vintage Batman onomatopoeias. They are also applicable words to describe the performance of the 444 banks that have failed since October 1, 2000 according to the Federal Deposit Insurance Corporation (FDIC). It was originally big news, but now that so many banks have failed, many people hardly notice when another one bites the dust. I confess that I was one of those people until a couple of months ago when I saw that one of the most recent bank failures was in my hometown of Jonesboro, Georgia. That was too close for comfort and made me want to learn more about how banks fail, what actually happens when they fail, and what I needed to do to protect myself in case my bank failed. I thought I would take a moment and share my findings with you.

Have you ever wondered how banks make money? It’s not by keeping your money locked up in their safe, paying their employees to watch over your money, and paying you a tiny bit of interest each month. Banks make money by taking your money and loaning it to other people at an interest rate much higher than the bank is paying you, by investing your money in regulated investments or government bonds that normally yield slightly more than the interest rate the bank is paying you, and by charging their customers fees. Out of those sources of income, what gets banks in trouble is the loaning your money to other people part. You see, when banks have made too many loans to people who default, they no longer have enough cash to both pay their bills and to provide their depositors cash on demand. And when a bank cannot pay its bills or provide cash to its depositors when they demand it, it fails.

When a bank fails, the FDIC takes over. The FDIC is an independent federal agency whose mission is to “promote public confidence and stability in the nation’s banking system.” The FDIC usually takes over failed banks on Fridays and tries to offer the customers a seamless transition to their new FDIC-run bank by the following Monday. You cannot predict bank failures because the FDIC has usually already taken control of the bank before the bank failure is ever even announced. This transition process doesn’t usually require any paperwork by customers, and their ability to use ATMs, access safety deposit boxes, and make deposits is usually uninterrupted. The only headache is that customers may be restricted from withdrawing their money for a few days. This restricted access is to ensure that there is not a run on the bank and to give the FDIC time to restore the bank’s ability to meet its financial obligations. The important thing to realize is that NO depositor has ever lost a penny of insured deposits since the FDIC was created in 1933. After the FDIC restores the bank’s ability to meet its financial obligations, it will begin looking for a strong bank to sell the acquired bank to so operations can fully return to normal.

So what do you need to do to protect yourself from bank failures? Two things:

1. You need to make sure your bank is FDIC insured. Most U.S. Banks are FDIC insured, but if yours isn’t and it fails, then the FDIC will not be there for you.
2. You need to make sure you do not have more than $250,000 per depositor in any one bank because that is the maximum deposit amount that the FDIC guarantees. (If Mike had $300,000 in a checking account and his bank failed, he would only be given back $250,000.)

Number 2 is a good problem to have.

-Tom

A Rate of Return You Can Actually Count On

Credit: Stuart Miles

I find it quite funny how many people I come in contact with think that financial advisors know what the stock market is going to do. I find all the people that claim they know what the stock market is going to do to be even funnier.  I would know what the stock market is going to do if I could only get a copy of the Wall Street Journal a day early. Even the best of the best stock-pickers are only making very educated guesses.

What I can tell you is that in the long run, the stock market is going to grow and go up because it always has. I can give you a bucket of frequently successful investment strategies to try. I can even tell you statistically that over long periods of time the stock market goes up an average of about 8% a year, but I can’t give you specifics.

In spite of acknowledging my crystal ball shortcomings and all the market fluctuations in recent years, I have good news. Today, I can tell you something you can do that will give you a rate of return you can actually count on. 

Do you have a school loan, car loan, furniture loan, or a mortgage? If you do, I can almost guarantee your rate of return; your interest rate.

Frequently people are focused on owning more houses, more property, more jewelry, and more cars. They want more cash and more possessions; essentially more assets. It is a relatively simple concept, but paying off debt (lowering your liabilities) is just as good to your financial position as putting it in the bank or investing it. At times, it can even be better.

Let’s say you have $100. You have three options: 1) Put it in the bank, 2) Put it in the stock market, or 3) Pay off your student loans.

1.       If you took option 1 and put it in the bank, in one year you would have earned approximately $0.50 because interest rates are so low (per Bankrate.com, Interest Checking Yield is currently .50%).

2.       If you took option 2 and put it in the stock market, in one year you would have something. As I stated earlier, neither I nor anyone else can tell you what you will have. It is my belief that the market is slowly recovering, but there are some more peaks and valleys to be seen over the next few years. So, let’s say you get ½ of that average long term return we talked about earlier (1/2 x 8% = 4%). That would mean you would have earned approximately $4.00.

3.       If you took option 3 and put that $100 towards your student loans, you would have saved yourself $6.80 because the current interest rate for student loans is 6.8% (per direct.ed.gov). You saved $6.80 because if you had not paid that $100 towards your loan, you would owe $6.80 more at the end of the year than you did at the beginning of the year.

So I ask you, would you rather make $0.50, $4.00, or save $6.80? Of course you and I would take the $6.80. However, there is that risk that the stock market might do better than we thought and earn more than that $4.00 or even our $6.80 we saved. All that being said, with so much international and market uncertainty, you should at least consider the value of going with a rate of return you can actually count on and use any extra cash you may have sitting around to pay towards any of your liabilities that have a relatively high interest rate.

-Tom

The Almost Death of the Debit Card

Credit: worradmu

A couple of months ago, Bank of America’s CEO Brian Moynihan announced his company’s new $5 fee on debit cards by saying that his company had “the right to make a profit.” He could not have anticipated the response he and Bank of America would receive. They were almost immediately and severely flogged in the court of public opinion and many of their customers bolted for the door. The public outrage and backlash became so severe that Bank of America quickly decided to nix their plans for debit card fees altogether. SunTrust, Regions, Wells Fargo, and Chase had all either already started charging debit card fees or were testing them, and now they, too, have cancelled those plans.

The ability to still use your debit card for free appears to be safe for now, but perhaps this most recent debit card fee “scare” by the major banks is just enough reason for me to try to convince you that credit cards are the way to go; if you have self-control. Here goes…

     • Debit card purchases are an immediate withdrawal of funds. Using a credit card (if you pay it off monthly) amounts to an interest free 30-day loan; which adds up over time.
     • Most banks offer fraud protection for debit and credit card transactions, but federal law caps debit users’ obligation at $500 and credit users’ obligation at only $50. The bank’s policies could change any time.
     • Recovering money is much more difficult on a debit transaction than a credit transaction. If your card is stolen and the thief uses your card, if you have already paid for merchandise that is never delivered or delivered damaged, or if an amount is in dispute, the money has already disappeared from your account if you used a debit card. Who knows what lengths you will have to go through to get that money back! If you had used your credit card, the money is still in your account and you simply refuse to pay until the issue is resolved.
     • Debit cards do absolutely nothing to your credit score. If you have self-control, using several credit cards and paying them off consistently over several years can actually help build your credit score.
     • Debit card purchases are a plastic alternative to cash. Although there are a few debit card reward programs, typically, credit cards offer more variety and greater rewards (think sky miles, lower gas prices, hotel points, and cash-back). You might as well get something in return for spending your hard-earned money!

Debit cards are good and convenient. They allow you to make purchases and get cash from an ATM.

Credit cards are better. They are also convenient, they let you hold your money longer, they offer greater fraud protection, they let you build your credit, and they offer better rewards.

All I have written is null and void if you spend more than you have due to credit card interest rates. However, if you are responsible and don’t max out your credit cards and pay them off every month, then all of the pros I have given for using your credit cards for purchases are valid. As long as using your debit card remains free, then by all means use it; but only at the ATM.

-Tom

Check Engine Now!

Credit: FreeDigitalPhotos.net

Do you remember the last time your check engine light came on? I know I do!

This past summer, my wife and I were happily driving back after an awesome weekend in the Great Smokey Mountains and my Jeep suddenly started smoking. A long story short, a faulty belt caused us to end up on the side of a mountain road with no cell service having to flag down a park ranger in the middle of the road. A few days and almost $1,300 later, my Jeep would be fine.

Now $1,300 might be a lot of money to you or it might not, but that doesn’t really matter. The question that it raises is the same. Have you ever wondered if you could sustain a major, unforeseen expense and still be financially okay? Could you handle major car trouble on the side of a mountain? Could you handle emergency surgery that your insurance company does not want to cover? Could you handle losing your job for a few months? You can help ensure your short-term financial stability by simply creating a rainy day fund, but you probably already knew that. What you might not know is how much you need…

In order to determine the amount of safety net you need, I would suggest keeping up with your expenses for one month. Keep in mind that extra and unusual expenses like eyeglasses, Falcons tickets, or your mother’s birthday gift do not need to be counted. To make things simple, I would just consider:
     • Rent/House payment
     • Utilities
     • Car/Furniture payments
     • Groceries/Food
     • Gas

After you sum those expenses, I would suggest beginning to save up between 3-6 times that much for your rainy day fund. This way you can have the peace of mind knowing that you could sustain the loss of your income or a significant, unplanned expense without changing your current lifestyle for at least 3-6 months. What you should save up to be comfortable is different for everyone and is totally up to you, but personally, I would work towards the 6 month savings amount if possible.

The main thing to remember is that you need to build up and protect your rainy day fund in some sort of high interest checking or savings account or money market account so that it is easily accessible and is growing while in reserve. This rainy day fund is not for remodeling the kitchen or for that Caribbean cruise; it is your own lifestyle insurance policy only to be used when your financial survival is threatened.

Some might say this is a waste of money, but I can’t tell you the comfort a rainy day fund gives you when you’re stuck on the side of the road. If you don’t yet have a rainy day fund, you need to start working towards one so that you are always prepared before that check engine light rears its ugly head in some aspect of your life.

-Tom

The Jr. Bacon Cheeseburger Postulate

Creator: Grant Cochra

I played sports growing up. I played baseball, I attempted and failed at playing basketball, and I played soccer. I loved playing sports and I thought about trying to play soccer in high school, but my dad encouraged me to get a job instead. At age 15, I began my career as a clerk at a local 4-store dry cleaning chain.

I worked at this dry cleaner all through high school for 4 years. This job was a great experience because I earned some money, saved some money, and learned a lot of people skills (while handling angry customers that spilled spaghetti on their white shirts and blouses and were confused as to why there was still a stain). This job would also have a lasting impact on me because at the time, I loved Wendy’s.

You see, getting paid at $5.15/hour, I could buy 5 Wendy’s Jr. Bacon Cheeseburgers for every hour I worked. I never bought 5 burgers with an hour’s wage, but the important thing to note is that I could have. Thus, I began considering all of my purchases and expenses in terms of Wendy’s Jr. Bacon Cheeseburgers…

Is buying the latest Old Navy shirt worth 20 cheeseburgers? (I said no.)
Is going on that fishing trip with the guys next weekend worth 80 cheeseburgers? (I said yes.)
Is taking out Annie (name changed to protect the innocent) on Friday worth 40 cheeseburgers? (Absolutely not!)

Now fancy economists and college professors will tell you that I was considering opportunity cost. Opportunity cost put simply is the cost of what one gives up when making a decision. It’s easier to think about in terms of burgers if you ask me!

For example, when I was considering taking Annie out, I was on the fence. I figured dinner and a movie would cost me about $40. Well $40 is almost 40 cheeseburgers and when I thought about it that way, absolutely not!

As I’ve grown a little older and am making a little more than minimum wage, I now think of things in terms of nice meals at the Olive Garden, Georgia Bulldog tickets, or trips I could take with my wife as opposed to Wendy’s Jr. Bacon Cheeseburgers, but the principle remains the same. I encourage you to come up with your cheeseburger or some rubric of measurement that fits your personality whenever you need to make a financial decision. Think of purchases and expenses in terms of that rubric of measurement. Focus on the opportunity cost of what you are giving up based on your decision and you may find that your financial behavior changes more than you might think.

-Tom

And So It Begins...

Creator: porbital

“Money is a little tight right now.”

“Sorry man, I can’t go. The wife and I are trying to pay off her car.”

“I’m pretty sure I made less than $200 last year.”

My name is Tom Presley and all of these are quotes that people close to me have said to me in the past year. If I were only their friend or relative, I could only listen, sympathize, and try to offer some sort of optimistic comfort; but I’m not.  I’m a Financial Planner and a CPA. I chose this career to help you.

I grew up in Jonesboro, Georgia and attended the University of Georgia where I got my Masters of Accountancy in Taxation. I now live in Atlanta with my amazing wife and our dachshund puppy, Lucy. I love the Dawgs, Braves, and the Falcons (in that order). I enjoy travelling, history, music, hiking, theatre, reading, and cooking. I have worked as a tax accountant for a regional CPA firm in Atlanta and am now a financial planner at a private wealth management firm in Buckhead. 

I’m not Clarke Howard. I’m not Warren Buffett. I’m Tom Presley, and I’m starting this blog to share with you what I know, to share with you what I learn, and to provide you and others with answers to any financial questions you may have.  My posts will vary from budgeting tips, to debt management suggestions, to portfolio investment advice, to financial lifestyle suggestions. The content will be applicable to college kids, millionaires, unemployed people, retirees, working people, newlyweds, and everyone in between. I hope to play a small role in helping you achieve your financial and life goals.

Now you know a little about me and my plan for 2 Much Cents. If you follow my blog, the worst thing that could happen is that you spend a few minutes at work reading my thoughts and not working for your employer. The best thing that could happen (and my hope) is that my training and experience occasionally connects with you and makes you better off in the long run.

-Tom