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Do You Really Save Money on Tax Free Weekends?
By Jennifer Derrick Now that back to school season is upon us, my state and many others are promoting their upcoming tax free weekends. These are the weekends where you can buy items from certain categories and escape the state and/or local sales taxes on those items. The rules vary by state, but typically the items [...]WaMu Savings 3.75% APY: Should I Stay With A Struggling Bank?
While logging on to my WaMu account I noticed (as did reader Alvin) that the WaMu savings account* is now paying 3.75% APY as of 7/31. Some pages still say 3.30%, but my account details confirm the 3.75% APY. (Login and click on “About this account”.) Or, click here and hit Apply Today, and you should see this:
Of course, if you read the news, you’ll know that Washington Mutual stock is being battered right now. Is this move a sign of desperation? If so, is this rate increase good news or bad news?
It’s All About The FDIC Limits
Well, if you have money over the FDIC insurance limits of $100,000 per titled account, I strongly suggest you stop reading right now and spread it out immediately. Your money is at risk. Here are some good options.
If you are under the limits, then your money is safe. The main things left to worry about are (1) easy access to money, (2) crediting of current interest earned, and (3) future interest rates. But hey, we already have two examples of struggling banks that give us an idea of what we might be in store for.
IndyMac Bank CD Example (FDIC takeover)
I believe that IndyMac failed on a Friday, and branches were closed that day. Over the weekend, branches were closed and the website was down. ATMs and debit cards still worked. By Monday, all the branches were open and the website was back up. Direct deposits, electronic transfers, and written checks went through uninterrupted.
All interest earned in accounts (under the limits) was still credited. Before the failure, IndyMac Bank also had some high interest rates on certificates of deposit (CDs). Upon takeover by the FDIC, an ideal scenario actually happened. For one, you had the option to withdraw your money from a CD with no early withdrawal penalty. Or, if you liked the rate, your CDs could continue to earn the same interest until maturity. This is an even better deal than if IndyMac stayed intact.
Countrywide Example (Bought by Bank of America)
Another struggling bank, this time merged with another existing bank. Currently they are still separate websites, with their own interest rates and products. Nothing really changed from the customer’s point of view. There was no downtime, or lost liquidity. You use the same checks, same debit cards, same website. CD rates and other terms remained the same. A slight bonus was that Countrywide customers could now withdraw money from Bank of America ATMs with no fees. [Merger Info]
So, Will WaMu Fail?
I have no clue. My PTI-style Toss-Up Percentage: 25% Fail, 75% No Fail. But even if it does, given it’s size, I can’t see it disappearing overnight like a small local bank might. It would have to be taken over by another (probably large) bank. In addition, there are so many moving parts that it will probably keeping run as-is for several months even if it does get taken over.
Taking all this into account, I will be sticking with Washington Mutual and happily take the increased interest rate.
* Reminder: This 3.75% rate is only available if you apply online and open a Free Checking account at the same time. If you go into a physical branch, they will deny deny deny! However, after opening you can use it at a branch just like any other savings account. More details.
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A Modest Proposal For Hopeful Stock and Fund Pickers
I believe in holding a diversified, low-cost, passive investment portfolio. However, at the same time there is so much financial hype out there that I understand the natural tendency of people (especially intelligent, hard-working, competitive people) to actively manage their investments. They may think they can pick the best growth stocks like AAPL or GOOG, they may be Buffett disciples and search for durable competitive advantages, or they may be stable dividend seekers. Or maybe they just want to pick the best fund managers instead.
But what if you suck at it? By investing in low-cost index funds, you are essentially guaranteeing yourself to be somewhat above average every year. Wander off-course, and you could do great, or more likely you could crash and burn.
Many people decide mitigate this risk by doing some form of Core and Explore investing, where you keep most of your money in passive funds and gamble a bit with the rest. Since I do this myself to a (very) small degree, I’ve been toying with an idea that takes this one step further.
1. Start Out Small
Let’s say you are young and aggressive, and want your portfolio 100% stocks. Let’s say you carve out 5% of that, throw it into a cheap discount broker, and start trying some ideas out.
2. Track Your Performance Honestly
Thinking you’re doing well at stock-picking without knowing your relative performance is like running around the track alone with no stopwatch and saying “Gee, I’m fast!”. To gauge your self properly, you need to:
- Keep track of all investment inflows and outflows. This means keeping track of all your contributions, buys, sells, and fees/commissions paid.
- Account for uninvested cash. If you would have put $1,000 into an index fund, but instead bought $500 of GE, that means you also have $500 of idle cash earning 0-4%.
- Calculate your return properly, taking into account the information from the previous two steps. Here are two ways, one provides an estimate while the other gives more accurate numbers.
- Pick the appropriate passive benchmark portfolio. For example, the S&P 500 only works if you are investing in large, US-based companies.
3. Adjust Based On Your Relative Performance
You should run a comparison with your benchmark regularly. Each year that you beat your benchmark, you can increase the percentage of your portfolio which you actively manage. If you lag behind the benchmark, you must decrease the percentage of your portfolio which you actively manage. A really crude rule might be simply to increase or decrease the active amount by 2% each year based on performance.
If you are truly horrible, you’ll be out of stock-picking completely in a few years. For most people, you’ll probably be out of it within a decade or so, having learned a valuable lesson. If you are the proper mix of skillful and lucky, then soon you’ll be controlling the entire portfolio.
Sound reasonable?
The Finer Things In Life
By Jennifer Derrick Someone told me the other day that I should want to earn more money so that I could afford the “finer things” in life. I responded by saying that yes, more money would be nice (isn’t it always?), but that the tradeoffs (working longer hours, more stress, more time away from my family) [...]The Latte Effect: When Financial Changes May Be a Little Late
By Cortni Marrazzo It was recently announced in the news that Starbucks (SBUX) will be closing over 600 stores due to a phenomenon nicknamed “The Latte Effect.” This basically describes the actions people often take when economic times are tough and money is tight, which includes cutting back on extra expenses like coffee, manicures and [...]Reasons We Have An Umbrella Liability Insurance Policy
Personal Umbrella insurance is additional liability insurance, designed to pay out on top of your existing auto and homeowner’s/renter’s insurance policies. For example, you may only have $300,000 in liability coverage on your car insurance. If you are hit with a claim of $1,000,000, you would be on the hook for $700,000 yourself unless you had an adequate umbrella insurance policy. Here is a diagram explaining this from MSN Money:
In addition, an umbrella policy can also “fill in the gaps” by providing coverage for other incidents like liability for rental properties or being sued for slander or libel. Imagine working and saving for decades, only to have all of it taken away with one incident. Here are my reasons for buying an umbrella policy:
#1. Unlikely, But Actual Scenarios
These days, there are many scenarios where one might be sued for more than $100,000 or even $1,000,000. In my mind, the most likely event is to be found at fault in a car accident. Medical costs alone can exceed $100,000 per person easily. Now imagine if there were 2, 4, or even 6 people in the car. Imagine if some of them were children. Here is one example from a NY Times article on umbrella policies:
One of Mr. Cox’s clients crashed into the rear of a car on a slick highway. A woman and a child were critically injured. After two years of litigation, his client settled the lawsuit for more than $5 million. The client had $15 million in umbrella coverage. The policy paid for the settlement and all legal costs. “Without the umbrella,” Mr. Cox said, “they would have been completely wiped out.”
More recently, I read about a parent chaperone during a field trip being hit with a $700,000 verdict for negligence:
Lauren Crossan, of Randolph, N.J., had traveled to Hawaii in 2004 with Susanne Sadler, Sadler’s daughter, and another New Jersey cheerleader to perform in the halftime show of the Hula Bowl. Within hours of her arrival at the Hyatt Regency Maui Resort, Crossan was seen drinking alcohol. Her body was found the next day on the hotel grounds.
An arbitrator determined last month that Sadler was partially responsible for Crossan’s death and ordered her to pay $690,000 to Crossan’s parents and her estate.
More:
- A blogger writes something bad about a company and gets sued for defamation.
- A man was asked to cut down a tree from his own yard. He refused, and later a hurricane blew the tree down and injured someone in the neighboring house.
- Your child gets in a fight at school, and injures another student.
- Your dog bites someone.
- You have a pool, and a visitor hurts themselves.
- A handyman or contractor hurts themselves on your property.
#2. Have the Insurance Company Lawyers Take Your Side
Forget even getting a large jury verdict against you. If someone simply sues you for a frivolous reason, you’ll have to pay for a $400/hour lawyer to defend yourself. With an adequate umbrella policy, the money at risk will be the insurance companies instead of your own. That means the big corporate lawyers will be on your side, and your defense costs will be covered as part of the umbrella policy.
#3. It’s Cheap, and Easy To Buy
It cost us about $250 a year for $1 million in coverage for the both of us, including 2 cars and a house. That’s basically $10 per month per person. However, we did have to raise the liability limits of our auto and homeowner’s policies slightly to $500,000 each. So if you are only carrying the bare minimum required by law (not a good idea for most people), your actual additional costs may be higher.
It was really simple to get as well; we had an umbrella policy added to our existing policies with just one phone call. No long application or additional fees. But the low cost also means you may have to look out for your own interests. I guarantee that if you mention that you want whole life insurance to your local agent, they will get really excited (big commission) and get you quotes within 24 hours. They’ll even follow up if you forget. On the other hand, selling you an umbrella policy for $200 a year results in a tiny commission. All I got was a “yeah, I suppose that might be a good idea…” They’ll still sell it to you, but it won’t be heavily promoted like other products.
#4. One Less Thing To Worry About
Some people believe that you may be a bigger target for lawsuits if someone finds out you have a $1 million umbrella policy. Here’s how I look at it. If I really wanted to premeditate a lawsuit against someone, I’d pick someone who is worth a lot more than $1M. More like $10 million and up. In a big metro area like mine, multi-millionaires are a dime a dozen. Even if I was frivolously sued, again the whole point is that I’m still covered. To me, this argument is like saying you shouldn’t earn more money because someone will sue you for it.
In the end, we have a $1 million umbrella insurance policy because this is exactly what insurance is for - to protect me from unlikely yet possibly catastrophic events. The likelihood is low, but so is the cost. We chose $1M somewhat arbitrarily because it covers our net worth and also what I feel is a reasonable amount of likely claims. As inflation (and especially medical costs) rises, I could see upping it to $2M since the additional cost is only about another $100/year.
Now, if you have a low or negative net worth, then perhaps there would be less incentive in getting such coverage. I certainly had no idea what umbrella insurance was in college. I would imagine lawyers are less likely to go after those with “nothing to lose”.
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