Top Personal Finance Blogs
Tuesday September 26th 2017

Dividend Investing versus High-Yield Savings

Dividend investing is one of the easiest ways to build long-term wealth. When companies pay out dividends, they are essentially sharing the profits they have earned with shareholders. Investors, especially those who are interested in income investing, tend to favor companies that pay high dividends. But stocks can be risky and some prefer to put their money into High-Yield Savings. Which is right for you?

What is Dividend Investing?

Dividend investing is the process of taking the dividend payments received from the company you own shares of and using them to buy more shares of the company’s stock. One way of automating this process is to enroll in a Dividend Reinvestment Plan (DRIP). A Dividend Reinvestment Plan is a plan in which shareholders have cash dividends automatically reinvested into additional shares of the firm’s common stock.

What is High-Yield Savings?

As the economy struggles through a recession, more people are looking to place their money in savings accounts. A high-yield savings account is an account opened at a bank or credit union that yields a higher than average rate of interest.

As the name suggest, these accounts have a higher Annual Percentage Yield (APY) than regular savings accounts. The advantages of having a high-yield savings account is that your money is highly liquid, it is FDIC insured, and you can get started with a low minimum balance in most cases. Depending on the bank, some accounts may come with other perks.

Rates of Return

The rate of return on dividend investing varies depending on the stock. It is common for dividend investors to only invest in a company’s stock that has a dividend yield of at least 4%. The yield of 4% gives investors the assurance that they will earn more than the average rate of inflation. Investors want to make sure they maintain purchasing power.

The Federal Reserve is keeping target interest rates low, which means that the yield on savings accounts are relatively low as well. Currently, there are some community banks that are offering interest rates as high as 5%. Investors that earn rates this high will be able to accumulate great wealth over the long-term. This yield is not very common. Most banks are offering interest rates of 1.5% to 3% on high-yield savings accounts.

Risks

There are also unique risks associated with dividend investing. A dividend stock still has some of the same risk as non-dividend stocks. Companies can experience periods where they are not earning profits, and therefore are not paying dividends.

High-yield savings accounts are FDIC insured, which means that they have zero principle risk. However, there is an inflation risk that is associated with high-yield savings accounts. When the inflation rate, which is usually around 3%, is higher than the yield you are receiving from the savings account, you lose purchasing power. Dividend investing also has inflation risk. The dividend return can be less than the inflation rate as well.

Tax Implications

There are specific tax implications related to dividend investing. Dividend payments are taxed as capital gains and not ordinary income. The current capital gain tax rate is 15% for those in the 25% of higher tax bracket. It is 0% for individuals who are in a lower tax bracket than 25%.

When considering taxes, dividend investing has an advantage over high-yield savings accounts. The interest earned from high-yield savings accounts are treated as ordinary income and taxed at your ordinary federal income tax rate.

Dividend investing and high-yield savings accounts both have their advantages and disadvantages. As with all investments, it is important to research them thoroughly. Investors typically choose investments that offer them the highest possible returns for their risk preferences


Watch Out for Capital Recovery and Private Recovery Fees

Amidst the debacle of mortgage financing that led to a financial meltdown, the recovering market in the US has brought its own controversies in this period. The resale market, valued in excess of USD 100 billion every year has paved way for a silent and smooth movement of money to builders and other construction corporations across the US.

The Purpose of the Fees

Imagine this – Every time a real-estate property is being sold, the original builders (not the landowners mind you) will be paid a fee proportional to the transacted amount involved in the sale. Even though it sounds like an intelligent way for maximizing the revenue for the construction conglomerates, a second look at the policy reveals the harm that it can cause to the entire market and the consumers involved in thousands of real estate transactions every year.

Every time a consumer invests in buying a home, they look at the appreciation value of the enterprise so that they are left with something that has grown in monetary value along with them. The builders these days are attempting to include a clause – a transfer fee that has to be paid to them, every time a real estate property that they developed is being sold, allowing them to capitalize on property sales, regardless of profit or loss on the part of the consumer. This transfer fee is regardless of the appreciation or depreciation of the value of the real estate being sold.

Almost 100 Years of Fees

If you are buying a $100,000 house and selling it for 105,000 to another party then you will end up paying $1050 to the developer of the project. If the party who buys from you sells it for $110,000 then he will end up paying $1100 to the same developer and the cycle continues for all resale transactions for a period of 99 years.

Who Gets the Money

This money needs to be paid to the investors who backed the real estate developers during the initial development of the project. Failure to pay the amount will make the reselling a legally invalid contract. The reasoning being given by the principal advocate of the transfer fee scheme – Freehold Capital partners of New York is that “private transfer fees represent an adaptation in how to pay for development costs” incurred by builders “at a time when funding is not available” to them on “reasonable terms.”

With a contract for 99 years on every piece of real estate that is being sold the developers stand to reap the benefits for decades to come.

The people looking to move their families for career changes will be hit the hardest – people working for the defense forces in particular. Every time they sell a property, not only do they have to pay a transfer fee but the buyer of the property has the right to claim a certain reduction in cost pricing to negate the amount that he will have to pay to the developers when he intends to sell the property a few years down the line.

The FHA’s Involvement

The FHA – Federal Housing Administration has raised their voice against this fee that is against the rules. If Fannie May and Freddie Mac also join the fray then it will effectively stop this scheme from being implemented. Similar transfer fee programs had been implemented in different areas at different times only to be met with opposition from the consumers leading to the scheme being removed by the developer.
With such a big segment of consumers being affected many coalitions have taken up arms against this scheme and to prevent it from being implemented.


The Bucket Strategy for Retirement

Do you have enough money to live on without sacrificing a comfortable lifestyle once your working days are done? Have you started thinking about it yet? As retirement looms, it brings along a suitcase loaded with questions, such as: how long are you going to live, how much of the money you have managed to save up to this point will be gobbled up by inflation, and just what is the money you’ve already got in your various investments doing?

The 4% Rule Doesn’t Work Anymore

Since you can’t just go out and work for a long enough period of time to make up the deficit if you miscalculate, it’s important to estimate right the first time. For a long time, people who gave advice on financial matters suggested something called the “4 percent rule.” This strategy advises you to take out an amount equal to 4 percent of the total invested during the first year that you are no longer working; then the next year, withdraw the same amount as the previous year, and add enough to account for inflation. This method, experts previously suggested, provided most people with better than average odds of making it through at least 30 years at their current lifestyle.

Get a Bucket

In light of the recent stock market roller coaster, however, those in the fiscal know have decided that this method is a bit too oversimplified. Currently, more than half of those who provide investment advice are now recommending that their customers divide their rainy day cache into sections, or buckets, to carry them through with funds they can count on to remain stable.

Filling Your Bucket

Here’s how it works: first, you need to decide on a safe amount of money to remove during your first retired year, then, multiply your designated figure by however long you want a definite amount of income- the average is usually between five and seven years, including a secured amount that takes inflation into account. Once that is done, the funds are placed into a money market account, in order to make sure that you always have a pull-from rate that will sustain you during those years.

When your vat gets close to being empty, or every year, depending on what happens with the stock market, refill it with other prudent investments that will provide enough money to live on throughout the next cycle. This process is then repeated for the remainder of your retirement.

Try Two Buckets, or Even Three

There are two suggested types of bucket strategy: 2-bucket and 3-bucket. The 2-bucket model encourages golden-agers to squirrel away roughly five years of savings in bonds issued by the Treasury Department. Every year, take a set amount from the bonds to live on and then use the remaining funds to invest in stocks. When the year ends, any income earned from the stock growth gets shifted into the bonds for a little boost to next year’s income. If the stocks don’t earn money, the money should be left in the investment, giving it a chance to bounce back. The withdrawals can be adjusted as needed, in case of unforeseen shortfalls or poor stock performance.

Those seeking a bit more cushion might prefer to split their funds among 3 kettles. Into the first vat would go sufficient resources for the first seven years of retired life, including enough extra to account for any economic intensification, which is then placed in a secure investment such as a Treasury bond. The second container would account for the next eight years, from 8 to 15, and would consist of either annuities that would provide secure assets, or a mixture of stocks and bonds. The final bucket, which would cover the remaining years, would hold the most high-risk items, such as real estate. A full year’s worth of income is moved among the buckets annually, depending on what the stock market does. Obviously, this is an intricate set of plans, but it will certainly make your retirement funds safer.


Sell Your Car or Fix It? How to Decide

It’s a fact of life that sooner or later, your car will break down. Cars only last so long. When your car has some issues, a big decision will no doubt be whether or not to sell the car or to fix it. Car repairs can cost a serious amount of money, depending on what is wrong. This is why you really need to think about whether to spend on repairs or to sell the car and look for another vehicle. The following are some things to think about when deciding whether or not to have your vehicle fixed.

What Will it Cost?

The key to deciding whether or not to sell your car or fix it is to think about the involved costs. Sometimes, car repairs can cost more than the car itself is worth. So take the time to think about the year, condition, make, and model of the car and how much you could get for it. If the repairs are half or more the car’s worth, then it may be time to say goodbye to the car and work on getting a new one. Repairs are only worth the cost if you think that it will lengthen your car’s life span by a year or more.

Get Professional Advice

Always consult with three mechanics and experts before you make a decision about your car. Having a professional opinion will no doubt help you make the right decision for your life and for your bank account and getting multiple opinions ensures you are being given sound advice. These people will know how much more life is in a car, even with these repairs.

Ask loved ones who know a thing or two about cars whether or not they would have the vehicle fixed and really listen to what they have to say. There’s no use shelling out major dough for repairs if you are just going to have the car fixed again a month or two later.

Ask Others Who Own the Same Kind of Car

Think about the car’s age. Is it just another break down waiting to happen, even if you repair it? Check forums online to find out the experience of other owners with an older model of the same car. If the car seems to be reliable for others, it should be good to you as well, assuming you perform regular maintenance and don’t abuse the car with an aggressive driving style.

Be smart about this decision to protect your bank balance and stress levels. Forget about the idea that your car is an investment. Otherwise, you just think about all the money you are losing over repairs. Instead, see the car as an expense. Will it cost you more to fix it and keep it, or will getting another car be a bigger expense? You can’t be certain you are making the right choice either way, but thinking about it logically improves your chances.


Credit versus Debit: What’s the Difference?

On the surface, debit cards and credit cards look very much alike. In either case, the user typically slides a wallet-sized piece of plastic through a card reader, and then signs a receipt or enters a Personal Identification Number (PIN), authorizing his or her transaction. Looking more closely at these forms of payment, you will notice a few fundamental differences. Let’s take a look at some of them.

Source of Funds

The most basic difference between credit and debit cards lies in the source of the funds used to conduct a purchase transaction. A debit card uses the money that you have previously deposited into a bank account, while a credit card essentially gives you a series of short-term loans that must be paid by the end of the month. With a debit card, it’s necessary to have the cash up front. With a credit card, you can make purchases even if you have not yet earned the money.

Protection from Debt

For this reason, debit cards can act as an excellent insulation against credit card debt. Credit card debt is the scourge that has enslaved so many people to an endless cycle of payments to credit card companies. The interest on their balances is so high, that a large portion of monthly earnings goes straight to paying for the interest.

With a debit card, it is still possible to overdraw your account, resulting in fees. Typically, a fee of around $30 is assessed on your bank account when this occurs. New laws in place require banks to alert you and only allow an overdraft with your prior permission. This makes it impossible to go deeply into debt with a debit card.

Purchase Protection

One advantage that credit cards have over some bank debit cards is purchase protection. If an unscrupulous person attempts to defraud you or fails to deliver on promised goods or services, then you can contact your credit card company to have the charge removed. This protection is mandated by law on all credit cards. You can still get this protection with a debit card, as long as your card carries the Visa or MasterCard logo. If your debit card is issued by a small local bank, then you shouldn’t assume that you are automatically protected; you should check with them on their specific policy and be sure there is a Visa or MasterCard logo on the card.

When Credit is Better

One of the greatest benefits of using a credit card instead of a debit card is taking advantage of rewards programs. You can get 1% or 2% cash back on all your purchases at the end of the year. Sometimes you can accumulate airline miles that you can exchange for airplane flights or for hotel or rental cars. There are also many credit cards with specific tie-ins with some of the major corporations. The GM credit card, for example, will allow you to accumulate credits that you can use to obtain a discounted price on your next GM vehicle. If you are responsible and can pay your bill on time, then these rewards are a great reason to choose a credit card instead of a debit card. If you don’t regularly make your payments on time, then these rewards end up costing you more than they give you.


The Myth of “Easy” Payments

Advertisers make easy payments sound like a great deal. You get to buy the high-priced items you want or need right away without having to pay the full price. All you have to do is sign a contract that gives you the option to make smaller payments over a longer period of time. The problem with those long term contracts is that they require you to pay almost as much on interest as you would have paid for the item if you had bought it outright. Those payments are anything but “easy,” in fact, they’re downright hard on your bank account.

Years of Payments

Easy payment plans tie you into making payments for several years. Most of these plans can double or even triple the cost of the items because of the interest that accrues on your loan during the years that it takes to pay the loan off. Even if the payments fit comfortably into your monthly budget, you will have to keep paying for your items for several years before they will finally be paid off. What sounds like a good deal the day you bring your new items home may seem much less attractive during your second or third year of payments.

Actual Costs are Hidden

When you purchase something through an easy payment system, the real cost of the item is hidden. The sale price of the item is obvious, of course, but the amount of money you will eventually pay for the item depends entirely on the amount of interest you will have to pay on your loan. Longer loans have smaller payments, but they have higher interest. Your item could end up costing you two to three times as much as the sale price after you figure in all of the interest you will pay on the loan.

Easier to Purchase More Expensive Items

There is a real danger of getting into more debt than you can handle when you buy items on an easy payment plan. Since the monthly payments seem so small compared to the price of the item, you may find that you purchase something that is more expensive just because you can afford the monthly payment. It is very easy to upgrade your purchase to the most expensive option because the actual price of the item is not what you are thinking about anymore. The problem is that you are really spending more on the item than you would have. Spending more than you can afford on an item is dangerous for your budget, regardless of the payment plan.

Long Term Problems

Many people who buy items on easy payment plans find that they are making so many monthly payments that they do not have any income left over for savings. When an emergency happens, these people do not have any reserve funds to handle it. When you do not have the funds available for savings, you usually do not have any funds available to put toward your retirement, either. Easy payment plans can lure you into making purchases today that leave you buried in debt tomorrow.


Women: Is Your Financial Planner Giving You the Right Advice?

Many women are finding themselves solely in control of their financial planning after a divorce or after the death of a spouse. Unfortunately, the majority of financial planners are used to dealing with men. Research shows that most women have investment accounts that are only two-thirds the size of a typical man’s account.

Add to that the longer average lifespan of women and you have many ill prepared for retirement. If you are a woman who needs to handle her own investments through a financial planner, there are some things you should keep in mind about the service you receive.

Sexual Discrimination Problems

The fact that men have been the traditional financial agents for most marriages means that investment planning has become very male-oriented. Most of the financial planners are men who are used to working with other men. It is very easy for a male financial planner to slip into the habit of doing what they believe is best for their female clients without regard to what the client really wants or needs. Investors tend to guide women toward more narrow investment plans because they feel that women are not prepared to handle riskier options. Some planners can be outright disrespectful of female clients because they do not believe women understand the intricacies of investments.

Life Expectancy and Income Differences

The problem with this unfair treatment of women in the financial world is that women are more likely to need to handle their own investments sooner or later. Most women in the United States will outlive men by an average of 10 to 20 years. Since women tend to earn lower incomes than men, it is much more important for women to invest their money wisely so that they will be able to live comfortably once their spouses have passed. When a financial planner gives a woman bad advice, it can have a serious detrimental impact on her future.

Communication Challenges

Sometimes the perceived discrimination is really a problem in communication. Since the financial world has always been primarily male, it can be challenging for a financial planner to deal effectively with a female client. Men process their thoughts and plans differently than women do.

Many veteran financial advisers are used to working in a fast-paced environment with men who want to cut to the bottom line quickly. Women tend to want their advisers to explain all of their options in more detail and discuss what would be the best choice. It can be difficult for an adviser to change his communication style to accommodate a female client.

Cookie Cutter Investment Plans

Another problem for women in the investment world is that the most commonly used investment plans were created with male investors in mind. Women have different financial needs because of several factors, which means that a male-oriented plan may not be the best option.

Financial planners need to break free from the investment models they are comfortable with in order to offer more effective options for their female clients. If you are a woman receiving financial advice through an established financial planner, you need to take an active part in making sure that your portfolio is unique to your specific situation. If you aren’t getting the answers you need, or if you don’t fully understand your portfolio and investment strategy, it’s time for a different financial planner.


Five Financial Imperatives for Young Adults

The way you handle your money when you are younger can have a dramatic impact on your quality of life as you get older. Here are five financial lessons you must learn if you are to maintain your financial security in the future.

Write it All Down

The first step in organizing your finances is to write everything out. Make a list of the things that you spend money on. Include everything that you know you will buy during a normal month, such as your utility bills, car payments, house payments or rent, groceries, gasoline, and entertainment.

Don’t forget to include special expenditures that happen on an irregular basis, like car tag renewals or birthday presents. Once you have a complete list of what you spend, you can compare that to the amount of money that you earn.

Recognizing What You Want versus What You Need

If your spending habits exceed your earnings, you will need to make some changes to your budget. Look at the items you usually buy and determine if those items are things you really need or things you really want.

Keep the necessities, but cut back on the things that are not vital. You should always allow yourself a certain amount of money for entertainment, but make sure that it is an amount that you can comfortably afford.

Control Your Credit

Credit will be an important part of your financial life. A good credit rating can lead to better interest rates on loans for cars or mortgages, as well as better rates on auto and health insurance. Make sure you check your credit rating at least once every year to make sure it is accurate. You can keep your rating positive by paying debts in a timely manner.

Try to use credit cards sparingly. Remember that a credit card is really just a convenient bank loan. When you make a purchase using credit, make sure it is an amount that you can pay in full when your next credit card bill comes. Carrying a balance over several months accrues expensive interest payments that make your purchase much more expensive than it was originally.

Begin Retirement Investments Early

The earlier you begin saving money toward your retirement, the better your later years of life will be. It can seem strange to put money away for your senior years when you are just starting out in life, but you need all of that time to create a nest egg that will allow you to do what you want to do when you retire.

Remember that you are planning for a time when you will not work at all, which means that your savings will have to cover all of your expenses. On average, people are living 20 – 30 years after they retire, which means you need to save enough to pay for up to 30 years of life without a regular income.

Create a Safety Net

Unexpected things happen to everyone. Make sure you always keep some money in a savings account to help cover expenses when your car breaks down or you need to replace an appliance. Emergencies can cut deeply into your regular budget if you do not have any savings to help cover the costs.


Keeping Financial Information Safe Online

Keeping financial information safe has always been important. Before Internet technology became available, there were two or three important pieces of information to know: your social security number, your date of birth and your pin number at the bank.

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Three Ways to Thrive in a Struggling Economy

While the economy seems to be showing a marked improvement from where it was at its lowest point, there is no guarantee that it will continue to improve and remain good for any length of time. Indeed, market indicators have been shaky at best. It would be wise to take this time of introspection to learn from mistakes made during the recent financial turbulence.

When the economy was earning a gold medal with a 10.0 inward somersault in the pike position, people fell into two distinct categories: those who struggled and those who thrived. The people who struggled tried to keep up with their lavish lifestyles when money was tight, but those families that thrived during the downturn already had good frugal habits in place. Following is a list of some of the most common financial pitfalls.

Food: Poor Planning and Eating Out

There are many good reasons to dine out in a restaurant: celebrations and first dates are a couple of them. Some bad reasons people use to excuse their dining out is that they are too busy or they do not feel like cooking, or they cannot make meals taste as good as their favorite restaurant can. These excuses boil down into the fact that this basic skill has been delegated to someone outside of the family. A decision should be made about whether they are willing to sacrifice a bit of flavor for more financial security. Making a weekly menu and buying a good cookbook will go a long way toward saving a ton of dough for the family’s future.

Mortgages: Too Much House

During the heyday of home buying several years ago, many people bought a much larger house than they could realistically afford. The housing market tragedy has become infamous for the role it played in people losing their homes recently, but that scenario can be avoided this time around if families choose a smaller home than they can afford; that means the total cost of the mortgage should not be more than one quarter of the family’s take home pay. There is no sense keeping up with the Joneses if their house is getting repossessed anyway.

Toys: Cool Toys are Costly

There are many must-have items on the market today, from phones to eReaders to video game systems to vehicle accessories. These items are called status symbols for a reason: people of status (ie: them that got) can afford them. There is no sense in having huge alloy wheels with spinners on a vehicle if you can’t afford the tags or insurance for it. Why buy those cute designer pumps and matching bag only to stand in the unemployment line?

Goals and a Budget: The Ultimate Status Symbol

The family that was able to keep their financial heads above water when times got rough did so because they wrote down their goals and created a budget. The budget allowed them to reach their goals. No, they knew that there would be little glamour and convenience, but they felt no pinch when such things were suddenly hard to come by. Only now do many of us realize that peace of mind is more precious than any dinner out or fancy toy.