Do you save?

The Wall Street Journal recently ran an article about finance professor Peter Tufano of Harvard Business School who devised a new program titled “Save to Win.” The idea is that people have a tendency to overestimate the odds of rare events such as hitting the lottery or winning at a slot machine. The folks in Vegas have long taken advantage of this fact and the professor thought it could also be used to provide an incentive to save. The program allows people to invest in small CD’s ($25) without the usual minimum deposits. Then for each deposit they are entered for a chance to win various raffle prizes. This is a brilliant idea and one that I wish would quickly make its way across the country. Currently it is only at a handful of credit unions.

Does anyone know of any similar programs or any other innovative means of getting people to save? Smarty Pig comes to mind.

Money Folders Screencasts

We now have screencasts!  Check out our support page here and let us know what you think.  Currently we only have one screencast that covers the Budget Setup Wizard but more are in the works.

Money Folders 1.7 Released!

The big news this week was that Google finally dropped the beta tag from many of their products, including the wildly popular GMail.

Not wanting to be shown up by Google, Money Folders 1.7 was released from beta today!  You can download the latest from here.

This release contains substantial changes.  The biggest changes were to the underlying architecture that will enable Money Folders to move into the future while also making your data more available.  It is your data and you should be able to access it outside of Money Folders if you choose.  Watch this blog and the Money Folders site for future details on this topic.  It was also modified to support Windows Vista 64 bit edition as well as adding the ability to print transactions from the register.

We have many more exciting features in the works so make sure you check back here often!

Happy Independence Day!

The following is an excerpt of a letter from John Adams to his wife Abigail dated 3 July 1776.  At the time John Adams was in Philadelphia taking part in the debate over whether to declare independence and was prognosticating on how future generations might celebrate the signing of the Declaration of Independence.

But the day is past The second day of July, 1776, will be the most memorable epocha in the history of America. I am apt to believe that it will be celebrated by succeeding generations as the great anniversary Festival. It ought to be commemorated, as the day of deliverance, by solemn acts of devotion to God Almighty. It ought to be solemnized with pomp and parade, with shows, games, sports, guns, bells, bonfires and illuminations, from one end of this continent to the other, from this time forward, forever more.

Happy Independence Day!

APR vs. EAR: Realistic Credit Card Comparisons

We all know that the most appropriate way to utilize a credit card is to pay the balance in full each and every month.  If you do that, then great you can stop reading now.  However, if you do use credit cards that carry a balance then you should do some comparison shopping and pick the best card for your situation.  In this case I don’t mean which one has the best “Points” or which one lets you put Jr’s picture on the front.  Instead, let’s talk about how to realistically calculate what you will be paying the card company.

Credit Card companies are known for their fine print and sometimes questionable lending practices.  Whether or not they could be considered predatory could be the topic of a post on its own.  One of the questionable things they do, is to only disclose the APR of a given card and legally that is all they are required to do.  In fact, anytime you secure a loan the lender is required to state in clear terms the APR, or Annual Percentage Rate, for the financing.

I want to introduce you to a new term; Effective Annual Rate (EAR).  The EAR is a more accurate representation of what you will be required to pay back.  An APR gives you the Annual or Yearly interest rate.  If you borrow a $100 at 12% APR then you would expect to pay back $112.  This is accurate if the interest is “Compounded” or calculated annually (yearly).  Most consumer loans though require payment monthly, which means interest is compounded monthly.  Using the $100 example above, if compounded monthly you would have paid back $112.68 at the end of the year.  Sixty eight cents may seem a trivial amount, but when dealing with larger numbers the difference can be significant.  The 12% APR is actually 12.68% EAR.

When comparing credit cards, you need to check two important pieces of information.  The stated APR and the compounding frequency.  Many cards compound monthly but some may also compound weekly, which will result in a higher EAR and a higher pay back amount.  To calculate the EAR for a card you can use this formula:

EAR = ( 1 + APR / M)^m – 1

APR = Stated APR (rate)

M = Compounding Frequency (12 for monthly, 52 for weekly)

Our example above would look like this:

EAR = (1 + 0.12/12)^12 – 1

Which gives us 12.68%

Using the steps above you now have a realistic and fast way to compare the actual rate that you will be required to pay back.

ESA or 529?

“What we want is to see the child in pursuit of knowledge, and not knowledge in pursuit of the child.”
–George Bernard Shaw

Do you have kids?  Do you have a plan to pay for those kids college tuition?  With current tuition prices rising faster than inflation it is important that you start to set aside funds as soon as possible.  That is, unless you are independently wealthy and can simply write $20,000 checks whenever you want.  If that’s the case then what are you doing reading this and uh, can I borrow some money?

There are two major vehicles that have been created for college savings, the Coverdell ESA (Education Savings Account) and 529 plans.  Both of these options have strengths and weaknesses and we can start to look at a few of them here.

ESA Pros

1. Flexible  — These operate much like an Roth IRA and you can control what funds you invest in and how they are invested.
2. Familiarity — Again these operate like an IRA so they are familiar.
3. Tax Deferred — You are allowed to invest up to $2,000 dollars a year that then grows tax free.
4. Elementary Schools — Funds can not only be used for College tuition but also tuition at private elementary and high schools without penalty.

529 Pros

1. Higher Contribution Limits — Currently $11,000 per person as opposed to $2,000 for an ESA
2. Managed — These accounts are managed by fund companies.  You usually have a choice of funds but they are controlled by the fund company.  Many have funds that automatically adjust their risk level based on the age of the child.  Great for inexperienced investors or those who don’t have the time/will to manage it themselves.
3. Ownership — 529 Plans are owned by the parent/guardian as opposed to the child.  This could become very important when it comes time to apply for financial aid.
4. Tax Deductions — Many states offer tax deductions on contributions if you invest in your states plan.

ESA Cons

1. Low Contribution Limit — $2,000 a year limit plus caps on parent income can make this a problem for high income or two income families.
2. Age Limit — Funds must be withdrawn by age 30, even if that means withdrawing for non-approved purposes and taking the 10% hit.
3. Ownership — Child has ownership of the account which could skew the financial aid scales.

529 Cons

1. Restricted Funds — You can not choose any mutual fund to invest in but rather only those that the plan allows.  Many of these are run by Mutual Fund companies and you should be careful of any “actively” managed funds.
2. College Only — Unlike the ESA 529 funds can only be used for College expenses and not for private elementary or high schools.
3. Complexity — Currently over 70 different plans out of the 50 states each with different rules and pricing.
4. Costs — Many of these plans are managed by fund companies who try to push their own high fee funds.

The bottom line is that you will need to evaluate what your current financial picture looks like and what you plan for it to be over the next 18 or so years and choose your plan wisely.  There is a wealth of information available for you to sift thru and educate yourself with.  Just don’t let the fear of making a wrong choice keep you from making any choice at all.  Hey, if it comes down to it hedge your bets and invest in both a solid 529 plan and a Coverdell ESA.

Photo: laffy4k

Hanging On

"If you can keep your wits about you while all others are losing theirs, and blaming you. . . . The world will be yours and everything in it, what’s more, you’ll be a man, my son." - Rudyard Kipling

“You only find out who is swimming naked when the tide goes out.” – Warren Buffet

As I was reading thru the Wall Street Journal today I came across a personal finance article with the Kipling quote above and it reminded me of the Warren Buffet quote.

Over the last 4-5 years many people didn’t keep their wits about them.  They were convinced that they could use their houses like ATM’s and that the stock market would never go down.  You didn’t need any down payment to buy a house and yes you can afford that $40K car.  People didn’t use their God given common sense.

Did you ignore your common sense?  Are you swimming naked? 

Money Folders 1.5.0.10

There is a new version of Money Folders available that addresses a significant issue recently found in the “Transfer between accounts” logic.  This bug only affected users running version 1.5.0.9.  If you are running this version you should download this upgrade.

Money Folders v 1.5.0.9

Another quick update to Money Folders with a few requested features.  This update includes the following changes:

1. Added ability to edit folder names
2. Added the ability to transfer money between accounts by simply dragging from a folder and dropping into an account folder.
3. Added ability to clear the “Recently Opened” file list.

As always, this is a free update and keep the suggestions coming.

Thanks,

Adam

Money Folders Update 1.5.0.7

I just uploaded the latest build of Money Folders.  Remember, all upgrades are free for the first year or next full version whichever comes last.

This update is largely cosmetic.  The most requested change I get is to make Money Folders more colorful.  See what you think:

Download now and let me know what you think.  The folders change color based on their current balances and the ledger areas now have some color to make them easier to read.