ING Bank Just Got a Little Cooler

Unbeknownst to me, ING (the online based bank with the consistently good APY’s) has opened cafes in a bunch of major U.S. cities — complete with free wifi and free personal finance seminars and webinars.  Who knew!? Read more

Know Your Stuff: Breakin’ Down the Roth IRA

Investing in your retirement has never been more important than it is now. With the current state of the economy, there’s not much of a reason to have faith that you’re social security payments will provide much stability to you in your golden years. With the rising costs of living and pretty much everything else, social security contributions can’t and won’t keep up with inflation, and what may barely pay your bills now certainly won’t pay them when you’re 65.

This leads us to the following, inevitable fallback plan:  start piling up your own source of future income.  Since retirement planning is such a vitally important part of everyone’s long term plan, the government has blessed us with the Roth IRA. Keep on reading for a few basics that you need to know to get started with one:

• A Roth IRA is an Independant Retirement Account which allows you to save money for retirement by contributing a set amount of money per year and letting you earn interest through investments.
• Roth IRA’s currently have a contribution limit of $5,000 a year, considering that your earned income falls below $101,000.
• The major difference between a Roth IRA and a Traditional IRA is that you are not penalized and charged a fee if you take out your contributions (not your earnings) before you retire.
• The Roth IRA is 100% completely tax-free when you make your withdrawals after your retirement age. Kiplinger gives this startling (and inspiring) example: If a 25-year-old contributes $5,000 each year until she retires and makes an average annual return of 8% on her investment, she’ll have $1.4 million saved by the time she retires at age 65. If that same 25-year-old invested that same $5,000 a year in a regular taxable account earning the same 8% return, she’d only have about $1 million after 40 years if her earnings were taxed at 15% federal. That’s more than one-fourth less money than if she’d gone with the Roth.
  

There is really no excuse against opening a Roth IRA account. It will only benefit you and it also offers this additional bonus:

• You are allowed to take out up to $10,000 tax and penalty free to purchase your first home. This is per person, so if you and your significant other both have a Roth IRA, this would give you a $20,000 limit.

To open a Roth IRA Account, you need to first decide what you feel most comfortable investing in. A lot of people choose to go the mutual fund route because it offers a more diverse portfolio (investing in many different industries as opposed to just focusing in on say, real estate). There are a few places where you can open a Roth IRA:

• A bank – this is a good choice if you want to invest in COD’s (Certificates of Deposit) and Money Market Accounts, which are less risky investments.
• A Fund Company like T. Rowe Price or Vanguard is a good choice for mutual funds because you will have a professional choosing your stocks. For these funds, you normally need around $2,500 to start, and they will usually waive the minimum if you sign up for monthly automatic deposits into your account.
• A Brokerage Firm – this is a good choice for a more seasoned investor to purchase individual stocks and bonds. Usually the same $2,500 minimum applies, but these companies tend to charge hefty fees when it comes to each trade and maintaining the account. You should always double check to make sure your fees won’t hurt you.

If you’re young, going the Vanguard route may be the way to go – you have plenty of time to increase your earnings with a much higher return compared to a traditional COD.  It’s also the best way to get a well-rounded and diversified portfolio for your money without paying huge management fees.

But if the idea of calling up an investment company is still a little daunting, set up a meeting with a financial advisor at your current banking institution.  It’s free, and they’ll be able to set you up quickly with an IRA account or at the least, give you a sampling of helpful information to get you started on the right path.

The Worst Debit Card Ever? UPDATED

Capcom, a video game distribution company, is now promoting a new VISA debit card designed to promote Capcom-Unity points for their Accelerated Rewards program to be used for auctions, raffles, and to take advantage of company promotions (like access to Beta tests and priority entrance at Capcom events).   Read more

Coping with Crushing Student Loan Burdens

I’ve been reading more and more stories lately on how the high interest loans are putting an extraordinary burden on recent graduates paying off what they thought were federally controlled student loans. These loans were extended via private companies, but carried variable interest rates that, like a lot of mortgages, fluctuate with current interest rates. The ending result? Sky rocketing interest rates on loans for tens of thousands of dollars and none of the benefits you get with federal student loans like deferment and locked-in rates.

The LA Times published an interesting article about a young woman who recently graduated with a degree in photography. After taking out $140,000 in loans, she now has to pay out $1,700 a month towards these loans. And with some of these loans at a debilitating 18% interest rate, paying $1,700 a month isn’t going to go all that far.

To give a frame of reference, if she had taken out the entire $140K in private loans at 18% interest, she would have to chuck away $2,010 a month towards her loan, and then she would only be able to pay it off (at that same rate) after 30 years, all the while racking up a total bill of $618,464 — almost five times the original amount! Add in a missed payment one month, and you can see how this issue is gaining momentum as one of the most serious problems for new graduates — coupled with low employment rates.

While I think that loaning organizations are practicing dubious policies and purposely muddling the information that is given to the students who apply for loans, I also believe that a large part of the blame should go towards schools for not educating students on how to effectively finance their college education and what to realistically expect after graduation. FinAid, an online comprehensive financial aid guide, says that a good rule of thumb for taking out loans is that “…your total education debt should be less than your expected starting salary.”

I think that most students would pass up $100,000 in loans for a photography degree if they understood that they’d likely be making less than $40,000 in their first job after school. It’s unrealistic to think that a six-figure loan will be easily paid off after school unless you’re diving into a career in banking — and I don’t think that colleges are cementing this understanding to their students. According to a quote from the LA Times’ piece, Luke Swarthout (a former advocate at the U.S. Public Interest Research Group) said “The students think it’s an investment in their future, and the colleges are willing to let them borrow heavily because it helps them fill in their enrollment.”

I, for one, was never required to take any classes or lectures on how student loans work or where to look for financing. It was just assumed that you would take out loans and they pretty much had the paperwork ready. All they required was a signature. I guess I was lucky that I did indeed have a Federal Stafford Loan with a locked interest rate of 6%. I also went to a state school with relatively low tuition, so my student loan bills were far less of a burden than many of the students that I’m hearing about now.

So, just for argument’s sake, where do you guys believe the fault lies? Is it in the hands of the private loan sector for purposely providing confusing information and not disclosing full loan amounts? Does the blame go to the college for not providing better financial aid counseling? Or does it belong to the students for being too naive when agreeing to these terms?