Yesterday, the CEO of Bank of America argued that the bank has a “right to make a profit.” They do, in fact, have that right. But that doesn’t mean you have a responsibility to help them with that. If you regularly use your debit card and don’t want to pay the new $5 fee each month you use the card, you have a few options for avoiding the fee:

Switch to Cash
Many people have stopped carrying cash, but cash is still accepted in most places. I won’t say all, because I’ve been in doctor’s offices that couldn’t make change and airlines don’t take cash for in-flight purchases. But, for small, day to day purchases, carry cash. The merchant will be happier and you won’t get slapped with a fee. It might even reduce your urge to make all those small purchases.

Get a Credit Card
Of course, cash might not be appealing if you need to make a large purchase, and it won’t work for online or phone orders. Even if you avoid credit, you might want a credit card for these purchases exclusively. In addition to avoiding the debit card fee, you’ll receive purchase protection. Just make sure you choose a card without an annual fee. Only use the card for large purchases where cash is challenging, or online/telephone purchases. Don’t carry it with you. Then make an online credit card payment for the same amount as soon as you complete the transaction. It’s an extra step, but you won’t get dinged a $5 fee for the privilege.

Choose a Credit Union or Online Bank
Bank of America isn’t the only bank testing debit card fees, so you’ll probably have to avoid traditional brick and mortar banks to avoid debit fees. You can switch to a credit union, most of which belong to extensive ATM networks, or you can switch to an online bank. An online bank as your primary bank shouldn’t be your first choice if you make a lot of ATM deposits, but it’s great for those of you who generally only receive direct deposits, or can wait for deposits to be processed by mail.

While the new debit card fee is annoying, it can be avoided. I do wonder at the wisdom of the big banks doing this. As an NPR commentator pointed out yesterday, it does require effort to change banks if you have direct deposit, automatic debits, and online bill pay, but people will do it if the banks push us hard enough. I only use my debit card to withdraw cash, so I won’t be hit by the fee. But for those of you who rely on debit cards, I think the day will come soon when online banks will have those snazzy check scanning apps, and that might be all it takes to convince many people to leave the big banks.

I wouldn’t expect the fee to go away unless Congress changes the regulations or Bank of America loses customers in droves.

2010 is nearly over, and I am thrilled. 2010 was easily one of the worst years of my life. I’m eagerly looking forward to 2011. With that in mind, I’ve outlined six things I need to do prepare for the new year.

Set New Goals
Because this year went so badly, I don’t think I met any of my goals for 2010. I’ll check tomorrow. So, it’s time to set new goals for 2011. Most of them will carry over from 2010. I will also determine the steps I need to take to reach each goal. I did that last year, but life interfered and I couldn’t do any of them.

Gather Financial Documents
I like to do my taxes early in February. It gets them out of the way and I’m expecting a sizable refund because my husband was on disability (non-taxable income in California) for so long that our tax bracket dropped! So, I started by making a list of all the financial documents I need to have in hand before I can prepare our taxes. I keep the list in my notebook and mark the items off as they come in. They must all arrive by January 31, 2011, but I’ve already received one of them.

Assess Personal Finances
While you’re gathering your financial documents, this is a good time to review your assets. Review your portfolio to see if you need to do any rebalancing. Review your savings account balance to see if you need to shift any of it into higher-return options like CDs. Review your emergency fund to see if it needs to be replenished. Review your spending to see if you need to cut back in certain areas.

Say Goodbye to 2010
Whether your year was horrible or happy, it’s time to say goodbye to 2010. I do this by thinking back on the year and writing down everything important that happened and how I felt about it. It’s a nice record of the year that was, so you’ll know what it was really like twenty years from now when you’re telling the grandkids about the blizzard of 2010. It only takes about thirty minutes, but it lasts forever.

Make a 2011 To Do List
I make a major to do list of all the projects I need to do around the house or in my personal life at the start of each year. Things like organize the shed, build closet shelves, etc. By the end of the year, my list is marked up and scribbled all over. Start fresh by making a new list, with all the incomplete tasks copied over. You don’t have to put dates on them, but remember to bring the list with you when you’re going to the hardware store so you can pick up some of the small items on the list, like push lights for the dark closets. (Are you sensing a theme?)

Buy Some Champagne
Be sure to grab a bottle of champagne to toast the new year. It’s the best way to get the year off to a good start, and then hope things only get better from there. Make sure to buy a decent bottle. This isn’t the time to go for the cheap stuff.

Tomorrow I’ll assess my achievements for 2010, and then the next day I’ll review my 2011 goals.

Another interesting post from LearnVest this week: What should be in your wallet?  This will, of course, vary by person, but they offer a few pointers for paring down your wallet. You don’t want the exploding wallet a la George Constanza!

However, I had to disagree about some things they suggested for wallets, because I either don’t need them or keep them in my purse instead. If I kept everything in my wallet, it wouldn’t close.

What’s In My Wallet
My wallet has slimmed down significantly since most of my store cards have been cancelled, but it’s still got quite a bit of stuff in it:

License/ID: Obviously my driver’s license needs to be in there because I drive. Even if you don’t drive, you should always have ID with you because it could be needed in an emergency. Behind it I have my organ donor card and a change of address card because California doesn’t issue a new license when you move.

One point of contention with the LearnVest article though. They said, “Stores have the right to ask for an ID when you use a credit card, so you need to have one ready to show them.” Although some state laws do permit the request, it’s a violation of the store’s merchant agreement with Visa and Mastercard to require ID. They can request, but can’t make showing ID contingent on completing the transation. Requesting ID protects the store, not you. The signature is considered your ID for the transaction.

Emergency contacts card: My husband and I printed emergency contact cards that we keep behind our licenses. In case we’re in accidents and are separated from our cell phones, any emergency workers who find our wallets will know how to reach our spouses/relatives in an emergency.

Credit cards: LearnVest recommends only carrying one, but I carry three. One Amex, one Visa, one Mastercard. I mostly use the Amex, but I rotate the other two at stores that don’t take Amex. Their recommendation is to use a Visa or MC branded debit card if a store won’t take your primary Amex, but that really wouldn’t have worked when I had to buy $1400 worth of furniture! I recommend carrying at least two cards, just in case a card is rejected for credit card security reasons, as happened to me at Cost Plus while buying furniture.

Debit cards: Again, I carry two. One for my regular checking account, one for my business account. I could probably stop carrying the biz account card since I only use it to deposit infrequent checks, but I know I’d forget to bring it when I did finally have to deposit a check.

Retailer Cards: I’m down to Goodyear at this point, so that card stays with me. When your car has 150,000 miles on it, a service emergency can happen at any moment!

Membership Cards: I keep my Blockbuster card and my Costco card in my wallet, but other cards have a different home. I also keep my library card in my wallet in a prominent pocket because I use it almost every week.

AAA/Roadside Service Card: Another must carry. If you’re a member and drive a car, you should always have it with you. You can’t use it if you don’t have it! AAA members can also use it if they’re a passenger in a non-member’s car, so there’s no reason to remove it for a road trip where someone else is driving.

Health Cards: One more must carry. Actually, for me, it’s three cards. Medical insurance, dental insurance, and FSA debit card.

Business Cards: One of mine and one of my husband’s.

Cash: I’ll be honest. There are times when I run out of cash. Before my husband had surgery, he went to the bank each week and then I’d take enough money for the farmer’s market out of his wallet. Any leftover went into my wallet. I rarely spend cash, so after a while, the total will get up there. Other times, I’ll spend all the farmer’s market money at the market and not have any leftover. After a while, my wallet starts to empty out. I have to remember not to let myself be cashless! Fortunately, there’s an ATM for my bank in my office park, so I can replenish if I’m going to a team lunch or happy hour.

What’s Not in My Wallet
LearnVest recommends a few other items that aren’t relevant for my life, or that I’ve found a different solution for.

Frequent Flyer Cards: Rather than put them in my wallet, I put them in my address book so I can look them up when I’m booking travel. I also registered at each airline’s website. All you have to do is sign on to the website to get your number. You can always go back and add your number to the flight record later if you forget.

Club Cards and Gift Cards: Rather than keep my CVS card, Ralph’s card, Vons card, and all manner of gift cards in my wallet, I keep them in a zipped pocket in my purse. That way I can easily access them, but can still close my wallet. Actually, I keep my grocery store cards in my coupon folder because I can use my phone number to get the discount if I need to run out for one or two items. The card isn’t really necessary unless you want it to print out the points you’ve earned.

Are you a keeper of a slim wallet or do you let it fill up with junk before finally emptying it?

This is mostly about time management, but it also applies to personal finance. Every week, I create a To Do list in my notebook. It includes my usual weekly tasks (because I like crossing things off lists, not because I worry I’ll forget to buy groceries), the TV shows I plan to watch, events I plan to attend, as well as the things I need/want to do. I never mark off all the things on the list, though, because I make other things a priority.

Choosing Between Priorities
This weekend, for example, I wanted to do several things:

  • Go for a hike with my best friend
  • Paint my powder room
  • Make curtains
  • Paint a box for the bathroom
  • Work on a writing project.

Obviously, I had to narrow that list down, because there was simply no way to do it all and still have time with my husband.

So, I figured out which was most important to me.

I’d already agreed to the hike, and it was her birthday, so that was easy. Plus I got exercise, which I needed. Working out was also on the list!

The writing project was next on my list because I’ve given myself a personal deadline for it.

After taking care of some other household chairs, the other three things on the list didn’t happen. They’ll move to next week’s list.

Tips for Setting Priorities
If you’re deciding on priorities for your budget or your time, it’s all about calculating the relative importance.

My best friend is more important than my curtains. My writing project is also more important than my curtains, but less important than my best friend. If I had a paying deadline, the writing project might take the top spot.

If you’re budgeting, your rent/mortgage and other bills are priorities, whereas the vacation savings can wait.

If you’re choosing between purchases, or budgeting your spending money, decide which is more important to you. Do you need to buy the shoes more or can those wait so you can add to your vacation savings? Should you go out to eat or would it better to eat at home so you don’t have to put the movie tickets on the credit card?

Here are five questions to ask yourself before taking an action:

  1. Is this a want or a need?
  2. Is this related to an obligation?
  3. Is this related to a personal or financial goal?
  4. Can I do afford this without stretching my budget?
  5. Is the benefit greater than the cost?

For the hiking trip, the excursion was a want. The exercise was a need. It was an obligation, because I’d already agreed to go. It wasn’t related to a goal. It was free, so no cost. Definitely had a lot of benefits!

The Benefits of Setting Priorities
Obviously, we all want to do more than we have time for, and most of us want to do more with our money than we reasonably can. So, it comes to making choices. Priorities help make those choices easier. Most people, including me, have goals in the backs of their minds. By consciously prioritizing those goals and writing them down, you can more easily prioritize the other choices you have to make instead of taking an action and then realizing later that it was a mistake.

Today I used a quick calculator from Money magazine to determine that I have a net worth of -$60,000. But hey, that’s better than were I was a year ago, because I didn’t own a house. Back then my net worth was -$200,000. You’re probably wondering how taking on more debt reduced my net worth. And that is the trouble with net worth calculations.

What Net Worth Is
Net worth is basically your assets minus your liabilities. If you’re a corporation, this is an important number because it tells current and prospective investors where the company stands. For a family, the number doesn’t convey a whole heck of a lot.

Let’s look at a sample net worth calculation:

Assets
House value: $250,000
Car value: $10,000
Savings/checking: $2,000
Retirement: $50,000
Total: $312,000

Liabilities
Mortgage: $220,000
Car loans: $8,000
Student loans: $35,000
Credit card debt: $9,000
Total: $272,000

Net worth: $40,000

What Does Net Worth Mean?
So what does that number mean to a family? It certainly doesn’t mean that they have $40,000 available to them. They probably can’t borrow more than $5,000 against their home and selling it could take months, so it wouldn’t help in a cash crunch. The retirement savings could be tapped in a cash crunch, but it would incur high penalties and taxes. Selling the cars would only net $2,000, and then what would they drive?

Over time, the net worth number will rise because the mortgage will go down slightly each month while the home value will rise. The student loans and auto loans will also decrease over time. However, the value of the cars will also decline.

Cash on Hand Is More Important than Net Worth
So, even though they have a net worth of $40,000, they have only $2,000 cash on hand. If they had non-retirement stock investments, I’d also lump those into cash on hand. It would take a couple days to sell the stock and get the funds, but it’s fairly liquid. Other than that, this net worth calculation only tells their heirs what they might get from current assets if the parents died that day.

When I looked at our negative net worth number, my first thought was: eh. What does it matter? We have money in savings and no credit card debt. I know exactly why our net worth is low, but I also know that our large student loans aren’t going anywhere anytime soon. We’re in a pretty good position financially, and until my husband went out on disability we were able to save a decent portion of our income each month. To me, that matters more than whatever our “number” is.

Before my husband went on disability, we stopped spending money in order to increase our savings. We’ve found that our spending has actually been much lower while he’s been out of work, but we also had a few unexpected events develop where the savings has come in handy.

Delays in Disability Pay
The first issue is delays in processing disability pay. We were prepared for it to take up to a month to get the first check, so we needed to have at least one month’s expenses in the bank. As it turned, we got the first check in two weeks, but it gave us peace of mind anyway.

Being on Disability Longer than Planned
We initially planned for my husband to be out of work for two months. Due to a complication, that timeline stretched out to three months. We reached that point, and another small issue arose. My husband won’t be returning to work until three and a half months after he went out, and he may not be full time at first. Fortunately, we still have savings to cover any gaps, because our spending will start to rise again once he returns to work.

Gaps in Disability Pay
The initial disability application had an end date of April 1. At the end of that period, the state sent us an extension form, but it took a month to restart the payments from that point. We received back pay, but our check account got a little low during the gap period because we also had a plumbing emergency and some work done on the kitchen. Again, because we’d saved up, we were able to cover the gap without a great deal of stress. We were close to transferring money from our savings, but the checks arrived just in time.

So far we haven’t had to spend any of our savings, although we will when the plumber finally asks to be paid. We were very fortunate to be able to plan for disability, but this is yet another reason you need an emergency fund. California provides state disability pay (funds come from employee payroll taxes), but most other states do not. If you don’t have disability insurance, or your disability coverage is taxable, make sure you have enough money to cover a three-month shortfall. You’ll be glad you did you or a family member suffers an accident or illness.

I’ve mentioned CD ladders as good options for tax refunds and emergency funds. They’re a safe way to earn a bit more in interest than the basic savings account. Currently, you won’t earn significantly more, but in the past I’ve seen CD rates go as high as 7% on a 5-year CD.

What is a CD Ladder?
Basically a CD ladder is five CDs, each with different maturity dates. Traditionally, the maturity dates are 1, 2, 3, 4, and 5 years. You buy them all at the same time. Then, when the 1-year CD matures, you roll it over into a new 5-year CD. After 5 years, you’ll have 5 CDs with the highest possible rate at the time of purchase, and you’ll always have a CD maturing within the next 12 months in case you need the funds.

Where Can I Create a CD Ladder?
Most banks offer CDs, so choose any bank or credit union. It’s best to get them all from the same bank or credit union to avoid future confusion. Before choosing a bank, read the reviews to make sure they don’t have issues with properly informing you about CD maturity. If you don’t notify them of your intention within the designated time period after maturity, they’ll automatically renew it into a CD with the same term.

Potential CD Ladder Earnings
Here’s an example of the interest you could earn with a CD ladder vs. a traditional savings account. We’ll start with $1,000 CDs. You may need more than this to open a CD at some banks, but it’s a nice round number for calculations. If you have a significant amount of money to invest, you can buy jumbo CDs, which have higher interest rates. These are Everbank rates. Even though I no longer love the bank, they have all the rates on their website, and they’re pretty generous.

1-year CD – $1,000 – 1.39%
2-year CD – $1,000 – 1.85%
3-year CD – $1,000 – 2.27%
4-year CD – $1,000 – 2.78%
5-year CD – $1,000 – 3.30%

After 5 years, you’ll have earned $768.40 in interest vs. $360 from a standard savings account. Of course, this assumes that interest rates won’t rise in the next five years. They will, because they move with the Fed rate, but CD rates will also rise with the Fed rate, so you’re renewed 5-year CD will earn substantially more than a savings account.

Of course, the more you can start with, the more you’ll earn. If you’re just starting, shoot for $10,000 total. Then, as each CD matures, consider adding more funds to each CD until eventually you have $25,000 in a CD ladder. The money is safe, it can be used for emergencies, and it’s earning a decent return.

My husband and I have been debating what to do with our emergency fund. Should we keep it all liquid in an online savings account currently earning about 1.22% interest or put some it in a CD ladder? There are pros and cons of both options, so really it comes down the size of your fund and how liquid you need it to be.

Fully Liquid Emergency Fund
Right now our money is in a savings account earning a piddling amount of money in interest. Because the Fed rate is 0%, savings interest rates are low. For a while, banks were offering high teaser rates, but those don’t last long.

However, we chose to keep the fund fully liquid for the time being so that we would have full access to it while my husband is on disability. We haven’t had to tap it, but it’s there if we need it.

So here are the pros of the liquid emergency fund:
Always available. If your roof caves in during a storm, the money is ready to go. No need to wait for the funds or get financing in the interim.

Easy to access. We just transfer it from our online savings account to our checking account. It takes about three days for the interbank transfer.

No fees for withdrawing. We can take our money out anytime we want and we can add money to it whenever we want.

There are also cons to the liquid emergency fund:
Low interest rate. If you want to make money off your money, then a savings account isn’t a lucrative way to do that.

Temptation to spend it on non-emergencies. If we had less self-control, we might use that money for other purchases because it’s so easy to access.

CD Ladder Emergency Fund
You should always keep some money fully liquid. I’d keep at least one mortgage payment in cash – you never know when the bank will screw up (or when you and your husband will accidentally overpay the mortgage.) However, once the minimum is covered, you could move some of the emergency fund into CD ladders.

Pros of the CD ladder emergency fund:
Higher interest rate. Rather than 1%, CDs typically earn 4% or more. Not a huge amount, but a lot. When you ladder it into 1, 2, 3, 4, and 5-year CDs, interest rates climb with each year.

No temptation to spend it. If you want to break open a CD early, you usually have to pay a penalty. You can get no-penalty CDs, but the interest rate is lower.

Cons of the CD ladder emergency fund:
Difficult to access. If you need the money to fix your caved-in roof or overhaul the engine on your car, you either have to wait until the CD matures, and then wait for them to send you the money after you request it, or you have to break it open early and pay the penalty. In the meantime, you might have to get financing to cover the repairs, and that could cost more than the interest from the CD.

For now, we’ll stick with our liquid emergency fund, but we may start CD laddering as it grows. I’m thinking the right ratio would be 50% cash, 50% CD ladders. Then we would have enough to cover the initial emergency cost, and would be earning more interest on the rest in case a serious emergency (like a massive earthquake) develops.

Last Friday, NPR’s Marketplace had an interesting report on the true cost of all our modern necessities. Taken individually, we don’t really think about what all these things cost us, but taken together they add up to quite a bit of our budget. So, how did we get here and do we really need to be here?

Life in a Simpler Time
People like to hearken back to a simpler age, the 1960s, when talking about how a family could afford to live on one income, and yet they puzzle over the fact that a TV or refrigerator cost ten times more (when inflation is factored in). How could these families flourish on less income and still buy these things?

It’s simple – they didn’t buy as much stuff, and they didn’t have as many supporting expenses for that stuff. Back then a TV cost $300-$500 (more if you wanted color), which was a much larger chunk of the average $5500 income than a modern $300 TV. But, they only had one TV. And they didn’t have cable. So, they paid for the TV and the electricity to power it, and that was it. Since there were only a few channels, they didn’t watch as much of it, either.

Where the Money Goes Today
Household Incomes are ten times higher than the 1960s (although really, they’re only double when adjusted for inflation), yet TVs cost about the same as they did back then. The difference now, is that most families have two or three of them, plus cable, a DVR or two, and DVD player or two. Then you need stuff to watch on that, so add on a movie subscription, too.

Or, let’s look at telephones. Again, most families only had one. It had a cord and they probably rented it from the phone company. Long distance was expensive, so they didn’t make many of those calls. I can’t find an exact cost for the average phone bill, but let’s just go with “less than now.”

Flash forward to today. In addition to a home phone (if you have one), there are cell phones for every member of the family. Some of those have data or texting plans.

Of course, you also need to add in internet access and computers with which to access them.

Want music? Well, then, you’ll need an MP3 player and maybe a CD player.

What My Family Spends on New Necessities
Just as a real life example, here’s what my husband and I spend on our “necessities” for one month:

$88.40 for cable with DVR (one TV, one Premium channel, one upper tier package)
$66.33 for home phone and internet bundle (no long distance or other frills)
$95 for two cell phones (no data or texting plans)
$9.99 for Real Rhapsody (music)
$19.99 for Blockbuster Total Access (3 movies at a time)

Our total is $279.71 per month.

Of course, we get reimbursed $90 a month for our phones, although that’s taxed, so we’ll call it $75 a month. That brings us down to $204.71 a month.

Additional Costs of the New Necessities
Since we’re spending all this money to entertain ourselves and stay connected, we have to earn at least $2456 a year to pay for all of it, on top of our actual necessities like food and shelter. We probably need two incomes to pay for all our new necessities, so that also means daycare, extra commuting costs, as well as less time to enjoy all those modern benefits.

I’m not suggesting that we give up our cell phones and broadband access, I am suggesting however, that we all take a hard look at how necessary the things in our life are and what we can cut. If we had to, we could cut Real Rhasody and Blockbuster easily. We could also reduce our cable bill. The home phone I insist on keeping because we live in earthquake country and landlines/corded phones have never failed me in a major earthquake.

What could you cut?

Today, the Federal Reserve announced long-awaited new rules governing gift cards. For some of you, your state laws already provided these protections, but now they will be extended to all consumers as of August 22, 2010. The new rules also apply to network cards (bank-issued cards), which many state laws do not. If you’ve got gift cards in your wallet, here’s what you need to know.

Gift Card Expiration Dates Extended
In some states, gift cards expired a little as a year after being issued. The new rules require that gift cards be valid for five years from the date of issue OR the last date the card was loaded with funds, whichever is later. So, if you filled up a coffee card and then forgot about it, you may still be able to use it a few years later.

Inactivity Fees Curtailed
Currently some states bar inactivity fees on gift cards and other states don’t. Under the new rules, inactivity fees can’t start accruing for 12 months after the card has been inactive. In addition, only one fee per month can be charged. The fees can’t be charged unless the card holder has been given clear and conspicuous notification. In most cases, this will be disclosures on the gift cards themselves. Unfortunately, the Fed didn’t limit the amount of the fees that can be charged.

Some Cards Already in Compliance
Perhaps trying to avoid new regulations or sensing they were coming anyway, some retailers and network card issuers have already moved to eliminate inactivity fees and extend expiration dates. If you’re buying a card after August 22, be sure to ask when inactivity fees start to accrue and what amount is charged.

Use Up Gift Cards Quickly
As always, your best course of action is to use gift cards as soon as you receive them. If you receive a non-store card, use it for groceries or something similar as soon as you receive it. If you’re saving up for a major purchase, you can then simply take those funds from your grocery budget and put them in your savings for later.

I ran into a problem using the small balance left on an Amex gift card I received – when the cashier swiped it, the system didn’t reply with the balance due and instead rejected the transaction because it exceeded the balance. I had to tell the checker the exact balance so she could charge exactly that amount to the card. If you have a balance left on a network card, write the exact amount on the card and stick it to the front of the card on a post-it. If you have a balance left on a store gift card, the store’s register should be able to read the balance correctly, but it’s still nice to know what’s left on the card so you don’t spend more than you need to.

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