The Average Daily Balance Mystery
How to calculate interest on a loan should be very simple, but it seems to be a mystery to many people, including highly educated consumer advocates.
MSNBC.com columnist Bob Sullivan wrote a book Stop Getting Ripped Off: Why Consumers Get Screwed, and How You Can Always Get a Fair Deal. It was published around Christmas time last year. He spent five pages in the book trying to explain how credit card companies use the average daily balance method to calculate interest and how that method maximizes the revenue for the bank.
With the help of a spreadsheet created by blogger NCN at No Credit Needed, Sullivan showed that when a consumer doesn’t have a grace period because he’s carrying a balance, if he charged $3,000 on the 5th of the month (assuming the billing cycle runs from the 1st to the 30th), he would owe five times more interest than if he charged the same $3,000 on the 25th of the month. The author announced the surprise discovery:
Why a Bank Makes $500 a Year Off an Average Customer
Banks are not popular these days. Mike Konczal, a fellow with the Roosevelt Institute, wrote What are you worth to your bank? in The Washington Post a few weeks ago. He estimated that a bank makes about $500 a year off an average retail customer. That story also made its way to NPR’s Planet Money blog.
I have a good explanation for that and it’s not because banks are cheating customers.
Before we continue, let’s take a look at how Konczal got the $500 a year number. He first gave this formula: » Read more …
A Case Study On An Index Linked CD
An index linked CD, aka market linked CD or equity linked CD, is a bank CD with an interest crediting formula tied to a market index. The main attraction of an index linked CD is that the value of the CD can go up with the market index but it can’t go down. The principal of the index linked CD is guaranteed both by the bank and by the FDIC.
The no-loss guarantee usually comes at the price of capping the upside. The chart below shows what a market linked CD will do versus a straight-up ETF that tracks the index. The horizontal axis is the average annual (not cumulative) return of the index.
Taxes Going Up, Reset Cost Basis?
Reader Kevin asked:
"I have several mutual funds with large unrealized capital gains. I expect tax rates will go up in the future. Does it make sense to sell them now while the capital gains tax rate is still low, repurchase them immediately after, and reset my cost basis?"
The answer, as usual, is "it depends."
It depends on when one expects to eventually sell these funds, to what extent the tax rates will go up, and how fast these funds will grow.
The Best Tax Book
I can tell it’s tax time. Most of the questions posted to my old posts are about taxes. I’m not a CPA; I write about taxes only to the extent they affect me.
The best way to get tax questions answered is of course asking a real CPA. I realize not everybody can afford a real CPA so they ask an amateur on the Internet. The next best way to get tax questions answered would be getting a tax book.
There are two popular tax book series. J.K. Lasser’s Your Income Tax and Ernst and Young Tax Guide. These books are updated every year. They are very inexpensive for their size (think yellow pages). They both go for $13.57 at this moment on Amazon.
Why Do People Buy Snake Oil?
Reader Ace commented in my previous post The Need for a Consumer Financial Protection Agency:
"I’m afraid that we have to live with the fact that people have been buying snake oil for centuries, and will certainly continue to do so."
That got me thinking. Why do people buy snake oil? I can understand why people sell snake oil but why do people buy it? The immediate answer would be lack of education. Obviously if people know it’s snake oil, they wouldn’t buy it. But I keep thinking there’s got to be more to it. After witnessing one such purchase first-hand, I developed a hypothesis: people buy snake oil because they expect magic.
Flexibility and Retirement Planning
This is a guest post by Mike Piper.
Imagine this scenario: An investor (we’ll call her Susan) retires with a $700,000 portfolio. She plans to withdraw $28,000 in the first year of retirement and adjust that amount upward each year in keeping with inflation. In other words, Susan is using a 4% withdrawal rate–typically considered to be sustainable over a 30-year retirement.
Susan’s not looking to get rich, so she uses a moderate asset allocation for a new retiree: 40% stocks, 60% bonds.
In short, Susan is doing everything right — playing it "by the book" in every way.
Uninsured Motorist Coverage Is Not Expensive
A recent New York Times’ Your Money podcast had an interview with reporter Paul Sullivan about reviewing one’s insurance coverage. I was surprised to hear him saying uninsured motorist coverage in auto insurance is important but it’s expensive. I had to rewind and make sure I heard it right because that is not my experience. I’ve had uninsured motorist coverage for many years and it’s never expensive.
I found the article Paul Sullivan wrote in New York Times: Time for an Insurance Checkup, as Needs and Options Change. The part about uninsured motorist coverage said (bold emphasis added by me):
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