The 1-2-3 Money Plan Part 5

FDIC Rules: Is My Money Safe?

It's unusual, but banks can fail, as we now know all too well after the financial crisis. However, if the bank is FDIC insured, your money is safe up to $100,0001 per person on the account at a single inst.i.tution. If an account is held jointly by a husband and a wife, they each are insured for $100,000, for a total of $200,000.

If you have a lot of money to sock in an account, a good strategy is to deposit about $90,000 per person per bank. That way, your princ.i.p.al of $90,000 plus its interest will be insured. Certain retirement accounts are insured up to $250,000 per owner, per insured bank.

For more information, see fdic.gov/consumers.

There's so much compet.i.tion among banks, there's no reason to get an account without FDIC deposit insurance.

3. Join a Credit Union.

Credit unions might be the perfect mix of favorable rates and personal service. Credit unions, which are not for-profit, can offer good rates because customers are the shareholders. Credit unions are affiliated groups of people who pool their money and lend it to each other. Unlike banks, they don't have divided loyalties-trying to serve a customer at the same time as boosting profits and the stock price for shareholders.

Credit unions are exempt from paying federal income taxes, which allows them to be very compet.i.tive, despite being much smaller than the megabanks. Of course, that makes the banking industry very grumpy. It claims those advantages allow large credit unions to compete unfairly with traditional banks. But the advantages can be a boon for consumers.

Traditionally, the major catch was qualifying for members.h.i.+p in a credit union, through your employer, for example. But nowadays, more people than ever are likely to qualify to join at least one credit union-and probably qualify for several. A 1998 law loosened members.h.i.+p requirements for credit unions. So you might qualify just because you live in a certain county or are a member of a certain church. To find out whether you qualify to join a credit union, ask your employer or family members who belong to a credit union, or go online to credit union search sites, such as FindACreditUnion.com and www.ncua.gov/index-data.html.

Most credit unions require a small savings-account deposit-not a fee-to join. It could be as low as $5 for a lifetime members.h.i.+p. That means you retain members.h.i.+p even if you leave the employer, geographic region, or a.s.sociation that qualified you to be a member.

Credit unions are probably best for borrowing. Auto loans tend to be a great deal, and credit unions might be the only place you can get a personal loan. But you might find the credit union is a good answer for checking and savings, too. Credit union deposits are protected by the National Credit Union Administration with the same protections as FDIC-insured deposits at banks.

Bill Paying.

Now that we've gotten some big-picture stuff out of the way, let's drill down to the daily logistics of handling money-more specifically, paying the bills. The first rule of bill paying should go without saying. It is, well, to pay your bills. If you've ever been slapped with a late fee, you know how punitive they can be. And nowadays, missing payments can damage your credit rating, which can make life more expensive in a wide host of ways. So, pay your bills on time, every time.

That said, we can move on to how you pay bills. The usual bill-paying process-waiting for a bill to arrive, writing a check, and mailing off the payment-is one of the worst methods of paying bills today. The old method is more expensive, more ha.s.sle, and more susceptible to fraud and ident.i.ty theft.

In short, efficient bill paying means moving from pen and paper to keyboard and computer.

Bill Paying, 1-2-3.

1. Use direct deposit.

2. Automate bill paying.

3. Prioritize in a crisis.

1. Use Direct Deposit.

If you automate nothing else, at least have your paychecks and other regular income, such as Social Security payments, deposited automatically into a bank account. It cuts down on the time and ha.s.sle of going to a bank or teller machine. And you don't have to worry about misplacing the check. Most important, it gets money into your account quickly, which could help you avoid fees for overdrafts.

If you work for an employer, your human resources or payroll department can probably help you get signed up for direct deposit. You'll need the bank-routing number for the account you want money deposited into.

2. Automate Bill Paying.

You can use three main ways to pay bills automatically. Not only will you ensure bills are paid on time, you avoid the ha.s.sle and expense of checks, envelopes, and postage. The average consumer pays 11.5 bills per month, according to a survey by Harris Interactive and the Marketing Workshop. And we Americans spend about 22 hours a year paying bills, according to the U.S. Bureau of Labor Statistics.

The first way to pay automatically is for trusted payees, such as your mortgage company. And you don't even have to use the Internet. Set up an automatic monthly withdrawal, or debit, from your checking account. You supply the checking-account number and the payee automatically withdraws money when the bill is due.

You'll have peace of mind knowing that important bills are being paid-your lights won't go dark because you lost the electric bill. If you're wary of direct debit, dip your toe in the water by putting one bill on auto-debit-your mortgage or cable TV bill, for example. Once you see how easy and safe it is, you'll want to put as many of your recurring payments on automatic debit as you can. Of course, you must make sure there's enough money in the account when this withdrawal is made or face insufficient funds penalties. Maintain a cash cus.h.i.+on in your checking account and sign up for overdraft protection. That's where a bank links your checking account to a savings account, line of credit, or credit card. Overdrafts, if they occur, are automatically funded by these other accounts, avoiding a costly overdraft penalty.

The second way to pay a recurring bill is with a credit card, if the vendor will let you. This can be especially good when bills are charged to a rewards credit card, which pays you back a small percentage of your purchases in the form of cash, airline miles, merchandise, or other perks. See Chapter 6 for details. Automatic charges to a credit card are also good for merchants you don't fully trust. That's because credit cards offer more robust consumer protections than direct-bank debits do if a dispute arises.

A big caveat with this method, however, is this: If you don't use credit cards wisely, meaning you pay off the balance every month with no exceptions, don't use this method. You'll end up paying far more in interest charges than the convenience is worth.

Automation Drawbacks.

A problem with automating your financial life is the curse of recurring payments. That involves regular charges for products and services you don't want or need anymore. They include gym members.h.i.+p, video-rental club, wine-of-the-month club, satellite-radio subscription, and premium TV channels. Because those payments are automated, it's easy to do nothing and be needlessly charged month after month for services you don't use. Even if the payment is automatic, continue to review your bills monthly and evaluate whether discretionary expenses are worthwhile.

Similarly, you could become complacent about checking monthly bills for errors. And if you switch checking accounts, you'll have to reset automated debits. An expiring credit card might mean you need to provide a biller with a new expiration date, although card companies have programs that allow partic.i.p.ating merchants to automatically get new expiration dates.

The third way of automatically paying bills is a little less automatic: Using the Internet to proactively pay a bill. Online bill paying takes a couple of different forms, but each involves electronically authorizing money transfers to a merchant. Some people like it more than automatic debit because they feel like they have more control over what gets paid and when. And it's a good method for infrequent payments.

You could log on to your own bank's Web site and direct the bank to make an electronic payment to a vendor, such as your power company. You would have to repeat this each month for each vendor, although often you can set up repeating payments for fixed-amount bills. Many banks offer online bill paying as a free service.

Another way is to log on to a vendor's Web site to pay your bill. You would pay by typing in a bank account or credit card number. You would have to do this each month and visit a variety of different vendor Web sites, such as the power company, the phone company, and the mortgage company. That's less convenient than a one-stop bill-paying service.

Be sure to sign up for e-mail reminders about when bills are due, a service offered by some merchants.

If automatic bill paying and electronic payments just aren't your style, you could continue the old-fas.h.i.+oned way with some modifications. First, you have to stay especially organized, knowing when payments are due and regularly going through your bills, which you should keep in a predetermined place. To avoid late charges, you could pay each bill as it comes in. Any bank-account interest you forfeit by paying early is relatively minor compared with a potential late charge.

Of course, you'll probably end up using a combination of these bill-paying methods, but the more you can automate, the better. The important thing is to have a reliable, low-ha.s.sle system.

3. Prioritize in a Crisis.

At one time or another, most people have been caught in a situation where there's too much month left at the end of the money. Job loss, divorce, unexpected auto repairs, or a variety of other untoward financial strikes could derail the best intentions.

During these times of stress, people can get so upset at their money woes that they lose perspective about who should get paid and who shouldn't.

Here are the most important bills to pay: food, shelter, utilities, and transportation. Take care of those, and you can take a deep breath. They are your four pillars of security. Clothing is a necessity, too, but most people can get by temporarily with what they already have. Health insurance is also especially important, as is childcare for some working parents.

Notice credit card companies are not on the list. But make no mistake, card collectors will scream the loudest to get their money. They will try to rattle you during confrontational phone calls, hoping you will divert to them money that should go to your four pillars of security. Keep your cool. Yes, you owe money. But payments for credit card bills, medical bills, and personal loans can wait. Place student loans on hards.h.i.+p deferral.

Of course, you'll damage your creditworthiness for not paying all your bills. But during a money crisis, you need to take care of necessities first so you live to fight another day.

Endnotes.

1. On October 3, 2008, Congress temporarily increased FDIC deposit insurance from $100,000 to $250,000 per depositor through December 31, 2009. As of this writing, it is uncertain whether the raised limit will become permanent. Learn more at www.fdic.gov.

Chapter 3.

Get FIT (Food, Insurance, Telecommunications).

In Living Rich by Spending Smart, I talked about becoming financially FIT, which stands for food, insurance, and telecommunications. These are perfect areas to start a spending makeover because they involve tremendous spending and waste for the average household. An American family of four spends about $14,000 a year in these three areas alone.

These areas are also great for spending cuts because you can save money painlessly. It's not about deprivation. It's about spending smarter, so you can redirect money to things you truly care about. They are the best examples of spending smart.

These are also areas of repeat spending. That means you'll be spending in these areas-food, insurance, and telecommunications-over and over again, every year of your life.

In this chapter, I try to hone in on the absolute best strategies to save you the most money-to make sure you're on your way to becoming financially FIT.

Food at Home.

I call this category "food" at home, but I'm really talking about supermarket shopping. So, that includes paper goods, such as napkins and toilet tissue. It includes razor blades, shampoo, and other grooming products. It includes some over-the-counter medications you might pick up at the supermarket.

Food at Home, 1-2-3.

1. Maintain a price list.

2. Stockpile sale items.

3. Match coupons to sales.

1. Maintain a Price List.

You can't save money at the supermarket unless you can identify a good deal. The problem is that you buy so many items during a shopping trip that it's difficult to remember more than just a few prices.

* Is $2 a box a good price for Cheerios breakfast cereal?

* Is $1 each a great deal for Duracell AA alkaline batteries?

* Is 2 for $6 a bargain on Oscar Mayer Bacon?