If you’ve only ever had debt in the form of credit cards, you’ve probably never seen a payoff statement before. Unlike the nice grace periods of credit cards, there is no grace period when you’re talking about debt such as an auto loan, a mortgage, a student loan, or a home equity loan. Every minute that passes, that loan is accruing interest. That means when you check your account and it says that you owe $1,000; the moment you mail that check out, you actually owe a little more than $1,000.

Instead, what you should be looking for and getting is something called a payoff statement. It’s a document that will indicate how much you need to pay to completely pay off the entirety of the loan and that amount should be good until the end of the current billing cycle. When you send the check, it’ll actually be how much you would’ve owed at the end of the current billing cycle and the lender should credit you the different in interest once they receive the payment.

Sometimes you won’t need to request a payoff statement, your account will simply state that you need to send a check for $X.XX in order to pay off the debt. If your account does show that value, you should be all set once you send out the payment. If your account does not, you will have to call your lender and specifically request a payoff statement. If you do not, you’ll find that you’ll owe some additional interest because you missed it the first time around and that interest will accrue its own interest. It’s not the end of the world if you forget to request a payoff statement, essentially you’ll be dealing with a minor paperwork headache and paying out a little more interest unnecessarily.

So, remember to request that payoff statement!

Do you ever hear people proclaim that if you invested $100 in the stock market today and it appreciated 11% for the next 30 years, you’d have almost $2,300 at the end? It seems as though people can remember inflation when making short term decisions (such as whether or not to invest in a particular bond or certificate of deposit), but it seems to disappear from the discussion whenever long term decisions are made.

That was the premise of my friend’s article on salary increases, how people tend to forget about inflation when projecting salaries over many years and I think that applies even more so to investing. See, when you invest $100 today and it appreciates 11% to $2,300 in thirty years, you have to keep in mind that $2,300 in 2036 won’t represent the same amount of purchasing power as it does in 2006 - that’s because of inflation. At 4% inflation, your $100 investment is worth around $761 in purchasing power because it really appreciates at 7%, not the full 11%.

I believe that most people (unless you’re a politician, because those guys still don’t have every tax number tied into inflation yet) understand the concept of inflation, the hidden tax, and I hope this just serves as a subtle reminder about its pervasiveness and that you should remember it when you’re doing long term projections (especially if you’re doing long term projections).

If you’re like me, every year you sign up for your health insurance plan through your employer and ever year you do little to check what that insurance actually covers. The only exception to this rule is when you change plans (usually because you changed employers) and then you might compare and contract, but otherwise it’s on autopilot. You probably do that because health insurance is boring, complicated, and your insurance will probably protect you. Therein lies what I enjoy the most about Fred Brock’s book, Health Care on Less Than You Think: it’s simplicity, conversational style, and an ease to read. So what is the book about? It covers basically every aspect of health insurance that you could possible imagine, including health savings accounts, saving on prescription drug medications, and even goes through the fine print of your insurance plan - all with an eye at saving you money and having it cost as little as possible.

(read full article…)

I was reading my free issue of Cards & Payments, one of the many free trade publications available via Tradepub, when I saw an interesting program offered by Barclaycard, a European credit card issuer. Barclay’s Flexi-Rate program automatically rewards cardholders by lowering the interest rates on their cards the more they pay off their debt each month. The mandated minimum payment is 2% in the UK and so if card holders pay off more, their rates will be lowered automatically from the standard 16.9% rate. If a cardholder pays 5% of the bill, they pay only 12.6% in interest the next month and if they pay off 10%, then they are only charged 9.9% interest the next month.

The interesting bit of information that came out of this, and many personal finance bloggers are aware of this, is that when the magazine asked the American Bankers Associate, their spokesperson said “If a cardholder [pays his bills on time], and he thinks his interest rate is too high, he can call the issuer and have it lowered. It’s not automatic like Barclaycard’s. It takes a few steps and I haven’t heard of any issuers marketing it.” Well duh, it means less money for issuer. The difference in how much they earn is substantial too. If you owe $1,906 and make the minimum payment of 2%, it takes 23 years and $3,105 in interest. If you pay 10% on the same amount, it would be gone in 4.5 years and they only pay around $210 in interest. So… why are they doing it?

The reason is that by providing a financial incentive to paying off your debt faster, Barclaycard can collect more information and be able to separate who is risker than whom. Certainly earning a ton of money off a high interest rate from a perfectly ideal borrower is ideal, but as you probably have seen with many Prosper deals… not everyone borrowing at a particular rate is of equal creditworthiness.

Another reason, which parallels the US, is that UK card issuers have been beaten up in the public relations arena in that they’re seen as contributing to the high level of personal debt and this is their response. Whereas in the US we’ve passed laws, since lawmakers need to do something, the card issuers in the UK have taken it upon themselves to print interest rates and other associated information.

While it is on the other side of the pond, I think it’s worth taking a look at.

Source: Cards & Payments

In recent weeks, given the holiday season, a once (and still marginally) popular post I wrote back in the day about Amazon’s Price Drop Policy has become more and more relevant. Essentially, the post explains how Amazon has an unpublished (to my knowledge) price drop policy where they will refund you the difference if an item you buy within the last thirty days falls in price on their site.

The post was digg’ed, del.icio.us’d and all that social bookmarking goodness but I wanted to let new readers (at least new since May 26, 2005, almost a year and a half ago) of this site know of its existence. I’ve personally saved hundreds of dollars with this entirely legit, recognized but unpublished policy.

I just finished reading most of an article in The Atlantic titled Have You Ever Tried to Sell a Diamond?, a look into the history of diamonds, the De Beers cartel, and the great marketing machine that put into place the fact that diamonds are forever, a sign of betrothal, and a scarcity that must be sought after; into the American social fabric and psyche.

It’s a very long article, seven “pages” worth, but it’s definitely an interesting and educational read.

I’ll be starting a brief series this next week or so detailing and explaining the five big income tax deductions I’ll be taking advantage of for 2006 and asking for some help from you all in finding some lesser known, infrequently taken advantage of tax deductions. The five biggest tax deductions for me (and I invite you to share ones that you know of and will be using but that I haven’t yet mentioned) for 2006 will be:

1. Mortgage Interest
2. 401k/Retirement Contributions
3. Energy Tax Credit
4. Charitable Donations
5. Lifetime Learning Credit
6. Business Expenses

Those five are pretty common amongst most people so I’ll just do a little more research into what is involved in each one, the burden of proof (what docments you’ll need in the event that you are audited), and how much each one is potentially worth.

However, as some of you may know, the wealth is found in the long tail, so if you know of any good (legal!) deductions, regardless of how large or small it is, I invite you to share and I’ll probably take the idea and blow it up into a bigger post. Thanks!

Until a few months ago, all of my investing was done in either a Roth IRA or a 401(k) - I never put a penny of “real” non-retirement money into any sort of investment and part of the reason was fear. I easily dumped money into a Roth IRA or a 401(k) because it was the responsible thing to do, it was safe, and it was what I was supposed to do. Earlier in my career, after putting all that money away into retirement vehicles, I really didn’t really have much else left I could put into investments. I also didn’t want to deal with all the tax headaches of short term and long term capital gains and blah blah blah - I’d rather avoid all that by investing via retirement accounts. Now, with essentially two incomes, it’s no longer “correct” for us to just put the savings into a high yield savings account so it looks as though investing in whirlwind Wall Street is inevitable.

Ultimately, I believe all those excuses only served to mask the true reason I didn’t invest my real dollars in the stock market: I was afraid. It’s one thing to save $100 and earn a guaranteed 5%, it’s another to have to handle either a 30% gain or a 30% loss - especially since that money can be spent on something tangible. Honestly, it’s like gambling and while I do enjoy gambling, I don’t see gambling as a money making venture… I see it as entertainment and I’m not investing for fun.

So, what have we done? Well, we’ve put a little bit away into a Vanguard Target Retirement fund that we don’t intend to touch for a little while (our emergency fund sits in a high yield savings account) and it represents our third tier of funding (first is our regular checking accounts, second is our emergency fund). It’s not a full foray into stocks, it’s a little better than an Emigrant Direct account.

I receive the following email the other day and I am posting it to see if anyone else has some advice for a fellow reader with regards to his situation:

From: Dave
Subject: Tax Breaks for Student Loan
Hi Jim,

I’ve got a question on a difficult situation.

My girlfriend’s brother exited an Indiana university early with a 4.0 GPA several years ago, and when he wanted to go back he didn’t have the resources to get started. My girlfriend got a $3k student loan for him, as well as a laptop she put on her Discover card, with the idea that he would buy books and give her the rest back to immediately pay back Discover. Long story short, he never paid her back, ended up running away to the Southwest, and pawned her laptop. There’s not much that the authorities can do, since she applied for the loan and essentially gave him a gift on her credit card, but I was wondering if there was anything that she could redeem from the student loan on her taxes. All police reports have been filed at present.

Any help, as you could imagine, would be an enormous help. We have a mortgage to pay and would like to afford to have a child. I just want to see some of that back, if at all possible.

My response:

Thanks for the email and that’s unfortunate what’s happened between your girlfriend and her brother, but sometimes that’s life. In general, student loan interest is deductible if you make under $50,000 (after adjustments) and I would think that since she is a cosigner on a student loan, she could claim the deduction as long as she’s not a dependent on someone else’s claim (her parents?). If she just got a regular loan from the bank (not a student loan), and lent it to him, she may not have any options in terms of deductibility.

Anyone have any thoughts?

I absolutely hate the idea of a gift card. I understand the difficulty with holiday shopping and I don’t despise gift cards, as some people do, because they lack thought and feeling; I don’t like them because they force someone to spend money at some store that the giver assumes they shop at. In addition to that, companies make money from gift cards because of the fees, the fact that they know a shopper will tend to spend more than the value of the gift card when they buy something, and because 12% of gift cards are never redeemed. I think the most ludicrous aspect of gift cards are the fees - the store already has your money, you can’t get it back, so why do they need to ding you with fees?

A little over a year ago I digested and regurgitated a helpful resource online that outlined the laws that protected consumers against predatory gift cards, specifically fees and expiration dates, and that may be helpful now when you receive a gift card in about a month. Some folks are protected against fees and expiration dates, but not everyone is, review the list to see where your state falls.

I propose that Americans pick up a tradition the Chinese use (because the great retail marketing machine hasn’t yet changed “traditions” yet) with great regularity and eons of success - just give cash. For birthdays and Chinese New Years (and any other gift giving time, including the holidays) the gift of choice is money. Cold hard cash. If you have a good idea of what to give someone, I’m not advocating that you scratch the idea and go with money - I’m merely recommending that instead of a restrictive store branded gift card or a fee-based generic card, consider cash.

No one ever gets upset with cash and they’ll have no problem figuring out how they’ll spend it. (If they do, email me and I’ll help them spend it)