Travel Tip: Exchanging Money Abroad

The US Dollar is worth a lot less than it used to be in most foreign countries. Here are some common mistakes many travelers make:

Buying travelers cheques
Travelers cheques do have one big advantage -- if you lose them, they can be fairly easily replaced. But you can often get gouged when changing them to local currency. If you want to bring travelers cheques, get them issued here in the US in the local currency if you can get it commission free (usually available to American Express cardholders). You can then change them at any local bank with your passport for no charge.

Changing your dollars in the airport or at your hotel
You should actually never do this. Ever. You should only do this at the airport if you need a little bit of cash for transportation.

Instead, here are some better options to stretch your dollars.

Use a credit card with a low foreign exchange fee.
There's been an antitrust settlement against the credit card companies for cheating consumers on these fees, which charge you for using your credit card abroad. If you travel abroad or buy in foreign currencies frequently, consider getting a card with a very low fee (some are as low as 0%). Take a look at this compiled list of frequently updated information on foreign exchange fees for credit cards.

For cash, always withdraw from an ATM machine.
ATM machines will withdraw from your bank account without a ridiculous commission. Airports almost always have reputable bank ATM's for you to make your withdrawal. Be sure to check if your bank has a international ATM fee -- many brick-and-mortar banks have them, while many internet banks are fee-free. Here is some more info on what banks are charging.

Be sure to notify your credit card issuer if you are going to be visiting lots of different places, since they might start declining charges out of fear you've had your card stolen.

Taking little steps like these could save you hundreds of dollars that you didn't even know you were spending. Use that money to enjoy your travels, rather than giving it away to bank commissions.

Buying Health Insurance

Matching

A. No Health Insurance
B. Comprehensive Traditional Policy
C. High-Deductible Catastrophic

1. Probably Getting Ripped Off
2. Independently Wealthy or Delusional
3. Savvy

Answers
A-2, B-1, C-3

Choosing health insurance is annoying and something that most young adults don't pay close attention to. Many young people fall in one of these categories:

No Health Insurance at All

It's important for everyone to realize that this is completely irresponsible. Unless you have substantial wealth, you could ruin your financial future and potentially drain your parents or family of their retirement savings if you have an accident. Even if your employer doesn't offer it, you should still get insurance.

'Over'insured

Many young people have a comprehensive policy provided by their employee, even though they are healthy and rarely need any care. (This is more your employer's problem than yours)

How to Choose a Plan

For those of you who are self-employed, a student, or don't have an employer-provided plan, the first question to ask yourself is whether or not you are healthy. Do you need to see a doctor for any conditions? Are you on medication? If you only expect to see a doctor for a routine check-up, you'll want to get some catastrophic insurance to protect you in case of an accident or an unexpected major illness.

You can often subscribe to these plans for about $50 a month. Generally speaking, you won't receive any benefits, since these plans have a high deductible (often $2,500 to $5,000). You'll be responsible for this amount, and your benefits will kick in after you've incurred these expenses.

Generally speaking, the lower the deductible, the higher the premium. You'll also want to check to make sure that local doctors and hospitals accept the insurance plan.

This can be a serious savings from a student health plan through a university or a comprehensive traditional policy. Some of these plans have monthly premiums triple the amount of a catastrophic plan.

Check availability at sites like www.ehealthinsurance.com, where you can compare different plans.

More info on catastrophic plans: Pros and Cons of Catastrophic Health Insurance

Should You Be Borrowing More?

Yes, borrowing more. More people than you might think are racking up the wrong kind of debt, when they don't need to be. Take a look at these debt situations:



The total amount of debt is the same, with drastically different amounts of interest. Don't forget that student debt has deferred payments and is often tax deductible, making it even better than credit card debt.

Students and recent grads often develop terrible financial situations simply because they aren't taking out enough funds through their student loans. Recent grads are often paying back too much, since they feel their student debt is a burden.

If you think about it, it's totally silly if you have credit card debt, but thousands do it. The interest rate is probably much higher and will be more burdensome in the long-run with a credit card, and student loan interest is often tax-deductible and doesn't impair your credit score.

Hundred of thousands of students often borrow money only to cover tuition expenses. Instead of taking out more money for living, food, and other school expenses, they just rack up credit card debt.

The same goes with recent graduates who have agreed to an accelerated loan repayment schedule, which doesn't give them enough money to get by on.

As the new year and new semester is coming around, take a look at your spending over the last several months and see if you need to be borrowing more from your student or home loan. If you're a student, contact your financial aid office to increase your loan amounts and have the funds transferred to your bank account (if you have the self-control to use it wisely) -- you might even be able to get enough to pay off your credit card debt. If you're in the repayment process, call your lender to see if your monthly payments can be reduced, so you don't have to depend on your credit card.

Remember, no matter what the so-called pundits say, getting rid of credit card doesn't have to be solved by cutting spending dramatically. Managing your loans and lowering your interest rates is often much more effective.

Choosing a Credit Card: Cashback, Miles, and Points

I’m sure all of us have gone out to dinner with a big group and sometimes have that awkward feeling when the check comes. Is that annoying girl who only ordered salad but drank more wine than everyone gonna try and protest splitting the bill? We all hate that. But then there is that other girl, who always wants to pay with a credit card. Sometimes, she even takes other people’s cash and puts their portion on her card.

Sketchy? A little. Savvy? Yes.

After all, if you were going to pay cash, you shouldn’t really care if she puts your part on her card. But, what exactly is she up to?

She’s probably earning cashback, points, or miles (or Mommy and Daddy are paying the bill and she just wants the cash). For those of you with a credit card or planning to get a card, what should you be looking for when signing up for a card?

Getting rewarded for credit card use is only for people who plan to pay off their entire balance each month. (If you don’t plan to pay of your balance each month, then don’t apply for a new credit card.)

Rewards cards come in a few major types:

Cashback

Cashback cards traditionally return to you a standard percentage of your charges, usually in chunks of $50 or $100. For example, the Citibank Dividend card gives you 1% back on all purchases – this is fairly standard among cashback cards. This card also gives you 5% cashback on groceries, gas, and pharmacy purchases.

Some cards will give you additional cashback for purchases at a specific store or other category (like purchases at the post office, restaurants, travel, etc.)

Cashback cards are a great option for those who don’t like dealing with points and other non-monetary forms of currency. They are especially great if you only use them for the bonus cashback categories. Many people will use the Citibank Dividend card, for example, only at supermarkets and gas stations.

Frequent Flyer Miles and Hotel Points

Almost every airline and hotel chain in the world now has an airline branded credit card that offers miles for purchases, usually one mile per dollar spent. Many airlines even offer bonus miles just for signing up. The Delta Skymiles American Express offers 15,000 miles when making the first purchase.

A caveat about mileage cards: frequent flyer miles are depreciating currency. Airlines are becoming stingier when it comes to redemption, allocating fewer award seats than ever before. A mileage card is probably best for those who fly frequently and really understand how the airline program works or for someone who needs the bonus miles for signing up to redeem a ticket soon.

Many mileage cards charge an annual fee, though some do not. Check the terms of the card carefully so you know how mileage accrues, when it expires, and all of the other small print. Hotel point cards usually don’t have a fee, but be sure you have something in mind about what you would use the points for.

Charity

Many charitable organizations, universities, and advocacy groups offer a branded credit card now. A percentage of your contributions is given to the organization.

It feels awful to write this, but charity-branded cards are actually not a good idea. You are better off getting a cashback card and sending those proceeds to the charity of your choice. Not only can you get a tax deduction this way, but you may also have more choice about the specific program within the organization or university you wish to support.

Other Points and Rewards

There are a whole other range of rewards cards. If you are an avid shopper at a specific store, they might offer a card where spending leads to gift certificates. Sports team-branded cards might get you invitations to special events. Whatever the card, see if the rewards are something you actually value and would use. If the terms are right, then go for it.

If you are getting points or miles or other rewards, you should try and get a card that gives you about 1.5 cents per dollar you spend in rewards. If you plan to spend $10,000 this coming year, make sure that you value the rewards from a potential card at about $150 or more.

Beware of annual fees. Be sure to subtract out any annual fee from the rewards you expect.

Check the amount you need to spend to get the rewards. If the cashback card offers you 2% back, but the minimum reward is $500, figure out if you really plan to spend $25,000 on the card. This is especially true for point cards.

Finally, do not get a rewards card if you don’t plan to pay off the balance in full each month. These cards usually have higher interest rates and fees for late payments and going over your limit.

If you are looking to sign up for a card, search the web for offers. Check the airline, hotel, and stores you use most to see if they offer a branded card. Carefully look at the terms and conditions, and see if you actually value the rewards before you sign up.

Even if you don't have a rewards credit card, making charges and paying them off helps to build a good credit history. So next time you're out with a group of friends for dinner, if someone is being annoying by using a credit card, throw yours in too.

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Choosing a Bank: 'Brick and Mortar' or Virtual?

I recently gave a check to a friend for several hundred dollars. While most would expect to hear a "thank you," his response was, "What the hell is Umbrellabank?"

I explained to him that it was a virtual bank which solely operated online. He asked a lot of questions, including:
"How do you know they are real?"
"Where do they keep the money?"
"Aren't you afraid about keeping your money on a website?"

All of these questions are actually the wrong questions, since they seem to indicate a general misunderstanding about how banking works. There isn't a big vault where you can swim in gold coins like Scrooge McDuck could do. Virtual banks are all FDIC-insured, so there isn't a worry about losing all of your money if the bank shuts down.

Though virtual banking offers a lot of advantages, it is definitely not for everyone. Here are some factors you should consider when deciding between a checking account at a virtual bank or at a traditional brick and mortar bank.

Do you deposit a lot of checks or cash?
While most people usually have direct deposit for their paycheck, those who need to deposit cash and checks often may want to keep a brick and mortar bank account. Virtual banks usually process deposits via mail and ATM. A lost envelope or an ATM error could lead to a major delay in accessing your funds.

If you live paycheck to paycheck and you don't have direct deposit, there will be a small delay between your deposit by mail and the processing of that deposit, which will not allow you to have access to your funds immediately.

Do you plan to move in the short term?
For people who move often, sticking with a virtual bank can save a lot of hassle. No matter where you live, you'll have the same access to your bank.

Do you frequently use ATMs?
Those who travel or use ATMs often will probably benefit from virtual banks who generally automatically reimburse you for any fees you incur.

Do you like to yell at bank tellers?
Some people like the peace of mind of being able to talk to someone in person when they are having problems with their bank account. Brick-and-mortar banks are good for these people. (Though, virtual banks don't have the same reputation of randomly asessing exhorbitant fees, leading to fewer confrontations)

Do you need to keep a low minimum balance?
Many virtual banks have no or low minimum balances but still offer competitive interest rates. If you have plenty of cash but don't think the interest rate is worth it, stick with your brick and mortar.

Do you like to pay bills online?
Most virtual banks offer free bill-paying services, where they will electronically or physically send a check to anyone you choose. Brick and mortar banks often charge for this service.

For young people who are more mobile and tech-savvy, virtual banking is usually a better fit. For the past six years, my bank has provided me with free checks, bill paying, ATM reimbursements, no foreign exchange fees, no minimum balance, free transfers to money market accounts, and very competitive interest rates. I'm honestly not sure how to rate the customer service, because I haven't really had any difficulties.

Brick and mortar banks have a lot of overhead, so they tend to pass on those costs to customers in the form of fees and inconvenience. But for some people, sticking with a traditional bank might make sense. However, there is no evidence that traditional banks are any more safe from identity theft or fraud than virtual banking.

If you're thinking of switching to a virtual bank, browse Bankrate.com's checking and savings account current rates. In addition to Umbrellabank, there are many unfamiliar names in this market, like NetBank and iGObanking, but also some of the more recognized companies, like Citibank and HSBC. Be sure the terms fit your needs, and make the switch.

The real benefit to virtual banking is connecting your checking account to a high-yield money market or savings account, which will be discussed in a future post.
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Don't Cut Up Your Credit Card! But Your Debit Card...Maybe

Why do people think they've made some sort of major accomplishment by cutting up a credit card? They still owe the debt that they probably accumulated on it. The account is still active. They can still use the number.

This "cutting up your credit card" nonsense is the exact kind of advice that the so-called experts give to young people. In their usual condescending way, they think that young people just don't have the ability to resist the temptation of maxing out their credit cards buying drinks for strangers at a bar. For the millions of you who actually do know how to control your spending, you should consider never using your debit card.

Many people think that using a debit card is much more responsible than using a credit card. I think they're wrong.

For people who have no credit card debt, you should almost never use a debit card. First and foremost, you are much more likely to avoid a nightmare with a credit card if there is any fraudulent activity.

Fraudulent debit card use can wipe out your entire bank account. While the legal limit for fraudulent use for most cards is $50, your bank might take up to 10 days to investigate the fraudulent use before returning the money into your account. By that time, you might have written rent, utility, and other checks that you are now bouncing, leading you to excessive late fees and overdraft charges. The bank might also decide to further investigate, leaving you without any money for quite a bit of time.

While you might not think this could happen to you, identity theft and debit card fraud happen more often than you might think. With fraudulent credit card use, you will discover the fraud before a penny is taken out of your bank account. When you dispute the charge to the credit card company, it is immediately taken off your bill until the investigation is complete. The burden of proof lies with the credit card issuer, not you.

But safety aside, there are some of the many other advantages of using a credit card over a debit card:

1) Earn rewards.

Whether it's frequent flier miles or cashback or money for charity, credit card issuers routinely offer a rewards program for using a credit card.

2) Build a credit history.

Using credit cards and paying your bills allows you to increase your credit score, allowing you to get lower interest rates for student loans, auto loans, mortgages, and more. (Debit cards can't really help you with this.)

3) Protect yourself from scams or defective products.

If you buy something that was not defective and the merchant accept your return, tell your credit card issuer, and they will investigate. If you're found to be right, they will withhold payment to the merchant and you won't be liable for the charge. This is especially important when purchasing something online.

4) It's a free loan.

Charging your purchases on a credit card allows you to earn interest on your checking account balance, since you get an interest-free grace period between the closing of your statement and your payment due date. Debit cards, on the other hand, take money out of your account immediately.

While debit cards might have a little less paperwork to deal with, most of us -- especially people who pay off their balance every month -- are far better off swiping a credit card.

Coffee is Not the Problem, Interest Is

Why do people seem to think their financial troubles are solely due to their Starbucks habit? Personal finance gurus love to talk about how making coffee at home will somehow allow you to retire 10 years earlier. Some coffee quitters are so proud of themselves that they want to spread their gospel -- one of these students was so proud of their genius that they made a coffee calculator.

The media likes to blame young people for their financial struggle, as if we are so self-involved and irresponsbile for accumulating debt that we forget to pay our rent because we're addicted to coffee.

When talking about one young person in debt, one journalist writes:

Serves her right, you think? Many twenty- and thirtysomethings raised on MTV and InStyle magazine have tried to mimic the glamorous lives of the rich and famous through the use of credit cards. (MSNBC, February 8, 2006)

But the truth of the matter is that tuition, housing, and life in general is far more expensive than it used to be, and most of us never really learned how to deal with it.

This culture of self-loathing for buying a pair of jeans or a sandwich for lunch is only making matters worse. I've seen people move in with creepy strangers to save on rent or become hermits in order to spend less. But for plenty of young people, you can take control of your debt without really changing your lifestyle.

As of 2001, the average credit card debt of an American aged 25-34 was $12,000. This number is sad, but not because people are spending too much. The problem is getting trapped by credit card interest and finding it impossible to dig yourself out of the hole. Thousands, maybe millions, of Americans are accruing more debt in interest than from new spending.

So if you have credit card debt, spending might not be the problem. In my first post, I talked about someone with credit card debt and student loan payments. One of his many mistakes is making extra student loan payments instead of focusing on the credit card debt.

Here are a few tips on getting rid of credit card debt:

1) Take advantage of a 0% Balance Transfer Offer
A fairly easy to obtain way to buy some time to keep yourself afloat is to transfer your credit card balance that is accruing a lot of interest to a card that will charge no interest for 12 or more months. This is a great way to attack the debt, and if you aren't finished within 12 months, you can transfer the debt to another 0% card!

If you don't qualify for a balance transfer, you can probably move your debt to a card with a low introductory APR to reduce the burden of interest piling up.

2) Focus on the right kind of debt
When attacking debt, prioritize your payments first on the highest interest rates. Don't make advance payments on your student loan payment or mortgage payment if you have credit card debt. Interest rates on these loans are lower and the interest paid is tax-deductible. Pay the minimum on these loans until you can erase your credit card debt.

3) Never miss a payment
Missing a payment can have really negative consequences on your credit history, and it automatically tacks on fees and high interest rates for most credit cards. If you are a forgetful person, consider a credit card that automatically deducts a certain amount of money from your bank account.

While giving up bad habits is always good, don't deprive yourself of things you enjoy when you might be able to manage your debt by transferring your balances and minimizing the impact of high interest rates.

Here is a list of cards that offer 0% Balance Transfers for 12 months.

Now stop thinking about moving to a sketchy place on craigslist and find a new credit card that will let you conquer your credit card debt. Do the math, you might just be able to afford an overpriced latte more often.

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Choosing a Bank: ATM Fees

Americans pay billions of dollars in ATM fees every year. When you use an ATM that belongs to a different bank other than your own, the law permits your bank to charge you a fee AND the ATM owner to charge you as well.

In 2006, the average surcharge assessed by ATM owners climbed again. Add in your bank's surcharge and $20 withdrawal to get some cash for a cab ride might cost you up to 20% extra in fees ($2 from your bank and $2 from the ATM owner).

This practice made enough people angry that some cities and states tried to ban ATM fees altogether. (I actually disagree with banning ATM fees, since they have given incentives for banks to create more and more ATMs all over the world, giving us easy, 24-hour access to our money.)

But then again, I don't pay ATM fees. Ever.

ATM fees are just one of many considerations when choosing a bank, but for many people, it is their primary consideration. For some reason, our instinct is to choose a bank near our home or work, so we can withdraw money without paying fees. While this is fine for some people, wouldn't it be better if every ATM was your bank's ATM?

Since I started college, I skipped opening an account with Bank of America (check out Bank of America's outrageous "ATM Denial Fee") and the other local banks around campus. Instead, I went with UmbrellaBank, an internet bank. Their policy on ATM fees: customers never pay them. Not only does the bank not charge any ATM fees, but they automatically reimburse you when you incur a fee from the ATM owner.

This is a very common feature of internet banking, and it allows you to never have to think about which ATM to withdraw from, since you never pay a fee to get your money. Even some "brick and mortar" banks with actual branches are offering promotions to reimburse your ATM fees.

Deciding between a "brick and mortar" bank and an internet bank can be tricky. I'll discuss the considerations in making this decision in a future post. But if you have a bank that charges ATM fees, get rid of them.

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Financially Illiterate

There's something bizarre about our society that we don't seem to realize is a problem. Smart, educated college graduates starting their first job seem to have no idea how to approach some of the most basic questions of financial survival. And some of them never seem to figure it out.

I asked a recent Harvard graduate living in New York about his financial life:

Annual salary: $70,000
Credit card debt: $4,000
Monthly student loan payments: $250

He's just gotten a new job that pays better, and he is looking to find a place on his own. He's decided to opt for the best health, dental, vision, and life insurance plans through his employer. He's also looking to pay down his debt, so he's only using his debit card. In addition to paying down his credit card (which has a 19% APR), he's also making extra student loan payments so he can erase his student debt.

He wants to try and find a place to buy after a year, since he hates throwing money away on rent. He's going to save 15% of his income each month in a Bank of America money market account so he can have a small downpayment within a year or two.

The funny part about this story is that most people would think he's making all the right moves. Paying down debt, saving, getting good insurance, and even making a potential home purchase. The sad part is that many (actually, most) of these decisions are wrong. They are the result of conventional wisdom, rather than real financial savvy.

In subsequent posts, I'll talk about the factors that one should think about in their financial life, like the decisions the person above makes. Saving, investing, taxes, insurance, renting, buying, loans, credit cards, and more.