2004 Federal Reserve survey on credit cards

The 2004 Survey of Consumer Finances from the Federal Reserve gives a snapshot of American household on credit card.

	2004	2001
Carrying a balance	46.2%	44.4%
Average balance	$5,100	$4,400
Median balance	$2,200	$2,000

This table shown American households are carrying higher balances. The average income of American household is currently $43,200 and the typical household's credit card balance is now almost 5% of their annual income.

But the survey is not a completely discouraging picture for American households.

While 74.9% of all households have a credit card, 42% of this group of households pays off their card each month.

Saving for retirement: Who's falling short

The Center for Retirement Research (CRR) estimates that

36 percent of high-income households - those with a median income of $117,000 - won't be able to live as well in retirement as they do today.

Among middle-income households, 40 percent are at risk of having to downsize.

While 53 percent of low-income households are likely to fall short.

Examples of credit card balance transfer

Lesson learned: The minimum payments could cause problems to your cash-flow management.

Example 1

Card: Citi
Amount: $6000 transferred to checking account
Rate: 2.99% until payoff
Fee: None
E-statement & automatic minimum payment
Where: 26 weeks & 13 weeks T-bills
$ made: 11.6 per month for last 15 months

Example 2

Card: M&T
Amount: $30000 transferred to checking account
Rate: 0% for 11 months
Fee: 2%
Paper statement & automatic minimum payment
Where: 26 weeks, 13 weeks, & 4 weeks T-bills
$ made: 612.86

Credit card debt in the US

By Elizabeth Harrison

American carry an average of 2.7 bank credit cards, 3.8 retail credit cards, and 1.1 debit cards, which averages to 7.6 cards per cardholder.

According to CardWeb.com, the recommended number of credit cards for the average consumer is 3. At most 4, if you use a card for business expenditures. And one of those cards should only be kept for emergencies.

The reason for this?

Preservation of your interest rates and your credit score. Not to mention your sanity.

30% of your overall credit rating is determined by how much debt you carry. The ideal picture of your debt: Low balances spread over several different types of accounts, like a mortgage, a student loan, and a few credit cards.

Another danger in carrying 6 or 7 balances: Credit card companies routinely scan your credit report to watch for signs of financial trouble. If just one of your accounts becomes delinquent, or if you suddenly revolve a balance at or near the maximum, this could induce your other lenders to raise their interest rates. Your interest payments could skyrocket.

Credit card companies want your business, and will spend $80 - $200 to acquire it. And its no wonder- in the US, we owe $785 billion in credit card debt, according to data analyzed by Cardweb.com. That's about $9000 of credit card debt per card-carrying household in the US. All that interest we're paying contributes to the lender's profits.

Note that $785 billion is just the amount of credit card debt; the actual figure for Americans' non-mortgage debt is $2 trillion.)

There are about 6,000 general purpose credit card companies in the US, mostly credit unions. That's a lot of options. Credit can be a great tool when used the right way.

So get your boutique-cards down to a minimum. They are not versatile, they can't help you in an emergency and they don't earn miles. Remember if you ever close an account to be sure the lender marks it 'closed by account holder.'

Keep a few general-purpose cards and leave it at that. And keep the balances low.

Credit card debt statistics

Total credit card debt in the United States has reached about $665 billion on bank credit cards and about $105 billion on store or gas credit cards. The total is roughly $800 billion. (January 2006, Cardweb and the Federal Reserve)

Average household or individual debt (or both) is about $9,300 per household holding at least one credit card. (Source: Cardweb)

According to the advocacy group Demos, the average balance among lower- and middle-income households is $8,650.

More statistics from Mark Brinker (updated June 2007)

In 1968, consumers’ total credit debt was $8 billion (in present dollars). Now the total exceeds $880 billion.(SOURCE: Federal Reserve Bank)

Approximately half of all credit card holders pay only their minimum monthly payments.(SOURCE: Experian-Gallup Personal Credit Index survey)

According to the Federal Reserve Bank, 40% of American families spend more than they earn.(SOURCE: www.federalreserve.gov)

23.8% of American households have no credit cards at all -- no bank cards, no retail cards, nothing. 31.2% of the households. paid off their most recent credit card bills in full.(SOURCE: Liz Pulliam Weston, www.asklizweston.com)

Only one household in 50 (2%) carry more than $20,000 in credit card debt. However, that "one in 50 households" figure represents more than 2 million American homes.(SOURCE: Liz Pulliam Weston, www.asklizweston.com)

Turbulent market offers 6 lessons

GETTING GOING by JONATHAN CLEMENTS of wsj.com

1. GO MODERATELY WILD

No more than 5% of your portfolio should be in these fringe sectors such as emerging-market stocks, emerging-market debt, commodities, gold shares, high-yield junk bonds and real-estate investment trusts.

2. CHECK YOUR PULSE

Every investor should have exposure to the broad U.S. stock market, to high-quality U.S. bonds and to developed foreign stock markets. These three core holdings should probably account for 70% or 80% of your investment portfolio, and maybe more.

How you divvy up your money among these three core holdings will depend on your tolerance for risk and your need for returns. Think about what mix you can live with when markets turn volatile.

3. IT'S A BIG MARKET

At this juncture, blue-chip U.S. stocks may be one of the global stock market's most reasonably priced sectors. After all, the S&P 500 is trading below its March 2000 stock-market peak, while small-company stocks, emerging markets, REITs and other sectors have all posted impressive gains over the past seven years.

4. LOSE YOUR CONFIDENCE

Not only do we need to think about risk as well as reward, but also we shouldn't be nearly so confident in our predictive powers.

5. FUNDAMENTALS TRIUMPH

When investments are hot, it can seem like there's no limit to the possible gains. Yet there are always limits -- and economic fundamentals always win out in the end.

For instance, the broad market's share-price gains frequently outpace the economy's growth rate over the short run. But unless investors are willing to pay higher and higher price/earnings multiples for stocks, that can't go on forever.

6. WINNING TAKES TIME

The lesson: It's mighty tough to predict which sectors will shine and which will sink, so our best bet is to diversify broadly, never betting too heavily on any one investment.

Statistics can be misleading

Liz Pulliam Weston complained the following misled statistic:

The average American household with at least one credit card has over $9,300 in credit card debt, according to CardWeb.com.

She claims that the average is skewed by a small % of households with very high credit card debt.

However, her concern is that this statistc gives false comfort to those people who think they're only "average" for having $9,300 in credit card debt.

In fact, they could be on the road to financial ruin.

According to Federal Reserve's 2004 Survey of Consumer Finances:

Most American households don't have any credit card debt.

- About a quarter of household, or 25% have no credit cards.

- Additional 30% or so pay off their balances every month.

- Of those households that do owe money on credit cards, the median balance was $2,200.

- Only 8.3% of households owe more than $9,000 on their credit cards.


For a group of 100 American households

55 households don't have any credit card debts.

25 households don't have credit cards at all.

30 households pay off their credit cards balances every month.

45 households do carry balance on their credit cards.

22.5 households have balances less than $2,200, and 22.5 households have balances higher than $2,200.

8.3 households carry balances higher than $9,000.

Are you on track for retirement?

Two questions from Money.com will tell you if you're on track for retirement or not.

1) Are you doing the right things?

Yes, if you
- contribute 401(k)
- know where you're and where you should be
- claim as many tax breaks as possible
- build safety net

2) Do you have the right investments?

Yes, if you
- asset allocation
- avoid high fees
- avoid hot stocks
- rebalance regularly

Can you afford a healthy retirement?

Source: Chicago Tribune personal finance columnist Gail MarksJarvis with Renee Montagne of NPR

My comment

Medicare only covers part of retiree health needs.

MarksJarvis claims that you need extra $400,000 in savings to buy extra health insurance to cover what Medicare doesn't.

As they approach retirement age, many people have no idea how much money they will need to support themselves - and they frequently underestimate the cost of health insurance that they'll need to supplement Medicare.

Gail MarksJarvis notes that the average senior gets $1,011 in Social Security a month.

Most households on the verge of retirement (within 10 years away from retirement) have saved no more than $88,000. That amount translates into about $653 a month for living expenses.

Medicare will cover only part of their health bill, and health insurance alone will cost a retired couple an average $330 per month.

Below are some of MarksJarvis' tips for avoiding financial troubles in retirement:

- Avoid wishful thinking and calculate what you will need to save for retirement.

- A rule of thumb: Go into retirement with savings that equal about 12 times your last annual pay and take out no more than 4 to 5 percent of your nest egg annually.

- Prepare when you are young by saving small amounts early and investing in a mixture of stock and bond mutual funds in 401(k) plans and IRAs. If you invest $20 a week on your first job, you'll reach $1 million by retirement age. Wait until 35, and you will need to save $100 a week for the same sum. And don't give up. A person saving $5,000 a year in middle age can still accumulate about $500,000.

- Consider health care costs as you look ahead. Be realistic. If you are retired for 20 years, you will need about $200,000 in savings to buy extra health insurance to cover what Medicare doesn't. If you live to 90, the cost will be close to $400,000. Medicare only covers part of retiree health needs.

- Check your employment benefits so you don't have unrealistic expectations. Most employers DON'T help their former employees with health insurance in retirement, but many people assume they WILL get this help. Even employers promising health benefits to retirees may back out of the agreement.

- Avoid retiring early unless you have calculated the impact of spending $1,000 a month to buy health insurance until Medicare benefits kick in.

- If you retire early and need to buy health insurance, you can cut your costs by using high deductibles and buying insurance through business or trade groups. Consider starting a small business so you have access to one of these groups, or work part-time for an employer who provides insurance.

- Pay off your home and credit cards before retiring so that you have manageable costs.

Calculating your retirement nest egg

Source: CRANKY CONSUMER By ANDREA COOMBES of Wsj.com

There are many online retirement calculators will tell you how much you need to save for retirement.

However, these calculators almost always over-estimate the amount that you need to save now. If you follow the suggestions, the savings for retirement may impact your current quality of living.

The parameters require for retirement calculators:

1) Rate of inflation - 3% is popular
2) Rate of return - 6% is popular too
3) Years in retirement - 25 years to 35 years
4) Living expenses in retirement - 70% to 80% of pre-retirement expenses
5) When will you retire? - 65

Most calculators are over-estimated the rate of inflation, but under-estimated the rate of return on your retirement nest egg.

Remember, if the rate of inflation is 2.5% instead of 3.0%, the error is 20%!

If the average rate of return is 8% instead of 6%, that is 25% for the error!

Notes on Harry Potter 7th book

The symbol of the Deathly Hallows:

- The triangle represents the Invisibility Cloak,
- The circle represents the Resurrection Stone, and
- The line represents the Elder Wand.

Anyone holding all three Deathly Hallows together becomes the master of Death itself.

Did Dumbledore try to keep the Deathly Hallows from Voldemort, or did he wanted Harry Potter to have all three Hallows?

1) The ownership of Invisibility Cloak was passed from James Potter to Harry Potter.

The true magic of the Invisibility Cloak is that it can be used to shield and protect others as well as its owner. If Dumbledore didn't borrow the the Cloak from James Potter, would James and Lily Potter still be killed by Voldermont?

2) The Resurrection Stone was willed by Dumbledore to Harry Potter.

3) Dumbledore had the Elder Wand from the beginning.

In book 6, Draco Malfoy became Elder Wand's new owner by disarming Dumbledore; but it was buried with Dumbledore.

In book 7, although both Draco and Harry didn't have the Elder Wand in their possession; Harry Potter disarmed Draco Malfoy and became the latest owner of the Elder Wand.

In the Forbidden Forest, Harry Potter wasn't really dying from the deathly curse by Voldermont using Elder Wand. Was it because the Elder Wand refuses to kill its master - Harry Potter; or, was it because Harry Potter had all three Deathly Hallows and became master of Death?

Horcrux was explained in book 6: It is any normal object that a Dark wizard stored a part of his soul. A Dark wizard can create more than one Horcrux and he becomes immortal as long as one of the Horcruxes remains intact.

Altogether there are 7 Horcruxes for Voldemort. He created 6 Horcruxes. Harry Potter was the unintended Horcrux.

5 Horcruxes are found and destroyed in book 7. They are Salazar Slytherin's locket, Helga Hufflepuff's cup, Rowena Ravenclaw's diadem, Harry Potter (who survives, but the piece of Voldemort's soul within him is destroyed), and Nagini; in the order of their destruction.

Did Dumbledore really want Harry Potter to die so that a Voldemort's Horcrux would destroyed?

The other 2 Horcruxes, Slytherin's ring and Riddle's diary were already destroyed in book 6 and book 2 respectively.

8th Harry Potter book?

Yes, J.K. Rowling should write another book on Harry Potter.

After spending last two days to read the 7th book, I think there are still a lot of stories to tell between the gap between the last two chapters of the 7th book.

Such as:

If Harry, Ron, Hermione ever finish their education?

How do they marry?

SPOILER: Harry Potter and the Deathly Hallows

Happy ending for the 7th Harry Potter book

Harry lives!

Hemione and Ron too!

Rules to grow rich by

Many articles on personal finance all seem to suggest these few rules to grow rich by :

- boost your earning power by work hard and educate yourself

You couldn't be rich if you can't make any money.

- live frugally, live below your means, and also live healthy too

- control your debts (mortgages, credit cards, and student loans)

- save 10% to 15% of your incomes for retirement, emergency reserve, and college education; in that order of priority

- asset allocate your investments, and defer taxes on your investment as long as possible

By the time you're in late 50s or early 60s, your household should have a net worth well over a million dollars

DETAILS

Retirement investments
- Financial planner
- 401(k)
- IRA
- Lifecycle funds
- Index funds
- Allocation of stocks & bonds

Real estates as an investment?
- TBD

College education savings
- 529 as soon as possible
- keep student loan debt to 1x of the annual income of your first job

Emergency reserve
- Start a "beginner" emergency fund as soon as possible
- Full emergency fund should be 3 - 6 months of living expenses

Mortgages
- Ensure you can afford the monthly payment
- The payment should not exceed 28% of your income

Money magazine's 25 rules to grow rich by

By Money.com

HOUSING

1. For return on investment, the best home renovation is to upgrade an old bathroom. Kitchens come in second.

2. It’s worth refinancing your mortgage when you can cut your interest rate by at least one point.

3. Spend no more than two times of your income on a home. For a down payment, it’s best to come up with at least 20%.
Make absolute certain that you can afford the monthly payments, especially if the loan is adjustable-rate.

4. Your total housing payments should not exceed 28% of your gross income. Total debt payments should come in under 36%.
If your monthly payments near the limit, consider re-financing the mortgage to longer term.

5. Never hire a roofer, driveway paver or chimney sweeper who is going door to door.

SAVING AND INVESTING

1. All else being equal, the best place to invest is a 401(k). Once you've earned the full company match, try to max out a Roth IRA.

2. To figure out what percentage of your money should be in stocks, subtract your age from 120. Consider lifecycle funds instead.

3. Invest no more than 10% of your portfolio in your company stock – or any single company’s stock, for that matter.

4. The most you should pay in annual fees for a mutual fund is 1% for a large-company stock fund, 1.3% for any other type of stock fund and 0.6% for a U.S. bond fund.

5. Aim to build a retirement nest egg that is 25 times the annual investment income you need. So if you want $40,000 a year to supplement Social Security and a pension, you must save $1 million.
You could safety use 5% as the withdrawal rate.

6. If you don’t understand how an investment works, don’t buy it.

7. If you’re not saving 10% of your salary, you aren't saving enough.
Saving of 15% is needed for comfortable retirement.

8. Keep three months’ worth of living expenses in a money-market fund for emergencies. If you have kids or rely on one income, make it six months.
Emergencies are short term disabilities or loss of jobs.
The money-market fund may not has the highest interest rate.

9. Aim to accumulate enough money to pay for a third of your kids’ college costs. You can borrow the rest or cover it from your income.
Use today's college costs as guidelines. Aim to have a third or half coming from your savings and the rest should come from financial aids and your future incomes.
Consider 529 college savings plan for the savings.

PLANNING

1. You need to have enough life insurance to replace at least 5 years of your salary – as much as 10 years if you have several young children or significant debts.

2. When you buy insurance, choose the highest deductible you can afford. It’s the easiest way to lower your premium.

3. The best credit card is a no-fee rewards card that you pay in full every month. But if you carry a balance, high interest rates will wipe out the benefits.

4. The best way to improve your credit score is to pay bills on time and to borrow no more than 30% of your available credit.

5. Anyone who calls or e-mails you asking for your Social Security number or information about your bank or credit-card account is a scam artist.

SPENDING

1. The best way to save money on a car is to buy a late-model used car and drive it until it’s junk. A car loses 30% of its value in the first year.

2. Lease a new car or truck only if you plan to replace it within two or three years.
It is expensive to drive a leased car.

3. Resist the urge to buy the latest computer or other gadget as soon as it comes out. Wait three months and the price will be lower.

4. Buy airline tickets early because the cheapest fares are snapped up first. Most seats go on sale 11 months in advance.

5. Don’t redeem frequent-flier miles unless you can get more than a dollar’s worth of air fare or other stuff for every 100 miles you spend.

6. When you shop for electronics, don’t pay for an extended warranty. One exception: It’s a laptop and the warranty is from the manufacturer.

Mortgages are a double-edged sword

Source: JONATHAN CLEMENTS of wsj.com

Mortgages are the cheapest money you will ever borrow. But if you took out a big loan that you can't afford, and are falling behind on you payments; you may lose your homes to foreclosure.

Playing the spread

If you need to borrow, you couldn't do better than a home loan, especially the adjustable-rate loan which monthly payment is often lower than the payment of fixed-rate loan.

Not only are interest rates typically lower than other types of loan, but the mortgage interest is usually tax deductible. To get a mortgage, you need to own a home or agree to buy one. But once you have that debt, the effect is to leverage all your assets. That can be highly profitable.

Suppose you have $300,000 in stocks and you want to buy a $300,000 home. You could sell your stocks and pay cash for the house. But you will likely fare better by putting, say, $100,000 of your stock money toward the house and funding the rest with a $200,000 mortgage.

Result: You control $500,000 of stocks and real estate, 40% of which ($200,000) was bought with borrowed money. As long as your assets generate higher returns than your mortgage rate, the leverage is working in your favor.

On one end, some are missing the boat

Many homeowners, however, are striving to pay down their fixed-rate mortgage quickly. Sometime they also are reducing their contributions to their employer's 401(k) or 403(b) plan.

That means these people are missing out on their 401(k)'s initial tax deduction and tax-deferred investment growth. That combination should easily outpace the interest expense they save by paying down their mortgage.

Throw in a matching employer contribution, and the 401(k) would be even more compelling.

Similarly, you could probably improve returns by taking money earmarked for extra mortgage payments and using it to fund an individual retirement account or to buy stocks in a taxable account.

Still, prepaying a mortgage can be attractive, especially if the alternative is to purchase bonds or money-market funds in a taxable account. The mortgage's after-tax interest cost is likely higher than the after-tax yield on these conservative investments.

On the other end, some are unraveling fast

Like the idea of supercharging your returns with low-cost leverage? Carry a mortgage of $300,000 for the house and you will be in control $600,000 of stocks and real estate.

But, before you take out such hefty home loan, make absolutely sure you can handle the monthly payments. Especially if you're getting an adjustable-rate loan to keep the initial mothly payments low.

Indeed, that's why I (Clements) get nervous when experts advocate getting the largest mortgage possible or recommend re-mortgaging a house to buy stocks or cash-value life insurance.

However, if the interest rate rise, you may not able to afford the larger monthly payments; things can unravel fast.

Now, if you have other savings, you could pay off a chunk of your mortgage. That should lower your monthly payment next time your mortgage rate resets.

Investment strategy with lifecycle funds

Source: JONATHAN CLEMENTS of wsj.com

Lifecycle funds were designed to be the ultimate buy-and-forget investment.

You purchase a lifecycle fund that targets your expected retirement date, and then sit back and let your money ride all the way to retirement and beyond.

But it turns out that lifecycle-fund investors have other ideas -- some good, some not so good.

Adding on

One sensible strategy: Stick maybe 80% of your retirement money in a lifecycle fund and then tack on smaller stakes in intriguing sectors such as emerging-market stocks, foreign small-company shares and high-yield junk bonds.

You might even buy more than one lifecycle fund. Suppose you plan to retire in 2017. You might purchase a mix of, say, Schwab Target 2010 and Schwab Target 2020.

Aiming elsewhere

Lifecycle funds were designed for retirement investors, who might draw down their nest egg over 20 or 30 years. But some shareholders are using the funds to amass money for a home purchase, where they will need their savings on a single day, or college, where costs should be over in just four years.

The problem: When lifecycle funds reach their target date, they typically have 50% to 60% of their money in stocks. You run that horrific risk of having too much equity exposure when you get that tuition bill.

A solution: there are lifecycle funds designed for college expenses.

Laddering funds

Some investors are laddering lifecycle funds in the same way folks ladder individual bonds. It could help you manage your retirement spending.

Suppose you plan to retire in 2015, when you turn age 65. You might buy a 2015 fund to cover the first 10 years of retirement, a 2025 fund to pay for the years from ages 75 to 85, and a 2035 fund for your final years.

Some bad financial advice

Source: Jonathan Clements of wsj.com

If your adviser who is disparaging lifecycle funds and telling you to throttle back on your 401(k) contributions.

It's time to find a new adviser.

My advisor suggested otherwise - investment in lifecycle funds would provide some balance to my portfolio that was setup by him.

1. "Lifecycle funds are a lousy investment."

Lifecycle funds were developed primarily to help 401(k) plan investors, who often struggle to build sensible portfolios. These funds offer one-stop shopping by combining a slew of investments - mainly stocks and bonds - in a single portfolio.

A talented adviser may be able to build you a better portfolio. But it may not be a whole lot better - and maybe not enough to justify the adviser's fee.

2. "Don't fully fund your 401(k)."

Some advisers have argued that people should contribute 401(k) only enough to get the full company match.

They claim that when you fund a 401(k), you are setting yourself up for huge tax bills later and thus it isn't worth maxing out on these plans. Any withdrawal (contributions and gains) will be tax at ordinary income rates, and may also incurs the extra 10% penalty.

Instead, these advisers argue that this money should be invested through a regular taxable accounts - only the gains are tax at the preferential long-term capital-gain rates.

The reality is, 401(k) plans are a great deal, even if you aren't getting a company match. The contributions and the gains are tax deferred; and thus, your 401(k) portfolio is compounding to the fullest.

Bankrate's guide to financial literacy

Financial Literacy 2007 - Guide to Building Personal Wealth

The 12 topics:

January: The simple art of budgeting

February: Mastering credit cards

March: Understanding mortgages

April: Mapping a retirement plan

May: Dealing wisely with home equity

June: Credit scoring demystified

July: Creating an emergency fund

August: Understanding insurance needs

September: Maximizing a college fund

October: Financial tuneup

November: Planning for your heirs

December: Taxes made easy

4 reasons to sell a stock

Source: Money by MSN video

Sell a stock if

1) It is overpriced.

2) Declining fundamentals.

3) You were wrong about this stock!

4) Your position is too large.