Ask Liz Weston

A rising personal savings rate indicates we’re doing better at putting money aside, but we have a long way to go. A survey released today jointly by the Consumer Federation of American, the Financial Services Roundtable and the Employee Benefit Research Institute shows many American families not only lack savings–they lack a savings account.

Taking data from the latest Federal Reserve Survey of Consumer Finances, they found:

• Less than one-third (32%) of low-income households – bottom quintile with incomes below $18,900 in 2007 – have savings or money market accounts.
• Less than one-half (48%) of moderate-income households – second quintile with incomes $18,900-33,899 – have savings or money market accounts.
• Even less than three-fifths (58%) of middle-income households – third quintile with incomes $33,899-53,599 – have an account.
• But 80% of upper-income households – highest quintile with income above $89,300 – have an account.

The three groups are trying to promote automatic savings–a worthy goal. And their press release includes a handy guide to banks that are currently offering savings promotions. I’m including it here, plus a couple of suggestions of my own:

1. Fifth Third Bank provides a double interest bonus to those who meet a goal in the Goal Setter Savings.

2. U.S. Bank offers a $50 Rewards Card for the first $1,000 in savings and another $50 Rewards Card if that balance is maintained for a year in its S.T.A.R.T. Savings Today and Rewards Tomorrow program.

3. SunTrust, in its Get Started Savings Program that in March will become its Live Solid Savings, offers a 1.5% rate for two months and a 2% anniversary bonus (up to $50) as well as free overdraft protection for those agreeing to automatically transfer at least $25 monthly to savings.

4. Regions, in its LifeGreen Savings, provides a 1% interest rate bonus if automatic deposits are made for 12 months.

5. BBVA Compass, in its Build My Savings^SM, will match, on an annual basis, up to 6% of a customer’s monthly automatic savings transfer amount. This program will be launching in April.

6. Bank of America, in its Keep the Change program, rounds up debit card purchases and transfers the difference from checking to savings where it provides a 100% match for three months then matches 5% a year (up to $250/year).

7. The Way2Save® account, created by Wachovia, will be offered to Wells Fargo customers in the future. It’s a savings account that can be linked to checking, turning purchases into automatic savings by transferring $1 from checking to the Way2Save® account each time you make a check card purchase or use bill pay.

(Liz’s note: With both these programs, make sure you have true overdraft protection, not bounce protection, since they can increase the risk of overdrafts.)

8. Union Bank offering a $25 bonus to those opening a new savings account.

And now my two additions:

9. ING Direct has a refer-a-friend program that currently gives the new account opener $25 and the referrer $20. UPDATE: ING Direct just announced it’s also offering a $25 account bonus to new customers who open an account with the special reference code “AMSAVES2.”

10. Check out your local credit union. Savings bonuses abound. First Entertainment Credit Union in Los Angeles, for example, is currently offering 7% interest on the first $500 you save. Check out FindACreditUnion.com to check out the CUs in your area.

Dear Liz: My online savings account has been taken over by another bank, which started charging a fee to transfer funds to external accounts. I feel like my savings are trapped and I want to move them.

But if I try to transfer the money to another bank, will I have to pay the fee?

Answer: Perhaps yes, but a one-time fee is better than being nickel-and-dimed to death.

One of the big advantages to online savings accounts — besides better interest rates — has been the freedom to save and move your money around without paying onerous fees. It’s unfortunate your new bank has changed the rules, but you’ll find plenty of competitors that will be delighted to accept your money without charging account or transfer fees.

Consider chatting up one of the bank’s phone representatives or branch tellers to see whether there’s a way to get your money out for free. If not, pay the transfer fee and consider it a small price to get free.

photo credit: Russ Beinder

I’m hearing from lots of people who plan to only spend cash this holiday season to stay within their budgets.

A recent USAA survey found more than half of respondents planned not to use credit cards at all, and 85% planned to pay cash for at least some purchases. Two-thirds planned to use more cash than last year.

I’m all for restraining spending and avoiding debt, but cash has quite a few disadvantages, such as:

Cash is easily lost or stolen. So are credit and debit cards, of course, but plastic comes with zero-liability protection. With credit cards, particularly, loss or theft is almost a non-issue; your card is quickly replaced and you move on.

There’s no “court of appeals.” Credit card issuers serve as middlemen when you have a dispute, a function I’ve had to use a few times. Unless you absolutely, positively trust the merchant to do right by you, you’re better off with that extra layer of protection.

There’s no purchase protection. Most gold and platinum cards will pay to replace your purchases if they’re lost, stolen or damage. Coverage varies by card, but you typically can get reimbursed for incidents that happen within 60 to 90 days of purchase.

Debit cards and prepaid cards aren’t really a good substitute for cash. Not only do they lack credit cards’ protections, but they have their own disadvantages: ridiculous fees in the case of prepaid cards, and the possibility of overdrafts in the case of debit cards.

If you really can’t control your spending without cash, then by all means, use cash. If you want to avoid debt without giving up credit cards’ advantages, though, here’s another approach to try:

Draw up your holiday budget. Include your list of gift recipients and how much you plan to spend on each. Also include travel, decorating and entertaining costs. Adjust as needed until you have a spending plan that doesn’t require you to add to your debt.

Set aside that money. You can transfer the whole amount to savings before you start shopping, or transfer as you go: as soon as you get back from shopping, log on to your bank and shift the amounts on your receipts from checking to savings. When the bills come, transfer the money back into your checking account and pay it off in full. Or you can make payments to your credit card as you go; most credit card issuers allow you to make payments weekly, if not more often.

Dear Liz: In a recent column, you advised someone to pay off credit card debt with his emergency fund. I agree that “Clinging to cash that’s earning less than 2% doesn’t make sense when your debt is . . . costing you a double-digit interest rate.”

But isn’t that “old school” thinking? Aren’t we all supposed to be in “survival mode” now and building up our emergency funds instead of paying off debt?

I am recently divorced at age 65, with no chance of getting a job soon. I did not get spousal support as my ex is on Social Security and a pension (which goes away when he dies). I got half of a very shattered IRA, which I am going to need to live on.

I am in the same boat, faced with carrying $8,000 of credit card debt or using funds that I need to live on to pay off the debt. What’s your answer to my problem?

Answer: Take a close look at what credit card companies are doing to their customers these days. They’re doubling or tripling interest rates, even for people with good credit. They’re lowering credit limits and slamming shut accounts, endangering people’s credit scores. They’re experimenting with new fees.

Why would you put up with that if you had a choice? People who don’t pay off their credit card debt with their savings when they can are choosing to bind themselves to companies that have made it quite clear they don’t care about their customers’ financial well-being.

The key phrase there is “when they can.” If you’re facing a layoff or already unemployed, you really do need to be in survival mode and conserve your cash. That means paying the minimums on your debt until your economic situation improves.

If your situation doesn’t improve, or if issuers raise your rates to the point where you can no longer pay your minimums, you may need to consider credit counseling or even bankruptcy to deal with this debt.

Dear Liz: My wife and I each had excellent credit when we married 10 years ago. We are now divorcing (amicably). Since we married, we have put everything in her name: two houses in succession, three cars, all car insurance and utilities. We refinanced our house in February with her name first.

I recently opened checking and savings accounts in my name only and had my paycheck deposited there instead of our joint account.

What steps should I take before a divorce decree to be sure I retain a great credit score?

Answer: To protect their credit, divorcing couples should make sure to close all joint credit accounts and transfer any balances to the partner who will be responsible for paying the obligation.

The same is true for mortgages and other loans that are in both names. Whenever possible, these debts should be refinanced in the responsible party’s name only.

All this should be done before the divorce is final. Otherwise, your ex can trash your credit — deliberately or not.

If your name is still on the mortgage, car loans or credit cards, your scores could plummet if she misses a payment. You would have little recourse because your creditors aren’t bound by your divorce agreement, even if it plainly requires her to stay up to date on these obligations.

Closing accounts and opening new ones can inflict temporary dings on your credit, but these pale in comparison to the damage done by a single skipped payment. If you want to keep that amicable vibe and your excellent scores, separate your credit accounts now.

The fact that the personal savings rate is close to 7% is good news, but too many people are still unprepared for a major financial setback like a job loss.

A survey released yesterday by HSBC Bank USA found:

• 38% of respondents didn’t have even one month’s worth of expenses saved
• 61% could live on their savings for 3 months or less
• 51% of respondents with household incomes of less than $50,000 had less than one months’ expenses saved
• 29% of those who earned $100,000 or more had less than 3 months saved.

HSBC’s findings mesh with those of previous researchers who found only about one third of U.S. households had enough liquid savings to sustain them for three months or more.

Three months’ worth is a good goal in normal times, but in recessions, when the risk of job loss spikes, you may want more. The median duration of unemployment is now 14.7 weeks (nearly four months), up from a duration of 8.9 weeks (a little over two months) in July 2008. One third have been without a job for 27 weeks or more.

If you have toxic debt such as credit card debt or aren’t saving enough for retirement, taking care of those issues usually should take priority over building up your emergency fund. As soon as you’re able, though, stashing aside extra cash is a smart idea.

For more, read:

• Why you need $500 in the bank
• An emergency fund out of thin air
• When should you use your emergency fund?

photo credit: quaglia

Targeted accounts are the best thing to happen to savers since compound interest. But too few people use them, or understand how much easier they can make the budgeting process.

A targeted account is simply a savings account that you designate for a single purpose. You can set up different targeted accounts for specific goals, such as vacations and home improvements, as well as for recurring expenses such as car repairs, holiday spending, quarterly tax payments and insurance premiums.

These individual “buckets” of savings can help you track your progress to your goals and make sure you have the money you need, when you need it. When all your savings are jumbled together in one account, it’s too easy to overspend–you’ll think you have enough for that vacation to Disney World only to find out you just spent the money you’d been saving for Christmas.

The easiest (and least expensive) way to set up targeted accounts is usually through an online bank such as ING Direct, Emigrant Direct or FNBO Direct. Online banks allow you to set up multiple savings accounts for free, with no minimum balance requirements or account fees, plus you can name them anything you want.

For example, I named our main savings account at our online bank “Emergency Fund” and use that to store the cash we’d need to get through several months of unemployment.

But I also have accounts for “vacation” and “sabbatical.” The vacation fund gets a monthly infusion to cover any weekend trips as well as the longer family getaways we take each year. The sabbatical fund, which will pay for a much longer trip several years in the future, also gets regular contributions.

I use other savings buckets for taxes, car repairs, home repairs, insurance payments and the holidays.

Those buckets ensure that we’ll have the money, in advance, to have fun and follow our dreams.

For more, read:

• How to plan your “emergencies”
• How to open multiple accounts at ING Direct (from Get Rich Slowly)

It’s kind of a wonderful dilemma: there’s so much personal finance writing going on that it’s easy to miss some great stuff. Here are some picks for what I liked in the past few days:

1. Want to find more bargains? Use Twitter. Writer Melinda Fulmer offers some great folks to follow to find coupons, deals and freebies. CLICK HERE to learn more.
2. Instead of a mental health day, the New York Times’ Ron Lieber took a fiscal health day and tackled a laundry list of financial tasks. CLICK HERE to see what he accomplished as well as some great suggestions and links.
3. Social networks are a great way to share information, but Smithee at Consumerism Commentary raises a good point that broadcasting the fact you’re on vacation may not be such a great idea. CLICK HERE to read about the perils.
4. If you’re struggling with massive debt and have questions about what to do, you might want to check out Steve Rhode’s site GetOutofDebt.org. I met Steve back in the days when he ran MyVesta, a consumer credit counseling service, and he has deep knowledge of the world of credit, debt repayment, debt settlement and bankruptcy. We don’t always agree, but I think he gives straight answers based on his considerable experience rather than the dogma, cheerleading or press-release twaddle you might find elsewhere. CLICK HERE to start checking out his site.
5. I constantly tell people not to borrow more for an education than you expect to make your first year out of school, but researching that figure can be tough. A new peer-to-peer private lending service, People Capital, is attempting to estimate your future earning power via a new calculator in beta. The site hopes this Human Capital Score will fill in for folks who have no credit score to determine who’s a good risk for repaying a loan and who’s not. CLICK HERE to read a Smart Spending blog entry about the calculator, then follow the links.

How quickly we might forget. A new survey by HSBC Direct shows that 76% of those polled will probably return to their old money habits once financial conditions improve.

Currently, Americans have returned to some good financial habits during the recession, including:

• 81% are saving more or the same than they were six months ago
• More than half have reduced discretionary purchases, and nearly half have cut back on household spending
• 71% of people feel either an equivalent or increased sense of financial control than they did six months ago

But according to the survey, which polled 1,000 respondents online on April 14 and 15, these habits might not stick or develop further once the financial crunch eases. (Survey’s error of margin is +/-3.1%):

• One in four admit to not having a specific savings strategy
• 15% say it took significant debt or bankruptcy to get them to save at all
• Half don’t thoroughly research all the financial products they purchase
• 44% don’t consider themselves as knowing enough about personal finances to “get by”
• 43% have saved money on and off, but never followed a consistent plan
• One in four admit to not having a specific savings strategy, and 15% say it took significant debt or bankruptcy to get them to save at all
• Only 12% have instituted an actual budget

If history is any indication – ahem the dot.com bust in the stock market in 2001 comes to mind – then it doesn’t take consumers all that long to forget.

Don’t repeat history. Check out my columns for the latest financial news to help you get back — and stay — on track:

• 7 guides to fixing your finances

• The 100 most useful Web sites

• Organize your financial life

Saving water is good for most people’s budgets. Even if you don’t pay directly for your water use (your utilities are included in your rent, for example), using less water is the environmentally conscious thing to do.

We here in Los Angeles are about to get a crash course in water conservation. The city will impose mandatory conservation and “shortage year water rates” June 1. For our family, that means paying a higher rate for water unless we cut back consumption by 15%. (If you’re in Los Angeles, you can check your account at www.ladwp.com to see how much water you can use before higher rates kick in.)

We’ve already done the easy stuff. We run the clothes washer and (water-saving) dishwasher only when full. We shut off the tap while brushing teeth. We fix leaky faucets promptly.

To drop the water bill even more, we’ve:

Switched to two days of automatic sprinkling a week, instead of three. This will be required as of June 1, but we’re getting an early start. Any plants that start to droop in the heat can be watered via garden hose equipped with a shut-off nozzle.

Closed the driveway car wash. Our daughter loves to help suds the cars, but commercial washes are way more water-thrifty. She’ll be content with just vacuuming the cars, which she also loves to do.

Started using the low-flow switch. When we repiped our house awhile back, the company we used installed a type of shower faucet that allows you to regulate the water pressure–from full throttle to a trickle and back again–with a lever on the faucet handle. This reminds me of the “Army showers” we took growing up on a farm, where the water supply was–shall we say–less than reliable. You hose down, turn the shower off or down while you soap up, then turn it back on to rinse.

Put a bucket in the shower. The water heater’s at the other end of the house, so it takes a minute or two for the water to warm up. Someday we may go tankless, but in the meantime we can collect the cold water and dump it on the plants.

Some other things we’re considering:

Stripping the turf. Not from the whole yard, but from the curb strip at least. Several of our neighbors have torn up the grass and re-landscaped their strips with drought-tolerant plants and bark or decomposed granite.

A rain barrel. A great way to collect runoff, but it has to be aesthetically pleasing (for my artist husband) and relatively cheap (for me). So far, we haven’t found one that fits the bill.