This Week In Your Wallet – February 1, 2011
Hi, and welcome to February!
One sign to me that you’re reading – and enjoying – this newsletter is that I’ve started to receive notes in return. Love that! When you send me something that I think can help other readers, don’t be surprised if I decide to include it in an upcoming edition. For example, in response to last week’s item about what to do with your tax refund, Amy Chain, who works in public relations at Vanguard writes:
“This week, I was particularly captivated by your stat that the average annual tax refund was about $3,000 last year and your recommendation to sock it away for a long-term goal. I hope folks understand the power of this great suggestion if one considers the impact of compounding. Just think — if a 25-year-old were to plunk that refund in an investment that returned an average of 8% a year and leave it to compound without ever adding another cent, they’d more than double their initial investment amount in 10 years ($6,477). Let it ride until they retire at age 60, and they’d have a $44,356 nest egg. And this is all from this one-time investment of a $3,000 tax return. Imagine if they committed to allocating a portion of their return each year to savings!”
In fact, we don’t have to imagine. We can calculate. Say a 25-year-old gets a $3,000 tax refund every year and decides to sock it away in an IRA at an 8% return.
In 10 years he’d have $37,280
In 20 years he’d have $80,780
In 30 years he’d have $135,980
In 40 years (at age 65) he’d have $206,028
Ka-Ching!
A Loophole Closes
Social Security, as you likely know, works this way: You are allowed to start taking payments at age 62. But your payments will be substantially lower than if you wait until you’re older, say age 67 or 70. Fortunately, for the financially savvy, there was also this loophole: Take the money at 62, pay it back down the road (with no interest) and you could restart the clock drawing a higher payout. It was perfect, a no-cost loan from the government, for all of those people who were savvy enough to swing it.
Well, those days are gone – or at least they’ve been minimized. New rules from the Social Security Administration cap the amount of time you have to apply, pay back, and apply again to a single year. Don’t stress. Instead, strategize to get the most from Social Security that you can. First, delay. Each year you hold off taking social security, your payment goes up by about 8 percent without inflation and about 10 percent with (although not the last two years, when Social Security didn’t get a cost of living adjustment). And second, max out what Uncle Sam owes you. Your Social Security check is based on your average wages from your 35 highest earning years. If you’re not in the workforce that long, any years where you don’t have an income will be counted as a $0 and bring down your average. So continuing to work will increase your lifetime pay.
Password No-Nos
Do you know what the most common password – for websites, banks, ATM cards and the like – is? It’s 123456. It used to be 12345, but then we were forced to add a digit. I once had a boss who grumbled about any story that he said had “a PhD in the obvious.” This password has it all over the place. And so does your dog’s name, your birthday, the name of your street, and anything else that someone who knows you even slightly (or friends you online) might be able to grasp. To make matters worse, a survey I collaborated on with the Norton Security folks showed that you very likely don’t change those passwords often enough. Nearly half of people never change their passwords on their email accounts. About one-third never change them on financial accounts. And four out of ten never change them on social networking sites.
Do you want to be a victim of id theft? If you’re not using strong passwords – i.e. 10 digits, a combo of letters and numbers – and switching them up every three months, you’re kind of asking for it. Because today’s smart swindlers pull the same game that someone who might have lifted your wallet a decade ago did. They use that personal information, combined with info about where you bank, live, shop, etc. to apply for credit in your name. Then they have a credit card you don’t even know about that they can use freely until you check your credit report (do it for free at annualcreditreport.com) and go to work shutting it down. Stop them with tough passwords – before they get started.
Now I know it’s tough to remember all those passwords. This suggestion from Jim Van Dyle at Javelin Strategies is the best I’ve heard for keeping track of them in a long time: Make a list of your passwords. You can even keep it on your computer or in your wallet. But in the middle of each insert the characters XXXX. And don’t tell anyone what the XXXX is. Works like a charm.
Cut Your Printing Costs
Finally, I thought this one from Consumer Reports was too good to keep to myself. If you hate changing the ink in the printer as much as I do, you’ll appreciate it. You can save money by changing your font. Times New Roman and Calibri are ink savers. Arial, Tahoma and Verdana are ink busters.
Jean Chatzky
Making money make sense
blogging at www.jeanchatzky.com
