4 April 2013
We are pleased to announce the launch of Koku 2.5 today, a major update that includes a new budgeting feature as well as a brand new icon design. Budgets allow you to actively track your spending goals in real time. Tracking spending has always been simple and elegant in Koku, but now with budgets, you can also set personal spending limits and manage how much you are spending on transactions as they occur. This new addition of budgets to Koku makes tracking how much money is spent on coffee every month dead simple.
Using Koku with budgets means saving more and spending less. Here’s how it works:
- Budgets can recur either weekly, monthly, quarterly, or annually
- Setup is simple. Just select a spending limit, decide on a frequency, and inform Koku as to which transactions should count toward your budget (i.e. all transactions tagged with “Coffee”).
- Koku tracks all the spending that falls under each budget you create, and presents a report on how close you are to hitting your spending limits.
- As you maintain a budget over multiple weeks, months, quarters, or even years, you will be able to view the history of your spending for that budget and how you’ve done in meeting your goals over time.
Budgets appear in Koku for iPhone as part of the overall summary report for your accounts. This means you can quickly check how much money is available to spend for any given budget while out shopping, along with up to date account totals. Koku with budgets takes all the guesswork out of spending money on the go!
Koku 2.5 for Mac supports Mac OS X 10.8 or later and is currently half off in the Mac App Store for a limited time at $14.99 USD (regularly $29.99 USD).
Koku 2.5 for iPhone supports iOS 6.0 or later and is currently half off in the Mac App Store for a limited time at $1.99 USD (regularly $4.99 USD).
Save more, spend less.
7 January 2013
In honor of Koku being featured in the Mac App Store’s New Year, New You section, here is some advice on how to get started with Koku in the new year.
Make it a habit
The biggest part of tracking your finances successfully is making it a habit. Try and set aside a certain time every week where you sync your accounts, tag your transactions, clean up transaction names, and anything else you do in Koku. The place where I most often organize my finances in Koku is on the subway to work. I sync all my accounts before I go underground and then spend the train ride tagging everything and looking my reports. Any transactions that need more attention I mark as unseen and take care of later.
Remember that tagging isn’t permanent
Tagging your transactions can be tough. Using tag names that are too vague can make you feel like you’re not doing a good job and some critical spending pattern will go unnoticed. Always remember that you can go back and add or remove tags at any point. If a tag is too ambiguous, simply use the tags view to view all transactions with that tag to reclassify them using more specific tags. The same thing can be done if you think you have tags that are too specific and are cluttering your reports.
Figure out what works for you
When I first started using Koku, I was tagging all my food transactions by which meal of the day they fell under (breakfast, lunch, or dinner). This made things complicated – brunches, afternoon snacks, and splitting up grocery lists into different meals was making tagging my transactions a nightmare. Trying to categorize all of these transactions was intimidating and I started using Koku less and less. I didn’t realize that my food spending didn’t follow a strict per-meal structure and trying to categorize it as such wasn’t yielding any helpful information on my spending. Worst of all, trying to fit my spending into this categorization made me want to stop tracking my finances. Luckily, I caught myself and now I’ve transitioned to tracking which of my food spending is from groceries, and which spending is at restaurants. This is a much simpler taxonomy that more closely fits my spending patterns. Koku doesn’t force you into any system for tracking your finances which is very powerful but can also feel too open-ended at times. Don’t be afraid to make mistakes and changes as you figure out what works for you.
Don’t be hard on yourself
Figuring out how to best track your spending isn’t easy. When you start using Koku, you may start to feel like a superhuman careful-spending machine. Using Koku won’t make you spend your money perfectly, but at least you’ll be aware of when you misspend your money. It’s similar to building a habit like working out — the thing that stops you from becoming fit isn’t the fact that you skip a single workout. It’s when you use that single missed workout to invalidate all of your aspirations towards fitness, which breaks the habit. Just remember, the fact that you’re aware of misspending is better than turning a blind eye to the problem. If you’ve fallen a couple weeks behind on tagging your transactions, just tag the most recent week. Just keep moving forward and working at it.
Hopefully this helps you get started using Koku or start using it again. If you have any further Koku tips I’d love to hear them - e-mail me. We hope you have a great start to the new year!
29 November 2012
This is a follow-up to a post on passwords and online security. We left off discussing some of the security features used when logging into banks online and how they affect you. Let’s continue…
Don’t Allow Browser Password Saving
When you log into many online services, your web browser will ask you if you want your username and password saved. Have you ever noticed, though, when you log in to your bank you’re never prompted? Most banks disable the password saving feature when logging in. It’s an option they have. Any site can do it, but it’s most prevalent with online banking.
There’s a very logical explanation for disabling the ability to save passwords: shared computers. If you log in to your bank account at the library and you accidentally click OK when you’re asked if you want your password to be remembered, then anyone who uses that computer can log into your account! For this reason, banks continue to use this feature.
Unfortunately, preventing the browser from saving your password has some downsides. If you allow your computer to store your bank password, then you don’t have to remember it at all. That means that you could make it 80 characters long, use characters found in english, spanish, japanese, arabic, african scripts, etc. You wouldn’t have to remember your password and it’s virtually impossible to guess! Also, you can use a different password for every bank account and not have to worry about what each one is. A hacker would need to physically access your computer to determine your password.
If you then protect that computer with a simple password, only people with physical access to your computer and who know your computer password will be able to log in to your bank account. In my case, that’s just my family members, so my password is relatively secure.
If using more complex and secure passwords is appealing to you, I’d strongly recommend investing in a password manager. This will allow you to generate and securely store random passwords without having to worry about remembering them. Many of them have the added benefit of simplifying the log in process for online banks and other sites through nice browser integration.
Confirm a New Computer
Many banks require you to confirm your identity each time you log in through a new computer. They do this to ensure that no one who happened across your password somehow is trying to access your account. This is one of the best security features that banks have in their arsenal. This is hard to hack because there are an endless number of personal questions that they can pull from.
Think for a moment about whether or not this is safe. If you were a hacker, how would you defeat this system? Sometimes, a simple search on the internet is all you’ll need. So how personal the questions are is very important. Questions from your credit report may not be easily found via a search, but what’s to stop a motivated hacker from getting that information? Businesses are able to get detailed credit information, so it can’t be hard for someone who’s willing to break a few laws.
Many systems rely on asking you questions that you provided answers to in the past, though. This can sometimes be better than information from your credit report, but only if you’re the one who knows the answer. Questions like What’s your mother’s maiden name? or Where were you born? are becoming increasingly Google-able. Do you remember when Sarah Palin’s email was hacked? Recently, we’ve started to see questions like What was the make of your first car? or What was your high-school mascot? that aren’t quite as easy to find the answer. Always think about this, though: is this information public in any way and/or how many people know the answer to this question? Choose questions that people don’t know. Or make up an answer if you have to. Instead of using your mother’s actual maiden name, use the name of a character in your favorite book and just remember that you’ve always done that.
Personalized images have been popping up a lot recently as a way to try to prevent phishing attacks. The idea is that when you log in, you’ll recognize that the image being displayed is not the image you’ve chosen. In order for this to work, you need to always check your image. If you get lazy (or don’t understand what the image is for), you may still be able to fall victim to a phishing attack. Phishing attacks tend to target an audience who are a bit less attentive, so the effectiveness of this has been questioned.
As personalized images are somewhat new, there have been different approaches to actually making them work. Some are more hackable than others. The effective implementations will use your browser’s cookies to store which image you’ve selected. This means that you can test them out and check to see if they are really secure.
Here’s what you should do. Close any browser windows that you have open. Clear your browser’s cookies. In many browsers, this is now included when you reset the settings. Now go back to the online bank login (or whatever other service). You should have to re-authenticate in some way. But it should not show you your personalized image. This may be a significantly more involved process (it may treat you like you’re on a new computer — see above). Once you’ve logged in, it will show your personalized image again on subsequent log-ins. If you see your personalized image right away, please let us know. We’ll be happy to contact your bank for you and let them know that they need to beef up their system.
Most websites these days allow you to reset your password if you forget it by e-mail. Banks usually take it a few steps further by requiring that you supply a little information about your identity. This is great, banks get this right.
Many other websites don’t do quite as good of a job though. Usually, you’ll be able to reset your password by clicking a link in an email. That’s fine, too. There are a few reasons they don’t email you your password. First, e-mail is very insecure. It jumps all around, so you wouldn’t want them to do this. Second, most websites don’t actually store your password. They store a translated form of your password.
Imagine you have a friend who’s been cursed — when you speak to him, he repeats your sentence flawlessly in an ancient language, a language that no one speaks any more. If you repeat a sentence to him, he’ll translate it the same way he did in the past. He doesn’t understand this language, though. If you try to have him translate back to English, he doesn’t respond. This is the way your password is stored. It’s read to this cursed friend. He gives you something back in the ancient language and you store that. Using this methodology, your password isn’t actually stored on the bank’s website.
An example illustrates this well:
- Your password is hello old friend
- The cursed friend translates this to congue purus ut lorem adipiscing
- That’s stored on the bank’s site
- Someone tries to log into your account with hello new friend
- The cursed friend translates this to tortor egestas tempus convallis
- The translations don’t match, so your login fails
- You log in with hello old friend
- The cursed friend translates this to congue purus ut lorem adipiscing
- Your login succeeds
You can’t have your password emailed to you because the website doesn’t even know what it is. This is a great way of protecting this sensitive information and prohibits everyone (including employees of the company) from accessing anyone’s passwords. In fact, it makes things harder for hackers if they ever do get access to the list of account information. They can’t determine your password quite as easily (though it is possible).
When you use a new service that you’re wary of, always test how password reset works. If they email you your password, it’s not stored securely. Someone at that company will be able to read your password. At least now you know.
There’s a lot that goes into online security. Day to day it’s easy to forget how susceptible we are when we log into different services. Being aware of why some of these systems are in place greatly improves your chances of keeping your information safe and secure. Our best recommendation to you is to purchase a password manager. Start using a new, randomly generated password for every site you log into. Best of luck, and stay safe!
14 November 2012
I remember payday when I was a kid… I used to ride my bike from the restaurant where I washed dishes over to the bank to deposit my paycheck. When I needed money, I’d actually go into the bank and ask the teller to make a withdrawal. I’d hand over a withdrawal slip and receive my cash. At one small bank that I used, I didn’t even have to show my license. A signature and my familiar face were enough for me to put some spending money in my pocket. Today, I can’t even remember the last time I interacted with a teller at a bank. And I certainly can’t get any information about my account without one trusty piece of identification, my password.
These days more and more of our lives are lived online. Banking is no exception, and financial institutions around the world are continuing to build up their online presence. Nearly everything that you used to do in a brick and mortar location can now be achieved with a couple of mouse clicks. We log in and out of different services every day without even thinking twice. Usernames and passwords have become commonplace, and it’s easy to get jaded as you type in your username and password one more time.
Banks have always been associated with security. When you think of a bank, you typically think of a large, well-built building, very thick walls, a vault with an enormous door, cameras, top of the line alarm systems, silent alarms, etc. The list of security features is never ending. Some of these systems work, some don’t help quite as much, and others can actually be used against the bank by someone breaking in. We’ve all seen movies where the burglars hack the security cameras and use them to their advantage. In the digital realm, we have a very similar situation. Some security features help, others do more harm than good.
Let’s take a look at a few of the frequently employed security measures that are used for logging into online banking websites.
One of the most basic features of logging into any site is the password field. When you type into the password field, you don’t see what you have typed. Instead, you see little black bullets representing each character. It’s pretty obvious, but this prevents someone who’s looking at your screen from knowing what you’ve typed. Unfortunately, it does have a few flaws that you may not have considered. First, these fields show exactly how many letters you’ve typed. Second, you’re still typing each of those letters, and that means someone could watch or record what you’ve typed. Honestly, only the super paranoid will actually care about these things. If you’re out in public or you’re extremely distrustful of the people around you, you shouldn’t care. Also, many people have learned that it’s polite not to watch you type in a password. So let’s move on…
Login systems frequently require that your password contain letters and numbers. Some require that you have symbols in your password as well. These requirements are encouraging you to use a password that isn’t simply a word in the dictionary. Why? Well computers are good at guessing passwords quickly. If your password happens to be a common word in the dictionary, a hacker will be able to access your account pretty easily. (And actually, if you use combinations of relatives names and birthdays, it turns out that people are good at guessing your password as well.) Unfortunately, that’s not the whole story. A password that includes letters, numbers, and symbols may actually be less secure than a few randomly chosen words. For those of you who are a bit more math oriented, a popular comic explains it best.
The worst aspect of composition requirements is that they are never the same. That’s frustrating as a user, but to some extent, it’s a good thing. You shouldn’t use the same password for your bank account as the one for that random service that you used once last week and never plan to use again. Why? Well because that random service may not be secure. If someone gets your password through it, they would be able to access your bank account as well. Your best bet is to use a different password for each of your bank accounts and never reuse them.
Minimums and Maximums
Often when you sign up for a new account, there’s a minimum password length. Typically, this is around 8 characters. Minimum password lengths are a very good idea. They ensure that no one has a password that’s simply 1 character and extremely easy to guess. Maximum password lengths, on the other hand, are a terrible idea. These usually exist because the engineers who created the system have imposed technical limitations that don’t allow longer passwords. If a hacker is able to attack a system and knows the password has to be between 8 and 12 characters, there are significantly fewer guesses that she will have to make in order to gain access. Other security measures are put in place to avoid guessing like this, but in general I would not put my finances at risk by using a system that has a maximum password length.
This has been a brief overview of a few features that are widely used to ensure you’re safe when you log into banks and other websites online. We’ve only scratched the surface here, though. In a few weeks we’ll dive into a little more detail about some of the more advanced security features that are used to keep you safe. If you have any questions about authentication that you’d like addressed for next time, please contact us and we will try to include them.
In short, our best suggestion is to use a different password for each bank you use. Create a password by choosing four random words and coming up with a visual explanation of how they’re connected (to remember it better). If you choose to reuse a password for services that are not as critical, that is okay, but ensure that each password you use to access sensitive information is unique and easy for you to remember.
22 October 2012
I cannot tell you how many times people have said to me, “I hate [insert bank name here]”. If you’re currently settling for a less than exceptional banking experience, have no fear. There is another way. I sometimes feel like I’m sitting on this major secret, which is that there are great banks out there that actually care. They have policies that favor the customer, they don’t charge fees, they actually reimburse ATM fees, they give you money back for being a loyal customer, and they provide reasonable interest! Yep, this is not a fairy tale, what I’m describing really exists! If you’re currently drowning in overdraft fees, and arguing with customer service that doesn’t care at all, it’s about time you made a switch!
My current all around top pick for outstanding bank goes to… Charles Schwab bank. Specifically, I recommend the High Yield Investor Checking account. Don’t let the word “investor” in there scare you. This is an extremely approachable bank, with practical accounts for real people like you and me. Here are just some of the things Schwab offers it’s customers:
- No monthly fees
- No overdraft fees. At all.
- No minimum balance
- High yield interest
- Outstanding customer service
- Free Direct Connect
- Reimbursement for ATM fees anywhere in the world
- No extra charges when using your card internationally
- Complimentary brokerage account (which you can use if you wish to dabble in investing, or not)
- Personal consultations on demand (just call or set up an appointment at a local branch)
- Convenient mail-in check depositing
- Full featured online website
- Free transfers to/from external accounts
I have never had a bad experience with Charles Schwab and have utilized all the above features with great success. The best part about working with a great bank, is not having to worry. I don’t have that looming stress of accidentally overdrawing. Of not being able to find an ATM that won’t charge me fees while I’m out. That I could be getting a much better yield on my money elsewhere, or that when I leave the country I will rack up crazy unexplained charges. I just don’t worry. I never feel like I’m being taken advantage of or ripped off.
Charles Schwab is a well established, more traditional bank. If you want to go a little more innovative, you should also check out Simple. Simple is a bank that is trying to do better. They are very new, and only recently began accepting new account holders. However, they are poised to be the next best thing to hit the banking industry. Right now, they lack the full feature set of other banks, but if you’re just looking for an easy place to stash some money without all the extra crap, definitely check them out!
Another bank that until recently would come highly recommended by me is ING Direct U.S. Specifically, the Orange Checking account. They have a very simple website, straight forward policies very similar to Schwab, sans fees. Also, ING provides checking account holders with consistently higher interest rates than the national average. So what’s the problem? ING Direct U.S. was recently picked up by the Capital One bank family and that puts a bit of a bad taste in my mouth. Capital One is not a name I associate with honest to goodness banking. I hope they continue to remain the great bank they are despite this acquisition. They’re worth a look if this tie doesn’t concern you.
So please consider making a switch. There’s no reason to suffer through fees, hidden charges, and horrendous service when you could have a wonderful experience. Trust me.
20 July 2012
A few months ago, I received a phone call from Capital One. The gentleman on the phone started asking me questions about my identity — name, address, etc. This immediately triggered alarms in the fraud prevention part of my brain. Don’t answer any of these questions, I thought to myself. But unlike calls that are trying to extract personal information from you, he already had everything he needed. All he wanted was that I confirm a few pieces of information, so I went along warily. But then he dropped the bomb, “I’m calling to discuss the credit card you applied for.” The credit card I — what? I never applied for a credit card!
Someone had stolen my identity. This was a terrifying and totally unexpected experience for me. I tried to stay calm while on the phone and listen to the advice that I was being given about how to handle the situation, but my head was spinning with possibilities of what might happen next. What if my credit gets ruined? How long has this been going? How did someone get this information? Why me? After the phone call ended, I had to remind myself to be calm. All the anxiety in the world wouldn’t make the situation any better.
Fortunately, I was well prepared for this type of situation. The first thing I did was crack open the book on identity theft. This was something I had read a year or two before, so I knew that it had a section on what to do if someone stole your identity. The most important thing that you need to do if your identity is stolen is to contact one of the three major credit agencies and have a fraud alert put on your account. A fraud alert makes it more difficult to open new credit accounts for 90 days. This may be an inconvenience for you, but it will stop whoever stole your identity dead in their tracks. The major credit agencies can be contacted at:
You only need to contact one of the three. Each is required to contact the others when you have a fraud alert added to your account. You’ll also be entitled to a free credit report. Most of the information on how to run your free credit report will come in the mail a while after the fraud alert is active. From there you’ll want to dispute anything that’s invalid.
I was lucky that I ended up catching all of this early. The phone call from Capital One was a blessing. What would have happened had I not received that phone call and been able to act immediately? I shudder to even think of what could have happened. There are, however, very good ways to protect yourself. Experts recommend regularly checking your credit report. We are all entitled to a free credit report every year, and there’s no reason not to take advantage of that. In fact, you can be more proactive by staggering your checks between the various credit agencies. Instead of checking all 3 one time a year, check 1 every 4 months.
To get your credit report, you’ll want to go to annualcreditreport.com. This site will allow you to obtain your report from all three credit agencies at once, but it also keeps you away from some of the scams that may end up charging you for the report or some extra service. (This is free, remember? There’s no point at which you should sign up to pay for anything.) Keep yourself on schedule by setting up a reminder to check your credit once every 4 months and rotate through the three agencies. If you’re vigilant, you will catch fraudulent activity early enough that no damage will be done. In fact, had I never received that call from Capital One, my next planned credit check was within 30 days, so I would have discovered that something was wrong very quickly.
Identity theft is a very common problem, and there is certainly room for improvement in the credit reporting system. For now, we need to deal with things as they stand. Understanding the system and what you can do as an individual will allow you to keep your identity and financial future safe. Best of luck!
P.S. Now that you’re finished reading this article, it’s as good a time as any to run your credit report :)
30 May 2012
Student debt in the U.S. surpassed $1 trillion dollars this year, and the cost of college is increasing on an average of 8% every year. Let’s face it: college isn’t cheap, and it’s not getting cheaper anytime soon. For most middle class Americans, that means loans, loans, and more loans. With the average price for four years of public, in-state, higher education (including tuition, food, books, room and board, and frugal living expenses) coming in at about $138,000 in 2012, the vast majority of students and their families are in a lot of debt. Oh, and did I mention the student debt in the U.S has surpassed $1 trillion? Yeah.
In light of these facts, I wanted to share what I have learned managing my own student debt. I was fortunate enough to have the privilege of receiving financial aid through a private grant, which covered most of my (quite expensive) tuition. In addition to tuition, there was room and board, books, food, clothes, and more. It added up, even with a frugal budget and financially responsible lifestyle. In the end, I graduated with a significant amount of debt. I remember going into the senior financial aid office session on student debt management right before leaving campus for good. The goal of the 30 minute talk was to prepare students for handling their debt before heading out into the real world. The session informed us that we could “defer” our loans or put them on “forbearance” if we ever got into deep financial trouble. Outside of that the advice was to start paying right away and never miss payments. Easier said than done!
Deferment and forbearance are basically ways of temporarily placing your loan payments on hold. With deferment, you either need to be going into the military, US government services, or be unemployed. If you fit the criteria, your loan payments will be on hold without accruing interest in the meantime. Forbearance is the next best option, also placing your loans on hold, but with continually accruing interest. There a few caveats here, though. First, you can’t use these financial tools indefinitely. In most cases it’s 6-12 months and then you’re back on the hook. Second, you have to be very careful about your loan terms and how they may change after coming out of deferment or forbearance. The bank or lender can essentially re-organize your loans so that it looks like your payments haven’t changed, but it may take years longer to get them paid off. It’s basically a way to trick you into thinking you have the same deal when really you are being penalized. I’ve also heard of lenders upping your interest rate after this period which significantly impacts the total amount you will pay over time.
Assuming you are one of the 90% of recent graduates who have a job, though, there are still a lot of aspects to managing student debt that can be quite confusing. Banks like to talk about student loan consolidation and how that will help you to pay less. Well can it? It depends. Loan consolidation is when you take several loans with different interest rates and payment terms, and lump then into one loan with only one interest rate and payment to worry about. Most experts recommend that you only consolidate loans if you are having trouble making the payments. While loan consolidation is often portrayed as a magical fairy that dashes it’s wand and decreases your interest rates, it’s not always the right choice. Consolidation may be right for you if you need to lower your interest rate and/or payment amount and don’t mind extending your payment period. This is helpful in instances where you can’t meet your monthly payments (you can afford $150 a month instead of $300, for example). However, make sure you are aware of how much interest you will be paying over the lifetime of your new consolidated loan, it’s often more than the original loans when you look at the big picture. Also, federal loans, which make up a good portion of student loans, can no longer be consolidated.
How have I managed student debt that I have? Well, I was fortunate enough to find employment after school, so I have been able to make my payments. I have paid the various loans through their (horrendous) websites, and that’s what I still do. Other people I know have placed their loans on deferment or forbearance while looking for jobs. This helped them out significantly at the time, but they are going to be paying for that “free pass” with higher interest rates and longer re-payment periods. There’s no such thing as “no strings attached” with student loans. If you find otherwise, please do let me know!
So to all the recent grads out there reading this, I hope it has been somewhat helpful in breaking down the student debt that never ends. Maybe one day soon, we will start to see a trend toward more affordable higher education in this country, but until that time, be smart about your loans and pay them off as soon as you can!
Oh right, and the most important question: Was college worth it? Yes, I think it was.
More Good Reads on Student Debt Management:
Deferment and Forbearance: http://www.direct.ed.gov/postpone.html
AmeriCorps and Student Loan Benefits: http://www.americorps.gov/for_individuals/benefits/benefits_ed_award_repayment.asp
27 February 2012
Banks use a lot of acronyms. Sometimes those acronyms appear overly similar to the non-bankers of the world. Today we’re going to break down two common acronyms used for interest rates: APR and APY. These two acronyms are plastered on ads from checking accounts to auto loans. It’s easy to understand that they’re referring to interest rates, but what do they really mean?
Let’s start with what each stands for. APR is short for Annual Percentage Rate. APY stands for Annual Percentage Yield. These definitions don’t reveal much more about their underlying meaning. We’ll need to delve into some more detail before the differences start to emerge.
One common piece of wisdom is that APR is used by banks when they are lending you money. If you use a credit card, buy a car, or get a mortgage, chances are you’ll be comparing APRs. APY, on the other hand, is used when you receive interest on the money in your bank accounts. This base understanding can go a long way in understanding the two. Basically, financial institutions will quote the interest rate that is more advantageous to them in either case. They’ll want you to think you’re paying less interest when borrowing money, and receiving more interest when depositing money.
To really understand this, we need to look at each term individually. Let’s start with APR. APR is an estimation of the interest that you will pay that does account for fees, but does not account for compounding on that interest. The use of APR is regulated in the US and the UK as well as other jurisdictions. These regulations ensure that consumers have a good way of evaluating their options. Let’s examine a hypothetical loan to help our understanding. Say you need to borrow $1000. You go to your local bank and they say they’ll charge you 7% interest annually. Since there are no extra fees, and APR doesn’t include compounding, this results in an APR of 7%. Simple enough. But what if they charge you $20 to set up the loan? The APR would then increase to 10.7% (this calculation of this is better left to calculators). If there is compounding on the loan, it won’t be reflected in the APR, so you’d end up paying a little more than this rate. However, knowing the APR certainly helps compare the terms of different loans on an even playing field.
Now let’s jump over to the APY side of things. APY does not take fees into account, but does account for compounding of interest. APY is mostly used in the US for rates quoted to depositors. Let’s look at another example. Say you deposited $1,000 into your bank account that pays 4% interest. If your bank does not compound the interest it pays you, you’ll have $1,040 at the end of the year. This means you’ll have gained exactly 4% interest on the money you deposited. This would be an APY of 4%. With monthly compounding, however, your account balance would be $1,040.74. Since APY accounts for compounding, the new APY would be a 4.07%.
Now that we understand both APY and APR, we can compare them a bit. Assuming your bank doesn’t charge you fees, both of the previous scenarios would result in a 4% APR. It’s easy to see why the bank chooses to tell you the APY when you deposit money with them. It’s a little higher. And who doesn’t like the idea of earning a little more interest? In reality, even if someone understands that the APY is higher, they will often make quick judgements based on which number is larger. This is what the banks are expecting. Would you rather have 4% APR or 4.02% APY? The APY appears higher since the number is bigger, but the interest earned off of it may not be. If the interest is compounded monthly, the APR would not show your gains from it. So with monthly compounding the 4% APR would be equivalent to 4.07% APY (making it better than the 4.02% APY).
All this understanding is very helpful, but are you going to have to pull out a calculator to figure out if you’re getting a good deal? Fortunately, APR and APY are almost always used in the same circumstances. APR for lending. APY for deposits. This allows us to keep our calculators safely stored somewhere collecting dust. Having gotten to the heart of what APR and APY really are, though, you’ll never have to wonder what the difference is again.
10 February 2012
Do you remember interviewing for your first full time salaried job? The HR department likely emailed you a link for learning about their 401(k) and company matching benefits. You re-read the page three times trying to understand just exactly what it is you were being offered and how in the heck it would work. You might have asked yourself questions like “Will I actually be compensated more if I go with the company that has 100% matching up to 5%, or is 50% up to 10% better?” or “Where does my money go and when will it be coming back?” It’s quite complicated, and for a first timer, the mysterious 401(k) can be darn right overwhelming. But it has an enormous effect on your personal financial strategy and, therefore, it’s important for you to understand the benefits. So let’s get down to it.
So, what is a 401(k) exactly?
In a nutshell, a 401(k) is an investment product in which you can put away a percentage of your salary for your future retirement. At the time of your retirement, you have access to that money, plus any return that it has earned. The portfolio is typically managed by a firm that specializes in investing people’s money for retirement. It’s held by your employer, and is composed of your retirement as well as that of your co-workers.
Why not just put my retirement money into a savings account?
There are several important benefits to contributing to your 401(k) instead of managing your retirement savings on your own:
Free money! Most employers will “match” some of the money that you choose to take from your paycheck and contribute to your 401(k) for you. (More on matching in a minute.)
It saves you from yourself! You cannot take money out once it goes in until you actually retire - with a few exceptions. You can make a withdrawal if you experience financial hardship, need help putting money down on your first mortgage, and a few other exceptional circumstances that you can read about here.
It matures as you do! You can tailor your savings so that they are more risky and therefore potentially earn a lot higher return while you are still young and far away from retirement. As you near retirement, you can move into safer, lower risk options.
How does matching work?
Many employers will match some of the money that you choose to contribute, essentially giving you more money to put towards retirement. This is typically a certain percentage of what you have contributed, and has a cap. So for instance, if your employer says that they match 100% up to 5%, this means that they will match 100% of what you choose to put into your 401(k), up until reaching 5% of your salary. It’s free money, just for being diligent and investing in your own future. Sweet!
Now let’s throw in a kink…
There are two different ways that a 401(k) can be setup to withhold money. Pre-tax and post-tax. What does this mean? In the pre-tax scenario, you aren’t taxed on the money you put into your 401(k) today, but when you go to cash out at retirement, you will be. The post-tax works the opposite way. When you put money in today, you will be taxed and then what you see in your account at retirement is what you get. This is called a Roth 401(k) and is an option that your employer has when setting up the fund. If you have a preference for investing pre or post tax, and your 401(k) isn’t set up that way, you can always consider an IRA.
There’s no right or wrong answer as to which method is better. With the pre-tax option, you are taking a gamble that your tax rates will be lower than they are today. With the post tax option, you’re assuming your tax rate today is greater than what it will be at the time you retire. Consult a financial advisor if you’d like, but my personal opinion is it’s anyone’s guess.
So there you have it.
It’s up to you whether or not you want to take advantage of your company’s 401(k). With any investment portfolio there’s always risk involved but it’s an extremely worthwhile way to plan for your future. Hopefully now you have a bit better understanding of this mysterious phenomenon that is the 401(k). The sooner you start saving, the more you will be able to earn, so you should start saving towards your retirement as soon as you are able. If your company has a 401(k), and especially if it has a matching policy, it’s a great opportunity that you should not pass up!
12 January 2012
When I was a kid, my parents taught me that a bank was a place that held your money for you — kept it safe. There’d be no need to worry if your money was in the bank, but if it was under your mattress, someone could take it. I still remember the experience of opening my first bank account. The branch was right across the street from my house. I was a big saver, so I took everything that I had out of my piggy bank to deposit. I didn’t even know how much money I had because a lot of it was in quarters and other coins. We had to roll money at the branch in order to find out that I had a little over a hundred dollars to deposit. Wow, I thought, I have a hundred dollars! Plus, my money is safe!
Years later, what I’ve learned is that banks aren’t really a place to keep your money safe. Or at least, not in the way that I thought of it as a kid. I thought, once the money goes in, it’s there until I take it out. The truth is that the bank might take money out and keep it for themselves. That’s right, banks charge you fees. Banks are just businesses that want to make their own money, and in my country, the United States, they take that idea to heart. Some banks (especially the big ones) have a fee for just about everything. They even charge you monthly just to have an account.
This is preposterous! This isn’t how a bank should work. They should hold on to my money, and keep it safe until I take it out. Why? Well, because I understand how a bank works. They hold deposits from thousands of people. It adds up to a lot of money, so they can safely lend some of that out. What they lend out, they charge borrowers interest on. And hey, if that interest is more than they pay me in interest, then they make money. That’s how it used to work, but somewhere along the line things started to change and fees began to become a major source of revenue for banks. So they keep adding more fees.
Let’s see what sort of fees banks have currently:
- ATM fees
- Monthly ‘maintenance’ fees (frequently waived if you have a minimum balance)
- Fees after a certain number of transactions
- Transfer fees
- Online banking fees
- Currency exchange fees
- Overdraft fees (laws have started to change the impact of overdraft fees)
These are only some of the common fees that banks are charging customers.
I’m here to tell you that you don’t need to pay fees. Your bank should be on your side, and it shouldn’t be something that they just say in their marketing materials. I know that there are banks out there that allow you to avoid all of these fees. I know because I use one. Banks without fees tend to fall into some sort of niche. Maybe one day we’ll see major banks back off on fees, but for now, the major banks pitch themselves as caring in their advertisements; you’ll see all sorts of ads out there telling you that they do everything for you. You need to read the fine print, though. Then you’ll find the fees. If you look a little harder and ask around, you’ll be able to find a bank that really is working on your behalf. I found my current bank through a recommendation from a friend. Here’s some of my recent banking activity that I’ve done sans fees:
- Withdrawn money from an ATM (they reimburse ATM fees for me)
- Transferred money from an account at a different bank
- Automatically downloaded my transactions to Koku
- Bought stuff and withdrew cash in Europe
I haven’t overdrawn my checking account, but I’ve been told that they’ll just pull from any cash you have in your brokerage account with them. They truly care about their customers.
I live with no fees. You should too.