Personal Finance

Since the Wall Street meltdown and the Great Recession, Americans have been trying hard to watch their dollars. We’ve been trying to pay down debt, save more, and live more frugally. Many of us have realized that the free-spending ways of the past don’t work in the new decade.

In this chapter, I’ll show you how to track your spending, saving, and debt online with free tools; how to handle your investments yourself; and how to boost your credit score, including why you should use your “back of the wallet” credit cards at least twice a year.

BANKS AND BUDGETING

Triage your finances

When you get into financial trouble, who do you pay first? Human nature dictates that people will pay the person who screams the loudest. That often means we pay our credit cards and skip the mortgage payment. Bad move.

Credit card debt is unsecured, meaning there’s not much a lender can do to you if you don’t pay—other than ruin your credit. Debtor’s prison is very rare in the United States.

That’s why the banks that control the majority of credit cards in the United States use bully psychology to force you into paying up. Mortgage lenders, on the other hand, can take your house away from you if you don’t pay up. So they’re typically very nonconfrontational when you don’t pay because they’re the ones who can actually hold your feet to the fire by doing something tangible.

I want you to start thinking about your finances like you would a triage room at a hospital. In the emergency room, the staff determines who has a life-threatening situation like a bullet wound, who has a fractured bone, and who is just there for a headache. Obviously, the wound victim will be seen immediately while the guy with the headache is likely to be all but ignored until after everybody else is seen. That’s how I want you to prioritize your monthly bills.

Basic grocery expenses should always come first. You’ve got to eat, right? That should be followed by your transportation bill or car loan so you can get to work and keep earning. I used to tell people that paying your mortgage or rent was the highest priority. But nowadays paying your car note might actually be a higher priority than your housing debt. After all, most Americans need a car to get to job interviews. And if your situation is really desperate, you might need to live with friends or relatives until you can get back on your feet—in which case you’ll have few or no housing expenses.

After you take care of those basics each month, I want you to drop your credit card debt a few notches down the totem pole and ignore the lenders if you don’t have enough money to go around. People immediately say, “Well, I’ll ruin my credit if I do that.” But if you don’t have enough money to pay your mortgage or car loan, chances are your credit is already being messed up.

If your wallet is still ailing after triaging your finances, you might need to seek free or low-cost debt counseling. Read the tip “Get Free Credit Counseling” (see page 185) for details on that.

A CLARK FAVORITE
Track your finances online with free budgeting tools
One of the most frequent complaints I hear from people is that they have no idea where their money goes each pay period. There’s such a sense of powerlessness in that statement. I have several free tools to share with you that will help you gain control of your wallet again.
In another age, I recommended the old-fashioned envelope method or the notebook method of keeping track of your expenses. But it’s much harder now to keep track of balances with the ATM, checks, auto-drafts, debit card transactions, and more all clearing at different times.
Banking has gone from being linear to something that moves in so many different directions that it’s easy to lose control. Because almost everything we do today is online, it’s only natural that the Internet offers a way to help you gain control over your spending.
One of the best free online budgeting tools I’ve found is Mint.com. You register all your financial accounts with them anonymously, without using your name or other personally identifiable info. It’s a “read-only” service, as their website explains, and no money transfers are allowed via Mint—either in or out.
Once you’ve signed up, Mint uses artificial intelligence software to analyze where your money goes on a daily basis. In addition to tracking your spending, the service will also send you simple reminders when your bills are due. One of my credit card bills got lost in the mail, but Mint reminded me it was due, so I didn’t have to pay a late fee.
My executive radio producer, Christa DiBiase, likes the automated reminder from Mint that tells her if she’s approaching the limits of her monthly budget for groceries or entertainment. Mint allows Christa to then review her monthly spending and see exactly where her money has disappeared.
There are other Mint competitors that I’ve been playing around with, ClearCheckBook.com and Yodlee.com. JustThrive.com is another site that seems to target the twentysomething crowd and should appeal to people who like social networking.
People always ask me about safety concerns with these online budgeting tools that require access to your accounts. All these sites say they’re safe for you to use. But are they really? Well, I’m willing to take the chance because I believe the greater risk here is the one posed by uncontrolled spending.
I use a trick that I believe that I adapted from Clark, but I’ve been a listener for so long that it’s possible that I just created it based on Clark’s “budgeting brain” leaking into mine.
Trick: I don’t use a debit card, but use a point-earning credit card, almost exclusively. I then record it in my electronic check register with a code of CCHOLD and deduct it as IF I wrote a check. Then, when the credit card bill arrives, I simply add back in the held balance and I have all the money I need to pay the credit card bill. I haven’t paid interest in a decade using this approach and I have a clear idea of how much available cash I have without letting credit card purchases get in the way of my budget.
Plus, I get the points, which I’m saving for an anniversary trip to Ireland! My family is never surprised when I bark, “Clark Says . . . ”!
Beverlee A., FL

Find the best CD rates online

Throughout the beginning of this decade, CD rates were looking anemic across the nation. At one point, the national average was just a little north of a measly 1 percent! But there are a number of smaller banks, credit unions, and some wholly unusual sources that offer rates above the norm.

How do you find these deals? Many of the best ones are at community banks and credit unions in your hometown. Look on billboards or signs when you’re driving around. So long as the bank is FDIC insured (or NCUA insured for credit unions), your money is protected up to $250,000.

If you want to cast the net a little wider, Bankrate.com is one of the best national clearinghouses I know for rates. Once you establish what Bankrate.com says is the best national average, I’d like you to go one better (hopefully) and put your business into an online auction marketplace where small banks will compete for it. That service is available for free at MoneyAisle.com.

At MoneyAisle.com, you simply pop in your deposit amount, pick a CD duration, and enter your state and zip code. Then banks and credit unions start bidding for your business online and in real time. The bidding process takes about sixty seconds or less, and you can watch the competitors driving up your interest rate right before your eyes!

CD rates are sure to go up from here, but no one knows exactly when. It could be in the very near future or it could be further down the road. That’s why I recommend laddering your CDs. The easiest way to do that is to split your money into three piles—a money-market or savings account, a one-year CD, and a five-year CD.

A more sophisticated laddering approach would involve a six-tier setup. Splitting your money into six even piles, you’d have the following setup: a money-market or savings account, then a one-year CD, two-year CD, three-year CD, four-year CD, and five-year CD.

Taking the latter example, when your one-year CD comes due, you have that money available to take advantage of a better rate—if there is one. Ditto for your two-year CD when it comes due, your three-year CD, and so on. This way you don’t lock all your money into a lengthy CD if rates go up in the near future, and you’ll still be earning the rates you lock in today in the very unlikely event that they go slightly lower down the road.

Lend or borrow money without banks through P2P online lending

What do you do if you need money but want to avoid borrowing from the banks? In the past, I’ve always recommended credit unions. But now there are even more options available thanks to what’s called peer-to-peer (P2P) lending.

In P2P lending, individuals willing to take the risk will lend their money to others online—once a potential borrower’s credit standing is carefully vetted. The best P2P websites incorporate elements of social networking (users create their own pages detailing why they need the money and upload photos of themselves) and elements of an online auction (borrowers advertise how much interest they’re willing to pay).

A single borrower will typically get little slices and dices of cash from multiple lenders online. That helps lower an individual lender’s risk in the case of default. The P2P sites make their money by charging a loan origination fee and taking a small cut for loan administration, which includes pursuing collections if need be.

Before I go any further, I want to underscore the possible risk here for lenders. Some of these sites have high failure rates and might be gone by the time you read this. But others will surely take their place; this idea isn’t going to go away!

Prosper.com was one of the earliest P2P lenders to gain traction in the marketplace. After some early trouble, Prosper now claims nearly one million members and nearly $200 million in loan funding at the time of this writing. Barron’s reports the site has a 5 percent default rate among borrowers.

LendingClub.com has a 3 percent default rate, meanwhile, but turns down 90 percent of potential borrowers in an effort to cull the herd and find the most creditworthy.

This all begs the question: Why would anyone go the P2P route if they’re creditworthy? Generally, you can get a better deal with a P2P lender versus a bank. Yet it’s roughly equivalent to the kind of deal you’d get at a credit union.

The returns you might get as a lender can be enticing. Prosper.com says their average lender earns 7 percent on his money, net after expenses and charge-offs. But those who are really into this virtual underwriting boast that they can make a 12 percent return.

My advice? Be skeptical and do your research if you want to get involved. There are already blogs and message boards dedicated to P2P lending. Study them and be sure to know your risk. There will always be people trying to clean up a mess in their life with somebody else’s money.

Don’t exceed FDIC limits on your bank deposits

During 2009 and 2010, nearly three hundred banks failed and were taken over by the Federal Deposit Insurance Corporation (FDIC). That hurt a lot of people who had money on deposit in excess of current FDIC protections.

The FDIC guarantees that any money on deposit in an FDIC-insured account will be repaid even if the bank fails, as long as the amount doesn’t exceed $250,000. Back in 2008, before the big wave of bank failures, the FDIC limit was $100,000.

One of the earliest bank failures of the Great Recession was IndyMac, which had $541 million in uninsured deposits at the time of failure. That’s $541 million that went up in smoke and there’s been no way for ruined customers to get it back.

During our last rash of bank collapses in the 1980s, approximately 8 to 12 percent of the money was uninsured. Today that figure has ballooned to nearly 40 percent—especially among organizations, nonprofits, and small businesses.

The reality is that a large number of banks will continue to go insolvent during the next couple of years. Many will be invisibly absorbed or merged into larger banks. Customers will be fine as long as they don’t exceed the FDIC limit.

Though FDIC insurance is available on deposits up to $250,000, I advise people to put no more than $225,000 in a single account. That way you don’t forfeit a penny of interest in the event of a bank failure.

If you have multiple accounts at one institution that are all titled differently for ownership, don’t just assume each one is protected. You can find out for certain at FDIC.gov by using the Electronic Deposit Insurance Estimator (EDIE) at FDIC.gov/EDIE.

Meanwhile, in the world of credit unions, the National Credit Union Administration has an insurance fund that protects deposits at the same limits as the FDIC. But be aware that in some instances, certain credit unions might be covered only by a state guaranty pool. Check with NCUA.gov to determine coverage.

If you do have a lot of money to keep on deposit—and I mean a lot—I suggest using the Certificate of Deposit Account Registry Service (CDARS). With CDARS, you can put in up to $50 million and it will be spread around to multiple financial institutions in FDIC-protected CDs so that no one account exceeds the traditional $250,000 protection limit. Obviously this is a very good problem to have! Visit CDARS.com for more info on the program.

Never give out your checking account info

Toward the end of the last decade, the Federal Trade Commission announced the largest ever bust of telemarketers as part of its “Operation Tele-PHONEY.”

Here’s the scoop: Scammers were trying to sell people all kinds of things over the phone, from advance-fee loans to big savings on prescriptions, from magazine subscriptions to household products for seniors. Though there were many independent telemarketers, the common thread here was that they all sought to get your checking account information. Once they had it, they would bill you and try to empty out your account.

The banking industry continues to have zero security in place for drafts on your account. A legitimate person trying to cash a hard-copy check will be put through the ringer at a bank if they’re a noncustomer—including being asked to provide a fingerprint in addition to two proofs of identification.

But if you just have an account number and make an electronic draft, they’ll pay it with no questions asked. This is a true Achilles’ heel that can easily be exploited by criminals.

The takeaway here is simple: Never give out your check routing number over the phone or on the Web. If you’re dealing with a collection agency, consider paying by money order rather than by check. You might pay a nominal fee to do so, but this is the only truly safe way to settle your debt.

Suspend automatic drafts from your account

Too often, I talk to people who have allowed a company to automatically deduct money from their checking or savings account each month. It could be a utility company, a health club, a mortgage lender, a cable provider, a cell provider, or any other business.

That business might continue to make monthly Automated Clearing House (ACH) debits from your account once your contract with them ends. Giving authorization to regularly draft an account is an open-ended arrangement, regardless of your contract. And getting that money back can be a grueling process. The problem with ACH payments is that there are no consumer protection statutes governing what happens if you’re cheated on purpose or in error.

The New York Times reported the story of one consumer who had a real nightmare with a car loan. The note was paid in full, yet the loan servicer continued to take monthly payments! The customer’s own bank was no help and it was a fight every month to get the money back.

Another recent report I saw in the Chicago Tribune detailed how a health club franchise that had fallen on hard times was tapping into the accounts of former members in order to keep its doors open. One woman reported her checking account was raided on three occasions for a total of $117—this despite the fact that she hadn’t been a member in more than five years!

The gym’s parent organization said they wouldn’t take responsibility for the actions of a franchise. In fact, I’ve heard more complaints about the health club industry than any other when it comes to these wrongful automatic drafts.

So what’s the solution? I have two for you actually. First, use electronic bill pay that you set up so you can shut it down anytime you want. That’s the distinction between e-bill pay and traditional ACH payments. The former you control, the latter is out of your control.

Second, if you’re already finding your account being dinged every month without your permission, you can write your bank and tell it to stop unauthorized drafts. (You’ll want to be sure you’ve already canceled the account in writing with the offending business, of course.) The Federal Reserve has special rules governing preauthorized transfers.

If you need to write your bank about this, I suggest you send the following simple three-paragraph letter by certified mail, return receipt requested:

“I am writing to request that you stop [insert company’s name] from making future automatic withdrawals from my checking account. These charges are unauthorized. I canceled my contract in writing with [insert company’s name] on [list the date of cancellation].

“The Federal Reserve’s rules governing preauthorized transfers (part of Regulation E) state the following: ‘Once a financial institution has been notified that the customer’s authorization is no longer valid, it must block all future payments for the particular debit transmitted by the designated payee-originator.’

“I would appreciate your immediate compliance with this federal law. Please contact me if you have any further questions.”

Upon receipt of this letter, the bank has ten business days to give you back the money that was wrongfully taken from your account, give you a provisional credit, or deny your request (I don’t see why they would). So the bank effectively becomes liable for refunding your money. It may not want to, but now you have the form letter to hold the bank’s feet to the fire!

There’s a larger problem here, of course: The rules on drafting accounts are set up for the benefit of businesses with zero consumer protections.

So if you sign up with a new company, be sure to give only your credit card number. That way you can dispute any bogus zombie transactions it might try to pull. Look through your bank statements and discontinue any automatic drafts that come out of your savings or checking accounts.

File a complaint against your bank

When monster mega-banks misbehave, the average person will just sit there and take it. That’s not the right response! You should really fire your bank if it can’t resolve an outstanding problem, and take your business to a credit union or small community bank.

Many big banks seem to pride themselves on customer no-service. Well, after you’ve given them a chance to do what’s right and they still haven’t done it, you have one final recourse: You can file a complaint with the Office of the Comptroller of the Currency, which charters and disciplines all of the nation’s banks. Visit OCC.gov and click on “Consumer Complaints” to get started. It’s a six-page form and the OCC makes it very user friendly.

I’ve found that once you register your complaint at OCC.gov, it’s helpful to go back to the bank and explain what you’ve done. The banks will usually start falling all over themselves to help you at this point instead of trying to ignore you. That’s the power of complaining to the right entity!

When the new Consumer Financial Protection Bureau created by President Obama’s financial overhaul law gets up and running, it will likely be the one to handle complaints against banks. But keep using OCC.gov until further notice.

I thank you for directing me to the Office of the Comptroller of the Currency in the U.S. Treasury Department. I had them contact my bank after I tried for 24 months to correct an error they made in not crediting a $30 payment to my account.
This escalated to $270 in late fees that I refused to pay and, after a dozen letters and faxes, they sold the account to a collection agency. They reported to the credit rating agencies that I was delinquent.
The OCC got the matter cleared up in 14 days! The bank sent me a letter confirming that the $30 was never properly credited to my account, but they did not apologize for trying to ruin my credit or making a mistake.
I have canceled the card and will never use anything connected with the bank or recommend them to anyone.
I wrote the collection agency and sent them a copy of the letter and told them never to contact me again regarding this matter or I would report them to Washington!
Mace F., CA

CREDIT CARDS AND CREDIT USE

A CLARK FAVORITE
Get a free approximation of your credit score
So often when I’m talking to someone, they’ll tell me what their credit score is. Immediately, I come back with something that makes them get that glazed look in their eyes: “Which credit score are you talking about?” No one knows there are about a gazillion different credit scores out there. But there’s only a single “real” one that’s used by most lenders.
Your true credit score is a number between 350 and 850 that evaluates your risk as a borrower. The FICO people (formerly known as Fair Isaac Corporation) are the one and only source for your true credit score—known simply as your FICO score.
A score of above 700 on the FICO scale is like getting a B+ in school. Anyone with a FICO score of 760–850 is an A student, or what’s called “golden” in the industry, which means you’re a very safe credit risk for a lender.
To complicate things, you have a FICO score with Equifax, a separate one with Experian, and another one with TransUnion! Each bureau’s score will vary slightly because of differences in the way they compile information on you. However, they’ll all be similar in range.
The credit score most used by lenders is the Equifax FICO score. You can purchase your Equifax FICO score for $7.95 by calling 1-877-SCORE-11. I recommend doing this if you’re about to apply for a serious loan like a mortgage or a car note.
But if you’re the kind of person who just wants to keep a general tab on your credit, I recommend getting a free non-FICO score that’s available instantly online. I know of three main outlets for this: Credit.com, CreditKarma.com, and Quizzle.com.
Credit.com gives you a “report card” based on your TransUnion score once a month. It includes a letter grade and a number that roughly equates to your true FICO score. CreditKarma.com will give a score based on your TransUnion report once daily. And Quizzle.com will give you a score based on your Experian report twice a year. Again, these are all approximations of your true FICO, not the real deal.
Each of these free services will try to up-sell you on a variety of additional services. That’s how they make their money and can offer their services for free. Be sure to read the terms of use closely on each site if you have privacy concerns. By using these services, you’re allowing them to contact you—even if you’re on the federal government’s “do not call” list. But there’s no obligation to buy anything ever to get your free non-FICO score.
CLARK’S GREATEST HITS
Get free credit reports at the one legitimate site
When is the last time you checked your credit report? Some people never do. And as it usually turns out, those are the ones who could become susceptible to deceptive loan tactics.
For example, let’s say you’re at a car dealership. When it comes time to talk financing, the salesman might put on a big show during which he or she says how difficult it was to get you financing, but that they finally found a lender who will write your loan at 14 percent. But all along you had great credit and could have found yourself a loan elsewhere at 4 percent—if you’d only checked your credit!
Each of the three main credit bureaus—Equifax, Experian, and TransUnion—maintains a credit file on you. You have a right under federal law to see each of your three credit files once a year for free. The federally sanctioned site for this is AnnualCreditReport.com. It is the only truly free website to check your credit report. The same service is also available over the phone for free by calling 877-322-8228.
Longtime listeners of my show might think this news is old hat, but I still get tons of calls from those who were taken in by the other (not so) “free” credit report sites. You know the ones I’m talking about—with the catchy jingle and the promise of a free credit report. The catch is that you enroll in a subscription service to have your credit monitored at a price of up to $200 annually. The public has been so deceived by these ads, particularly those put out by FreeCreditReport.com.
I want you to check your report periodically through AnnualCreditReport.com. I suggest you make a note on your calendar to check one of the three credit files every four months, like clockwork. If that’s not realistic, at least make sure to pull all three at once, once a year. You might find it very illuminating: You’ll learn how often you make late payments, which issues are aging off (most credit issues stay on your report for a maximum of seven years), and more. All of this will help you get your finances in better order and possibly eliminate credit problems down the road!

Pay your bills on time to boost your credit score

To get your credit healthy again, you’ve got to actively manage and manipulate your credit. Yes, that’s right, I said “manipulate.” This is the kind of instance where manipulation does not have a negative connotation!

Everybody wants to have a good credit score. Fortunately, the keys to making the grade are relatively simple. When you consider that credit scores remain central to getting good rates on insurance, on a mortgage, and on future credit and could even cause you to be turned down for a job offer, well, I think it’s one of the simplest and most effective things you can tweak in your life.

One big thing you can do to improve your credit score is to pay your bills on time. Even if you have some late pays on your report, just focus on paying your current bills on time. Making timely payments accounts for about 35 percent of your overall score, and the most recent bills count more. If you remember anything from reading this book, remember this one! This is the single most important rule for having a good credit score.

I started listening to Coach Clark about four years ago. (I call him Coach because he IS my financial coach.) In general, I had no interest in finances or credit before I started listening. In fact, I didn’t even know what a credit score was. I guess I had always assumed banks and other lenders had access to information but they kept all of that under wraps.
On Clark’s advice, I decided to check my FICO score and see where I stood. To my dismay, my credit score was 386! So I developed a plan using Clark’s advice.
Clark always said that your payment history was one of the biggest factors in your credit score, so I began by simply paying my bills on time.
With the few collection accounts I had, I again took Clark’s advice and contacted the creditor and got all of those taken care of. I just took my time.
Clark always said that the late pays on a credit report hurt less and less as time goes by, so I just waited. I continued to pay all of my bills on time, got a secured credit card (again at Clark’s suggestion), didn’t use the card except two times a year, and waited.
After about 18 months or so, I noticed a dramatic increase to about 570. I continued to wait it out and after about 30 months applied for a mortgage. My credit score was 656 at that time, which was still good enough to qualify back then. Now, just four years later, I can look at my credit score and proudly say that I stand at 736 and rising!
Joe R., NC

Don’t use too much of your credit

In addition to paying your bills on time, you should aim to use less of your available credit.

If you have a credit card with a $10,000 limit and you have a balance of around $3,000, you’re using 30 percent of your available credit. You want to stay at or below that level.

Your credit utilization rate accounts for about 30 percent of your overall score. So if you pay your bills on time and don’t use too much of your available credit, you’re good to go, because those two factors account for 65 percent of your credit score.

Unfortunately, during the Great Recession many people found their credit limits inexplicably lowered at what seemed like the whim of the banks. So if your credit limit gets cut to $3,000 and you have a $3,000 outstanding balance, then suddenly you’re using 100 percent of your available credit. Lenders do not like maxed-out borrowers, so a change like this can be disastrous to your credit score.

This is yet another reason to pay down credit card debt as quickly as possible. Under the new credit card rules that went into effect in 2010, if you have multiple interest rates on a credit card (balance transfers, cash advances, etc.), anything you pay over the minimum balance will be applied to the highest rate first. But beware, if you pay only the minimum, the banks are still allowed to apply the money to the lowest rate first. I want you paying more than minimums each month!

At a time in my life when I was barely making $27,000 a year, I managed to accumulate $25,000 in credit card debt. The fear and shame and helplessness I felt kept me up at night. Were it not for Clark and his advice, I don’t know what I would have done.
Per Clark’s suggestion, I first tackled the credit card with the highest interest rate, even though it wasn’t the card with the highest balance.
Taking care of the former gave me a psychological boost more than anything. Because I had deprived a bank the ability to charge me more money in interest, I now felt confident taking on the other banks.
Best of all, once I got used to paying off my debt regularly (twice a month, not once—another of Clark’s suggestions), I found I could pay even more without breaking a sweat.
By the end of two years, I was so used to frugality, I was actually paying off most of my last months in debt.
I want to thank Clark for throwing me a lifeline. And I’m happy to report I have not been in debt since.
Kevin C., TX

Keep credit card accounts open if there’s no annual fee

When people dig themselves out of credit card debt, one of the first things they want to do is cut up all their cards and close out the accounts. I understand the sentiment, but don’t do it!

Closing existing accounts only reduces your available credit and drives your score down. Keeping the credit line open helps your credit score. Open lines of credit account for about 15 percent of your overall credit score.

You want to have four to six lines of credit in today’s economic climate. And as I note later in this chapter, you’ve got to do more than just have them hanging around; you’ve got to actively use them. Be sure to use all your cards twice a year—even if it’s just for a dollar store purchase or to grab some food on the go—and then pay them off right away online or when the bill comes in the mail. That will keep those cards active in your credit mix.

A lot of people have asked me what to do when facing a huge new annual fee on a card that has a zero balance. I suggest “leapfrogging.” That’s my term for using the forty-five-day window you have before any new terms of service go into effect to shop around for a better deal. So once you get a notice about a new annual fee, start looking around for other no-fee credit cards. Submit your applications, and once you get your new no-fee card, then go ahead and shut down the original one that wanted to spring a huge new fee on you.

By doing this, you’re replacing like with like and substituting new open lines of credit to keep your credit score healthy.

I always thought that closing credit card accounts was the best way to increase your FICO score. Boy, was I wrong!! I closed some of my accounts, thinking, “Wow, this will really help my credit rating.” I listen to Clark Howard every day and watch him on HLN on the weekend. When he advised to leave the credit card account open, I almost fell off of my seat!! I had it all backwards. Now I keep my account open, use it twice a year, and pay off the balance as soon as possible (another awesome tip from Clark).
In these days of tight credit, and credit card companies getting tough on their faithful customers, Clark not only saved me from a plummeting credit score, but also put me in a much better position. I am getting ready to send my daughter off to college this fall. Thanks to Clark’s wonderful advice, my credit rating was saved! Now I can focus on saving for my daughter’s education, not my credit score.
Frances B., FL

Find the best reward card for you

People with good credit get a lot of pitches for reward cards—those credit cards that promise cash back or gift points for every dollar you charge. But reward cards typically have higher interest rates and benefit only those who pay the bill in full each month.

If you carry a balance, however, having a reward card is like trying to collect fool’s gold. You’ll pay more in interest charges than you get back in benefits. Try instead to get a nonreward card with the lowest interest rate possible. Look at small community banks and credit unions for the best offers in this regard.

There’s also the question of airline mileage cards. My advice is to avoid these kinds of cards because it’s difficult to redeem miles and the airlines keep raising the number of miles you need to get a seat. The only exception to this might be a business owner or executive who has a high charge volume and travels often.

Right now, high-net-worth people with good credit scores (740–850 on the FICO scale) are receiving solicitations for cards with high annual fees and a lot of rewards. The fees might be anywhere from $200 to $500. Some offers from American Express have annual fees of $1,500. A card had better offer you amazing rewards to make that fee worthwhile!

CreditCardTuneUp.com can help you determine the best reward card for you. When you’re at the site, you can enter the amount you charge each month by category—restaurants, grocery stores, gas stations, airfare, hotels, vehicle rental, and more—and their system will crunch the numbers to see what the thirty most popular reward cards will give you during your first year of use. The site even converts rewards like points or mileage into a cash-back equivalent so you can do a straight apples-to-apples comparison across a variety of card offerings.

There’s a new competitor, NerdWallet.com, that I read about on The New York Times’ Bucks blog. NerdWallet.com uses a slightly different routine from CreditCardTuneUp to find the best card for you. I particularly like that if you know your credit score, you can enter it on NerdWallet.com and that will change your list of potential best cards.

I recommending using both CreditCardTuneUp and NerdWallet and comparing the results. If both sites find the same card(s) as the first, second, or third choice for you, that would be great independent validation. At any rate, it sure beats picking a card based on the fancy envelope that comes in the mail, as many people do. CreditCardTuneUp and NerdWallet give you a way to methodically and scientifically select the right credit card for you.

Use your “back of the wallet” cards twice a year

Many of us have what are called in the lingo of the credit card industry “back of the wallet” cards. Those are the cards you hardly ever use that might be buried somewhere in your wallet or in a drawer at home.

The typical American has about a dozen cards but uses only two of them frequently. The rest are ignored until they go dormant. In fact, you might not even activate a new card when you get it in the mail.

Banks used to just let a dormant account sit and hope you’d someday use the card again—but that was not how it played out during the recession. If an account went stale, the bank just closed that account. Unfortunately, that meant a double whammy for you; it hurt your credit score and it limited your access to funds.

To avoid having a dormant account closed, use your “back of the wallet” cards twice a year about six months apart. Charge a nominal amount and then pay it off. Mark it on a calendar if you have to in order to remember.

This is not just a silly assignment. You’ll be helping your credit score, which is very important in getting lower interest rates and future lines of credit and securing job offers.

Get free credit counseling

If you watch bad late-night TV, you’ve probably seen those ads being run by the debt-settlement outfits. Their promises scream out in the night about reducing your outstanding debt to just pennies on the dollar without making you file for bankruptcy—no matter how much outstanding debt you have.

That promise, however, is just an illusion. The debt-settlement firms’ typical modus operandi goes like this: You pay an up-front fee to them, plus a monthly retainer. They then tell you to stop paying on your bills, stash the money you would have used to pay bills into a bank account, and just sit on it. The idea is to make the credit card companies so desperate that they’ll cry uncle and want to settle with you at a reduced rate. The reality, however, is that too often you wind up just damaging your credit.

In the worst-case scenario, the more unsavory players in the debt-settlement business will take your up-front fee and first month’s retainer and then ignore you when you try to initiate further contact with them. Beware!

It’s so easy to want to believe that somebody has a magic bullet to solve all your problems. But that’s simply not the case.

So what do you do? Get in touch with the National Foundation for Credit Counseling (NFCC) at NFCC.org or call 1-800-388-2227 to find a local affiliate office near you. NFCC affiliates offer free or low-cost debt counseling. About one in three clients just needs some budgeting help to get their lives back on track. Beyond simple budgeting, the NFCC can also get you set up on a hardship debt-management plan (DMP) if you qualify.

In the case of a hardship DMP, lenders agree to modify the terms and conditions of their repayment policies. That means they might waive late and over-the-limit fees, in addition to reducing interest rates. They will not, however, agree to a reduction of your outstanding balance. But it could be worth a look if you meet the eligibility requirements. Get in touch with a local affiliate of the NFCC today to find out.

I was solicited by a credit consolidation company. It sounded like just what we needed to get our monthly bills down just a bit. I talked to him, gave him all my info and he told me how he could help. I called my wife very excited after I arranged a call back with the representative.
However, my wife, who watched Clark’s show, was suspicious and she had questions. The representative I spoke with wanted us to ignore creditors while our “deal” was being settled. My wife called several times with questions and kept saying, “Clark Howard says this isn’t a good idea, I know—I watched a show on it!” So she looked up your site, called the hot line and confirmed she was right. We told the man what we did when he called back and, boy, he turned nasty quick—he actually said we were going to hell.
Well, we won’t be going to hell for scamming anybody! And thanks to Clark we still have a credit score in the 780s. Our bills are still a little bit high, but our credit is safe!
Nathan & Misty L., MO

Send bill collectors a “drop dead letter”

While I acknowledge there are some decent, honest, hardworking bill collectors operating in the collections industry, I routinely trash their counterparts who break the law when trying to collect outstanding debts.

Before I go any further, let me say that I actually paid my way through grad school working as a bill collector. I did commercial collections for IBM and really enjoyed my work. I got to use my own style of getting to know the people at the organizations that owed my employer money. Basically, I used my naturally friendly personality to get debtors to pay up.

Later when I owned my own chain of travel agencies, I would dedicate Thursday mornings to showing up in person at the doors of people who owed me money. I was always respectful, and you know what? It worked. But many others in the collections business are not as respectful.

Too often, collectors play dirty pool—threatening jail or even telling children that their parents are going to the slammer because they can’t honor their debts. Both are practices that disgust me to no end. To say that to a child is just sadistic, and the reality is that the likelihood of going to debtor’s prison is rare in the United States . Be sure to record any abusive messages from collectors. If you think they’ve violated the law, contact your state attorney general’s office by visiting NAAG.org and the Federal Trade Commission at FTC.gov.

It’s usually the third-party companies who buy outstanding debts for pennies on the dollar that use these threatening tactics even though they’re illegal. But sometimes, even the banks can legitimately behave like creeps.

The banking industry’s powerful lobby won an exemption under the rules of the Fair Debt Collection Practices Act (FDCPA) that actually allows their in-house collectors to do anything to collect on a debt—short of harming you physically or threatening to do so. Fortunately, that’s the only exemption in the entire collections industry.

Everybody else is governed under the normal provisions of the FDCPA. So once you tell non–bank employee collectors to stop harassing you about an unpaid debt, they are required to do so. Now, they may not heed the law as it’s written; some collectors care about the law while others do not. But I say it’s worth a try to get them off your back.

You can do that by sending them a “drop dead letter” by certified mail, return receipt requested, that states the following: “I have been contacted by your company about a debt you allege I owe. I am instructing you not to contact me further in connection with this debt. Under the Fair Debt Collection Practices Act, a federal law, you may not contact me further once I have notified you not to do so.”

They can still sue you or ruin your credit even if you’ve restricted contact. And you still owe the money, of course. But a drop dead letter can be a way to get them to stop bugging you until you can get some funds together to honor your debt.

IDENTITY THEFT

CLARK’S GREATEST HITS
Freeze your credit to protect against identity theft
People often ask me if they should sign up for LifeLock or a similar service in order to avoid identity theft. If you’ve ever seen or heard a LifeLock ad, you know that CEO Todd Davis proudly announces his Social Security number—essentially challenging thieves to steal his identity. It’s brilliant marketing that’s won his company a lot of customers.
While Lifelock is completely legitimate and in no way a scam, I think you’re paying for false security. I have a better way to get the job done and it’s very low cost or might even be free for you.
First, though, a little background: LifeLock’s business model is based on offering a glorified monitoring service and putting fraud alerts on your credit files. These alerts are meant to raise a flag to potential creditors so they carefully verify an applicant’s identity before granting credit. Too often, however, the alerts are ignored and credit is granted anyway to thieves using your name.
So what’s my solution? It’s called a credit freeze and it’s one of the most effective tools against financial identity theft available to consumers today.
As you probably know, each of the three main credit bureaus maintains an active dossier on you that contains info about your payment history, lines of credit, and more. A credit freeze allows you to seal your credit reports with each bureau. It does not affect your current use of credit in any way.
When you do a freeze, you get a personal identification number (PIN) that only you know. That added layer of security means that crooks can’t establish new lines of credit in your name even if they are able to take over other elements of your identity—because they don’t have your secret PIN.
Then when you actually want to apply for a new line of credit, you simply use your PIN to temporarily “thaw” your files. That makes them accessible to the creditor who’s considering you as a customer.
The cost to freeze your credit ranges from free to $10 per bureau, depending on your state. When you multiply that by three credit bureaus, you could pay anywhere from nothing to $30 for a freeze. Victims of identity theft can get any fees waived, and seniors are often exempt from the fees in most states.
If you visit ClarkHoward.com and search the keyword “credit freeze,” you can link to a guide I’ve prepared that will give you the cost in your state. My guide also offers full details on how to get in touch with each of the bureaus to request your credit freeze.

Beware of the worst corporations for identity theft

Several years ago, the Berkeley Center for Law and Technology analyzed corporate America to see which companies have the highest incidence of identity theft. The top company? Bank of America.

Bank of America is the nation’s largest bank. By comparison, Citibank—another of the nation’s largest banks—had about one-third fewer incidences of identity theft than BOA, and it came in sixth, according to the Berkeley study!

AT&T occupies the second slot following BOA. After that, Sprint, JPMorgan Chase, and Capital One round out the top five. (You can view the complete list online at eScholarship .org by searching the keywords “Measuring Identity Theft at Top Banks.”)

So three of the top five are banks, which is understandable. But why are two phone companies way up there? It’s because they do a credit check when you apply for phone service. That opens you up as a potential target after they get hold of your info.

Now the inevitable question: Why do these institutions have high rates of identity theft? I believe it has to do with the way they handle your information internally.

Quite interestingly, the Berkeley study revealed that the bank with the lowest incidence of identity theft was ING DIRECT. You would think they’d be up at the top of the list since they’re an Internet-only institution with no branches in the United States. But being a newer entry to our banking market, ING DIRECT has been dealing with outsmarting identity thieves since it launched. It’s much tougher for a legacy financial institution to retroactively patch good protection into banking systems that were built decades ago before the computer age.

I’m not raising this info to make you overly fearful about the companies you do business with, nor do I want you to feel that your “safe” options are limited in the marketplace. In reality, identity theft has not grown significantly since it emerged. It continues to hold steady at about 10 million people a year, which is about 3 percent of the population of the United States. But it’s still a major issue, nonetheless.

As I explained earlier, a credit freeze is the best tool that’s available today to curtail your chances of economic identity theft.

Beware of bogus mobile apps for online banking

Online banking is shifting from computers to smartphones such as the iPhone and all the Android phones. Along with that transition comes the threat of bogus mobile applications and downloads that aren’t from legitimate sources.

As a member of USAA, I first heard about this threat from that esteemed institution. Apparently there was a phony USAA app floating around that mimicked the true app from USAA. Criminals have discovered this can be a lucrative way to get rich in a hurry by stealing other people’s money.

Meanwhile, Dow Jones has reported that there are dozens of phony sites offering apps for the Google phones, which run on the Android platform. Android is an open platform, meaning that people can post whatever apps they wish. Only after someone gets taken and files a formal complaint will the bad apps be removed.

Interestingly, the iPhone is on a closed system, but that hasn’t made it any safer when it comes to the threat of bogus mobile banking apps.

So is mobile banking on your smartphone a smart idea? The techie answer is yes, but be sure to download apps only directly from your bank, brokerage house, or mutual fund company’s website. Don’t trust Apple’s App Store or the Google Apps website.

Automatically send sensitive financial info to survivors

What happens to your accounts, usernames, and passwords when you die? An article I saw in Time magazine titled “How to Manage Your Online Life When You’re Dead” addresses this thoroughly modern dilemma.

A variety of new online services have popped up with solutions. Deathswitch.com is a service that repeatedly prompts you for your password to make sure you’re still living. You choose the frequency of the prompts, and it can be anywhere from a daily message to a once-a-year checkup. If you fail to reply to multiple prompts sent by DeathSwitch’s servers, their system will then e-blast out a message you’ve precomposed (containing usernames, passwords, special messages to loved ones, sensitive financial info, etc.) to let those you wish know of your demise! You’re in complete control of the digital “beneficiaries” who will get your message, and your communication can include videos, pictures, and documents, in addition to a simple e-mail message.

The service is free if you have only one message you need sent to one person upon your death. A premium subscription that allows up to thirty messages (and ten recipients per message) is $20 annually. Similar services (all with different price points) are available from AssetLock.net, LegacyLocker.com, MyWebWill.com, and WeRemember.org.

But what if you sign up with one of these services and it goes bust? What becomes of your sensitive info? There is no clear law in the United States to govern this at the time of this writing. Hopefully some protections will be put into place in the future. I should warn you that in similar instances, user info has sometimes been sold to make creditors whole!

Obviously, there’s no perfect solution yet. If you’re a brainiac, there’s a great business opportunity here helping people preplan how to handle their digital lives after they’re gone, I promise you.

I handle the whole dilemma in a very analog way. I’ve given one of my lifelong friends an envelope that has all my usernames and accounts in the event of my death. He’ll then see to it that the info is shared with the right parties. Luckily, I really trust my friend, because if he’s not trustworthy, I could be broke in a minute considering all the info he has on me!

INVESTING AND RETIREMENT

Pick up matching 401(k) contributions from your employer

We as a country can’t continue to pay for the Social Security, Medicare, and Medicaid obligations that we’ve promised our citizens. The math simply isn’t going to work, especially as we enjoy longer life spans.

When you get right down to it, you are the only person who can provide for your retirement—particularly if you’re under forty. So you can either start saving money now, or face the fact that you might not get to retire. Not retiring is not the worst thing in the world; after all, retirement itself is a relatively new concept in human history.

But if you can save as little as a dime on every dollar you make, you’ll put yourself in good stead for retirement. Do you have an employer match through your 401 (k)? Make sure you’re putting in at least enough to pick up the match. If you’re not, you’re leaving money on the table that could be yours.

What if your employer doesn’t offer any retirement plan at all? That’s the predicament nearly 80 million people face, according to a study from the Employee Benefit Research Institute.

For those people, I have two suggestions. The first is to open up a simplified employee pension (SEP). The paperwork to set up a SEP is simple, and you can typically open it wherever you want—at a low-cost investment house, for example—at no cost. SEPs work like a traditional IRA, with a current year tax deduction, but withdrawals are taxed at retirement. They also offer flexibility, in that investors can put in nothing in a year or as much as $49,000.

The other option I like when you don’t have access to a retirement plan through work is to open a Roth IRA. See my No. 6 tip, “Help Me Now, Clark,” for more on that option.

A CLARK FAVORITE
Increase your savings rate gradually
A recent report from CNNMoney.com showed that more than one in four American workers have zero savings. Now, this could be a personal choice, or maybe it’s because of a series of circumstances like health woes or divorce. But getting financial breathing room in your life is absolutely essential. Otherwise, you’re one whisker away from financial disaster in the event of a job loss.
I often talk about setting up automatic withdrawals from your check each pay period to a 401(k) or a Roth IRA. Somewhere around half of us work for employers that offer a 401(k) plan. Employers that do so often mandate their employees contribute to it. In addition, the employer might even periodically bump up the level of your contributions. I’m in favor of this heavy-handed approach because it forces at least half of us to save for retirement.
Bumping up your savings rate—whether you do it or your employer does it for you—doesn’t have to be a painful thing. Most people find it pretty comfortable to increase their savings rate by one percentage point every six months. So if you save nothing currently, start by saving 1 percent of your pay, then increase to 2 percent in six months. With automatic withdrawals the money is gone before you ever see it. You probably won’t miss it!
It used to be an article of faith that as Americans made more money, we saved more money. But our culture has become one of immediate gratification for everything from houses to cars. Now as our income rises, many of us just spend and borrow more.
So how about you—are you in this category? Are you going for the instant store line of credit every time it’s offered? If so, I want you to take a new approach. Think about saving money before making a purchase instead of borrowing and then having another monthly obligation to meet. Greater long-term satisfaction comes from buying only what you can afford, when you have the dough, than from buying something on credit that you can’t afford, for which you get merely a momentary adrenaline rush.

Start a Roth with $100 or less

When I talk with someone who is trying to save for the future, I notice their eyes start to glaze over as I answer their questions. I can even tell when this is happening as I talk to someone on the radio!

Investing can seem so complicated that you might shut down and do nothing when you hit that wall—or feel you need to hire someone to guide you.

However, it doesn’t need to be complicated, nor does it have to be prohibitively expensive, either. Many investment houses charge up to $3,000 to open an account. But you don’t need big bucks to get started.

The Vanguard Star Fund, one of my favorite picks as a custodial account for a child, can be opened with as little as $1,000. Still too rich for your blood? Schwab is now requiring just $100 to open an account. And T. Rowe Price has no minimum requirement at all if you commit to regular contributions of $50 every pay period.

You can find out more about the Vanguard Star Fund at Vanguard.com or call 877-662-7447. Visit “Chuck” at Schwab.com or call 866-232-9890 for info on their plans. The T. Rowe Price option is called the Automatic Asset Builder plan. Visit TRowePrice.com and search that keyword or call 800-638-5660 to get signed up.

If you don’t have that employer forcing you into a 401(k), you might never do it. I want you to do what it takes to be the master of your own destiny.

CLARK’S GREATEST HITS
Dollar cost average and diversify in your investment choices
Once you start saving for retirement with a Roth IRA or a 401(k), my goal for you is to automatically put in a set amount of money each month to build the habit and reduce the risk of investing.
By making regular contributions monthly in equal amounts, you are doing what’s called “dollar cost averaging.” That’s just a fancy way of saying you’re not trying to time the market. In months that the stock market is diving, your money buys more shares. In months that the market is climbing, your money buys a smaller number of shares, but the shares you already own are worth more.
Dollar cost averaging is a way to pace your investing so that you’re buying shares when prices are low, high, or in between.
Over time, putting money in this way reduces the possibility that you will panic and either sell or stop investing; it keeps you steady as you go. And staying in the game makes you more money over the long haul.
When the Dow Jones Industrial Average dropped to 6,547 on March 9, 2009, a lot of investors had their willpower tested. But people who didn’t sell out and kept putting in their $50 or $100 saw big gains on their shares when the Dow surged back. No one knows what the markets will do, but putting in cash every month really cuts your risk.

Don’t tap into your retirement account when you’re unemployed

With the hard economic times, many people have taken to raiding their retirement savings without fully understanding the repercussions. If you do choose to cash out your 401(k), know that you’ll typically get hit with taxes and penalties that can eat up some 40 percent of your money.

For example, if you take a 401(k) with $10,000 in it and cash it out, you get a tax bill for 20 percent up front. Then when you file your tax return the following year, you get hit with another 20 percent in taxes and penalties.

That means your $10,000 becomes more like $6,000 and you have zero saved for retirement. Very bad math, right?

So you can see my bias against cashing out your retirement account when the going gets tough. In fact, it should be done only if you’ve absolutely exhausted every other resource and can’t put a roof over your head or food on your family’s table.

There are some circumstances where you can withdraw retirement money and pay only tax and no penalty.

For IRA holders, these circumstances include buying a home (as a first-time home buyer); paying educational expenses for immediate family; and some select instances involving unreimbursed medical expenses and health insurance.

When it comes to your 401(k), you can make a penalty-free early withdrawal in only two circumstances: if you turn fifty-five or older the same year that you leave your employer and for some unreimbursed medical expenses.

The problem is that I find the circumstances are little understood by the average person and all too often disregarded. You should consult with a tax professional before making any decisions.

Never take a 401(k) check yourself

The average worker no longer spends a lifetime with a single employer. That raises a dilemma when you do leave a job: What to do with your 401(k)?

The best strategies are to leave it with the old employer’s plan or to roll it over to your new employer’s plan.

Recent estimates from Hewitt Associates, a human resources consulting firm, suggest that 46 percent of people spend their 401(k) when they move on from an employer.

If you do need to get at that money—which obviously flies in the face of my advice in the previous tip—there are two smart ways to do it.

First, you can have your 401(k) rolled over to an IRA and draw only what you need to live on. By doing this, you reduce the tax and penalties you’ll face. Be sure you’re doing what’s called a “trustee to trustee transfer” when you move the money. That means the money goes from your current plan administrator to your new plan administrator and never enters your hands. You never want to receive a check yourself—even if you go ahead and deposit it in a new retirement account—unless you want to be eaten alive on taxes and penalties.

If you haven’t lost your job and need cash, you could try borrowing from your 401(k). Now, a lot of people have argued that this is a wonderful option because it’s like you’re paying yourself back as you pay back the loan. However, I don’t think it’s as great as it seems. You’re paying yourself back with after-tax dollars that will be taxed again during retirement. So you’re effectively being taxed twice instead of only once when the money is spent during retirement. And if you should leave your employer before you’ve paid back the loan, the balance becomes immediately due in full with tax.

Avoid “can’t lose” investments

The name Bernie Madoff has become instantly recognizable even to those people who don’t know anything about investing. That’s because Madoff operated an infamous $50 billion Ponzi scheme (the largest ever in history), promising his victims the “Madoff 10”—completely safe returns of 10 percent annually regardless of market conditions.

Madoff wouldn’t divulge the proprietary investing techniques behind “the Madoff 10” during the decades that he was in operation. Why? Because there weren’t any techniques! In classic Ponzi style, early investors were simply paid with money from those who later got on the gravy train.

You’d think after all the Madoff publicity, investors would be wary of Ponzi schemes. But The Orlando Sentinel reports there’s been a 175 percent increase in the number of investment-fraud complaints in the last few years, citing numbers from Florida’s attorney general. The FBI concurs with that assessment of the spike in Ponzi scheme activity.

Here’s what you need to know: You should be suspicious anytime you’re told about a method of investing that’s completely “safe” and promises returns that are higher than what the marketplace offers. Usually with a Ponzi, the floor is 10 percent a month. Maybe that’s why Madoff was able to fly under the radar for so long; he was promising only 10 percent annually.

Consider this: If the average savings account is paying about 1 percent annually as I write this, some “opportunity” promising well above that could easily be a fraud.

No one can promise you returns without risk. Beware of the “can’t lose” promises—no matter how small or great they are.

And don’t buy complicated investments that you don’t understand. If you follow this simple rule, you’ll avoid most of the scams out there. If you can’t explain the investment to a fifth grader, don’t buy it!

Limit your investments in gold or precious metals

I’ve gotten so many calls since the recession began from people asking about investing in gold or other precious metals. But buying gold because you saw a cheesy ad on late-night TV is not really an investment; it’s more of a speculative venture.

I recommend putting no more than 5 or 10 percent of your portfolio into gold or other precious metals. Anything above that is too risky. As I write this, gold has been trading at amazing prices—over $1,486 an ounce! That’s a huge sum. You might read this and think, “I’ve got to get a piece of the action.” But even if the price keeps going up from here, you’ve got to realize that the good news about gold is already baked in the cake. For those who already own gold, they’re showing good profits, on paper at least.

If you buy now, however, there’s a chance that values could start to decline. Prices could go higher still, of course, but that would likely be contingent on unfavorable world conditions such as a brutal world war. Gold trades on fear and bad fundamentals in the marketplace. We’ve already seen the bad fundamentals during the economic meltdown. That’s why I have to reiterate that this is not a great time to hop in—despite those amazing numbers.

If you still want to buy gold, do not buy the actual bars. Storage can be cumbersome, and there’s a huge spread on the buy and the sell. You typically have to buy at 5 percent above the market price and sell at 5 to 6 percent less than current value.

My preferred way to own gold is through a gold exchange-traded fund (ETF). ETFs are the fastest-growing area of investing, and I think of them as mutual funds for the next generation. Just as mutual funds have exploded in popularity over the last thirty years, so too will ETFs as we move into the future.

You buy ETFs exactly as you would a stock, preferably through a zero-commission broker, and you can sell them at any time. The fund stores the physical bars of gold at minimal cost to you. And then you can buy and sell at will, without worrying about getting clobbered on the spread.

If you want to get in the gold game, I like Fidelity’s PowerShares DB Precious Metals Fund, iShares COMEX Gold Trust, Central Fund of Canada, and SPDR Gold Shares because they all hold actual physical bars of gold in their reserves. Just pop any of those names into your favorite search engine and you’ll be able to link to their webpages.

Currency trading is just another get-rich-quick scheme

If you’re afraid of the stock market and tired of puny returns on CDs, you might be tempted to get into currency trading. Bad idea. For example, let’s say you bought Iraqi dinar during the Persian Gulf War years ago with the hopes that you’d become a millionaire when the country’s economy turned around. Today that currency is essentially worthless.

Currency trading is one of the latest Dare to Be Rich schemes making the rounds in a down economy, much as buying and flipping houses was all the rage before the real estate bubble burst.

First, it’s important to understand that there is a legitimate business here. The main purpose of currency trading is to allow businesses that operate in multiple countries to lower the risk of exchange movement and its effect on their profits.

But the only people making money on currency trading are the ones who push a variety of “how to” info tapes and seminars. They want you to believe that you, as an individual in your spare time, can take their course, watch their tape, or complete their webinar to learn this tricky business.

The reality is that currency trading is extremely high-risk territory. It’s not the “insta-business” it seems.

The New York Post recently did a story about the currency trading frenzy. According to the article, one trading desk did nearly $7 trillion in trades for clients in 2008. Another company claimed one top employee earned monthly returns of 1,951 percent on his money.

Those kinds of numbers really get your attention and make you think you can make big money. But don’t believe the hype. At their worst, currency trading operations can very easily be fronts for Ponzi scheme operators. Even in the best-case scenario, you as an individual trader are up against large institutions that have a lot of resources at their fingertips. That makes it very easy to lose money.

As one securities industry attorney told the New York Post, “ [Individuals] could be trading against professional traders with a lot of research, charts and sophisticated computer programs—and these pros could fleece them. I am now hearing cases of folks like these small investors losing $5,000, $15,000, $20,000, $25,000.”

I want you to stay safe and preserve your capital! The best way to get ahead is with sound principles like spending less than you make and saving for retirement little by little each pay period. There’s no fix-all solution that’s going to make you rich overnight.

TAXES

Prepare and e-file your income taxes online for free

Almost all Americans are eligible for free e-filing of their federal income tax. Generally, the IRS allows up to 90 percent of people to participate; it’s only the top 10 percent of income earners who are forbidden. Yet America currently has one of the lowest rates of e-filing among developed countries. I actually prefer that you e-file because errors are less likely thanks to software improvements.

Everyone knows our tax code is incredibly complex. My tax return is typically around 170 pages in length! If your return is simpler, you might also have an opportunity to have your federal tax return done for free by a professional service.

The IRS website offers a list of about twenty companies that will prepare and e-file your taxes for free if you earn an adjusted gross income of a little less than $60,000. It’s part of the IRS’s annual Free File initiative. Visit IRS.gov and do a keyword search for “Free File” to see the list. You can even try your return with more than one company to see who does the best job for you—just be sure you don’t file more than once!

Finally, if you’re not Internet-savvy, free income tax prep is also offered offline by AARP and the IRS. The latter’s Volunteer Income Tax Assistance (VITA) program caters to those with low income, the elderly, the disabled, and limited English speakers. VITA can be reached at 800-906-9887.

Pay dimes on the dollar on back taxes

If you owe back taxes, you’ve probably seen ads from companies promising to help you pay just pennies on the dollar and settle your debt with the IRS.

While that offer is doubtful at best, there is a way for you to pay dimes on the dollar in back taxes with an officially sanctioned IRS program called Offer in Compromise (OIC).

The OIC program—designed to allow delinquent taxpayers to negotiate a lump-sum settlement—was something of a joke in the past. Most offers in compromise were flat-out denied because the IRS assumed people were lying. In many cases, taxpayers who were sitting in homes that had appreciated in value were told they should take out a second mortgage to pay their tax bill. Well, we all know how that scenario played out after the real estate bubble burst and the recession hit.

Now the IRS is beginning to consider all reasonable OICs as a result of the dismal economic climate. The IRS knows that home values have plummeted and is now reviewing each OIC on its individual merits—not redlining it because officials are looking at an outdated valuation of your house.

There is a $150 application fee when you want to do an OIC. But you can wind up saving thousands in the process based on your individual circumstances and back taxes. Visit IRS.gov and search keyword “Offer in Compromise” for more information.

Beware of the bogus IRS e-mail scam

Have you gotten an e-mail that appears to be from the IRS and says you’re owed a small refund?

Crooks faithfully come out of the woodwork the first few months of each year pretending they’re the IRS and need to track you down with money that’s supposedly yours. I’ve heard several figures over the years for the dollar amount they promise, such as $63.80 and $139.50. But it can be any dollar amount that’s relatively small, say below $200 or $300.

These bogus e-mails are typically branded with the IRS logo and look very legit. They sometimes originate from an address that ends in “.us,” which most people think is a sign of authenticity. A “.us” domain name, however, is the same as a “.com”—it could be set up by anybody. Some of these e-mails might even come from an address that ends in “.gov,” falsely (in this case) signifying a government organization.

But know this: The IRS does not send e-mails to taxpayers or request detailed personal info through e-mail.

The fake e-mails explain that the money you’re supposedly owed will be deposited into your account—provided that you send your account number and secret access code. Do not respond, click on any links, or open any attachments. If you comply, your account will be cleaned out by cyber-criminals.