Monthly Archives: April 2017

Best Places to Put Your Savings

Money that is considered savings is often put into a low risk, interest-earning account, rather than into higher risk investments. Although there is opportunity for larger returns with certain investments, the idea behind savings is to allow the money to grow slowly with little or no associated risk. The advent of online banking has increased the variety and accessibility of savings accounts and vehicles. Here are some of the different types of accounts so you can make the most of your savings.

1. Savings Accounts

Savings accounts are offered by banks and credit unions. The money in a savings account is insured by the Federal Deposit Insurance Corporation (FDIC) up to specified limits. Certain restrictions may apply to savings accounts; for example, a service fee may be charged if more than the permitted number of monthly transactions occurs.

Money in a savings account typically cannot be accessed through check-writing or ATMs. Interest rates for savings accounts are characteristically low; however, online banking does provide higher-yielding savings accounts. (Even with inflation fears, saving money is still sage advice in a recovering economy. Check out How Savings Are Saving The Economy.)

2. High-Yield Bank Accounts

High-yield bank accounts are a type of savings account, complete with FDIC protection, which earns a higher interest rate than a standard savings account. The reason that it earns more money is that it usually requires a larger initial deposit, and the access to the account is limited. Many banks offer this account type to valued customers who already have other accounts with the bank. Online high-yield bank accounts are available, but you will need to set up transfers from another bank to deposit or withdraw funds from the online bank.

3. Certificates of Deposit (CDs)

Certificate of Deposits (CDs) are available through most banks and credit unions. Like savings accounts, CDs are FDIC insured, but they generally offer a higher interest rate, especially with larger and/or longer deposits. The catch with a CD is that you will have to keep the money in the CD for a specified amount of time; otherwise, a penalty, such as three months’ interest, will be assessed.

Popular CD maturity periods are six-month, 1-year and 5-year. Any earned interest can be added to the CD if and when the CD matures and is renewed. (A CD ladder allows you to stagger your investments and take advantage of higher interest rates. Learn how in Save Smart With A CD Ladder.)

A money market fund is a type of mutual fund that invests only in low-risk securities. As a result, money market funds are considered one of the lowest risk types of funds. Money market funds typically provide a return similar to short-term interest rates. Money market funds are not FDIC insured, and are regulated by the Securities and Exchange Commission’s (SEC) Investment Company Act of 1940.

Mutual funds, brokerage firms and many banks offer money market funds. Interest rates are not guaranteed so a bit of research can help find a money market fund that has a history of good performance.

5. Money Market Deposit Accounts

Money market deposit accounts are offered by banks, and typically require a minimum initial deposit and balance, with a limited number of monthly transactions. Unlike money market funds, money market deposit accounts are FDIC insured. Penalties may be assessed if the required minimum balance is not maintained, or if the maximum number of monthly transactions is surpassed. The accounts typically offer lower interest rates than certificates of deposit, but the cash is more accessible. (Learn more about liquidity in Diving In To Financial Liquidity.)

6. Treasury Bills and Notes

U.S. government bills or notes, often referred to as treasuries, are backed by the full faith and credit of the U.S. government, making them one of the safest investments in the world. Treasuries are exempt from state and local taxes, and are available in different maturity lengths. Bills are sold at a discount; when the bill matures, it will be worth its full face value. The difference between the purchase price and the face value is the interest. For example, a $1,000 bill might be purchased for $990; at maturity, it will be worth the full $1000.

Treasury notes, on the other hand, are issued with maturities of 2, 3, 5, 7 and 10 years, and earn a fixed-rate of interest every six months. In addition to interest, if purchased at a discount, T-notes can be cashed in for the face value at maturity. Both Treasury bills and notes are available at a minimum purchase of $100.

7. Bonds

A bond is a low-risk debt investment, similar to an I.O.U., which is issued by companies, municipalities, states and governments to fund projects. When you purchase a bond, you are lending money to one of these entities (known as the issuer). In exchange for the “loan”, the bond issuer pays interest for the life of the bond, and returns the face value of the bond at maturity. Bonds are issued for a specific period at a fixed interest rate.

Each of these bond types involves varying degrees of risk, as well as returns and maturity periods. In addition, penalties may be assessed for early withdrawal, commissions may be required, and depending on the type of bond, may carry additional risk, as with corporate bonds where a company could go bankrupt.

Make Money with Airbnb

Does your 9-to-5 paycheck leave much to be desired? Are you trying to pay down a mountain of debt as quickly as possible? Do you have a room in your home that you aren’t using, or are you frequently out of town and paying rent or a mortgage on space you aren’t occupying very often?

The peer-to-peer short-term rental service Airbnb might be the solution to your problems. Here’s what you need to know about the risks and rewards of renting out all or part of your home through this service. (For more information, see The Pros and Cons of Using Airbnb.)

How to List

You decide when to make your space available and at what price. Listing is free, and you can individually approve potential guests. In setting your price, you’ll want to consider the going rate in your area by looking at competing listings. You’ll want to consider the costs of hosting – including cleaning, higher utility bills, taxes and Airbnb’s host fee, which is 3% for payment processing. Your guests pay Airbnb’s 6% to 12% booking fees. Make sure you understand Airbnb’s hosting standards for listing accuracy, communication with guests, keeping your reservation commitments, cleaning your place for each guest and providing basic amenities such as soap and toilet paper. (For related reading, see How Airbnb Makes Money.)

Getting Permission and Paying Taxes

Before listing your place on Airbnb, you might need to get permission. If your property is controlled by a homeowners’ association or co-op, check its rules to make sure you’re allowed to host. If you rent, you’ll want to get your landlord’s blessing. Airbnb suggests adding a rider to your contract with any of these entities to specifically address hosting through Airbnb.

In addition, your locality might require a business license, and you might owe local taxes on any income you earn. For example, you might have to pay a transient occupancy tax, the same tax that applies to hotels. Hotels usually pass this tax onto their guests: You might recall the extra 12% that was added to your bill the last time you stayed somewhere. You can look up Airbnb’s information on many cities’ regulations here.

You’ll also owe federal taxes on Airbnb income, which will be reported to you and to the IRS on form 1099. However, you may be able to reduce your taxable Airbnb income by deducting business expenses, such as cleaning fees and insurance. (Read 10 Tax Benefits for the Self-Employed for more information.)

Personal Safety

Is it safe to rent out your home to a stranger? If you’re renting out your home when you won’t be there, you’re probably not at risk of physical violence. However, you’ll want to find a safe place to store anything of high sentimental or financial value. Your wedding dress, Grandpa’s gold watch, photo albums, your emergency cash and your tax returns are all examples of things you’ll want to secure. Don’t give guests the opportunity to steal your possessions or your identity.

Things get trickier if you’re renting out part of your home while continuing to live there. You can keep a closer eye on your stuff (though you’d still be wise to safeguard it), but you’re physically vulnerable if your guest turns out to be dangerous. It’s not realistic to run criminal background checks on guests before they book or before they check in; you can do some basic Internet sleuthing, but it’s not a failsafe process.

Reviews from previous hosts can offer reassurance, and you can always decline a reservation or even cancel a booking, though in some cases Airbnb will impose penalties. You can also limit the reservations you accept to guests who have completed Airbnb’s Verified ID process. Both hosts and guests can have Airbnb verify their identity by uploading a valid government-issued ID and connecting a Facebook, Google+ or LinkedIn account to an Airbnb account. (See Why You May Want To Think Twice About Renting Out Your Home to learn more about the risks of hosting.)

Home Safety

Airbnb also provides guidelines for hosts to make their homes safer. If basic human decency doesn’t give you enough incentive to make your place safe for guests, minimizing safety risks to guests minimizes your risk of being sued by a guest who is injured on your property. Guests also might give you lower ratings if you haven’t taken basic precautions to protect them, such as installing smoke and carbon monoxide detectors and eliminating or pointing out any trip or fall hazards. If you’re particularly negligent, Airbnb could refuse to let you continue to host.

Speaking of liability, let’s talk about insurance. Airbnb’s host guarantee provides up to $1 million in insurance coverage for property damage in 29 countries, including the United States, United Kingdom and Canada. Airbnb’s insurance is not a substitute for homeowner’s or renter’s insurance, and it doesn’t protect against theft or personal liability. Talk to your homeowner’s or renter’s insurance company to make sure your policy will cover your property, your possessions and your liability while renting out your place through Airbnb. If you need extra coverage, an umbrella policy might be the ticket. See Homeowner’s Insurance Guide.

Airbnb offers liability insurance for U.S. hosts. It offers up to $1 million per occurrence and is secondary to any other insurance, such as your homeowner’s policy or your landlord’s insurance, that might cover the incident. Like any insurance policy, Airbnb’s liability insurance has conditions and limitations, so if you want to know exactly what’s covered and what’s not, read the fine print thoroughly.

Airbnb’s host guarantee doesn’t protect against wear and tear to your place, but you can charge a security deposit to cover possible damage. It’s important to inspect your property after each guest checks out because otherwise you’ll have no way of knowing which guest caused the damage and you won’t be eligible to file a claim. You’ll want to document any damage with photos and substantiate the “before” value of the damaged property. Airbnb asks that hosts first try to resolve any problems directly with guests before filing a claim. To file a claim with Airbnb for more than $300, you’ll need to first file a police report. Hosts have a limited window to file a claim: 14 days or before the next guest checks in, whichever is sooner.

“Airbnb provides an option to procure a refundable security deposit, which is what I do for each guest,” says Deb Glassman, who has been renting out her Venice, California, home on Airbnb for the last four years. “In the one or two situations where I have had to collect the security deposit for minor issues, Airbnb has always backed me 100% with the guest.” She adds that staying in the studio in the back of her house while renting it out seems to be an automatic deterrent to potential guests who might want to party.

Payment Guarantees

Is it possible for a guest to crash and dash – that is, to stay overnight in your place without paying you?

Guests actually pay you through Airbnb. As long as there are no problems, Airbnb will release your payment within 24 hours of your guest’s arrival, and you’ll receive it within as soon as a few hours, if you choose to get paid via PayPal or via Payoneer prepaid debit card, within a few days for a bank transfer, or within 15 business days for a mailed check.

Guests must notify Airbnb within 24 hours of check-in if there’s a problem that warrants a refund. If you don’t respond to guests who try to contact you about a problem, they might be allowed to complete their reservation and receive a partial refund.

Airbnb could require you to refund a guest’s payment if you cancel a reservation at the last minute, forget to leave the key, misrepresent your listing, don’t clean your home or otherwise fail to meet Airbnb’s hospitality standards. Airbnb suggests making sure you’re available within 24 hours of guests’ scheduled check-in to address any concerns they might have since many problems are easily resolved. In your listing, make sure you describe your room type, number of bedrooms and bathrooms, and amenities accurately. If you choose to provide linens and towels, make sure they’re clean. Also note whether there will be any animals on the property.

You could also get burned if you arrange payment with a guest outside of the Airbnb website. A guest might try to do this to avoid paying Airbnb’s guest fee or might be planning to rip you off. As a host, you only stand to save 3% by not going through Airbnb’s payment system, plus Airbnb could refuse to do further business with you if you get caught. So don’t try to circumvent the system.

Why Say No To Credit

With credit abundantly available, getting what you want right away, regardless of whether you have the cash to pay for it, is common practice. There are many rationales for convincing yourself that this behavior is acceptable: you’ve had a rough week and you deserve a treat; you’ll be able to pay off your credit card as soon as you get your next paycheck; you need a wireless fitness wristband to help you lose weight; or perhaps you feel you’ve waited long enough for that new car and you’re not willing to wait anymore.

Combine the excuses from those of us who know better with those of us who don’t, and you’ve got a nation of debtors. Whether you need a gentle nudge to get back on the right track or some basic knowledge to keep yourself out of trouble in the first place, we’ll give you nine ways to help you talk yourself out of drawing on credit. (To learn more about the pros and cons to credit, check out our Debt Management feature.)

1. Financing your purchases doesn’t teach self control

At best, an unwillingness to exercise self control when it comes to money can rob you of financial security. At worst, an impulsive attitude toward buying can have a negative impact on other areas of your life as well, such as having self control. Yes, exercising self control can be both difficult and boring, but it actually has many not-so-boring rewards, from staying out of the hospital to being able to afford your own home.

What, you don’t have a budget? Well, don’t despair; it’s easier than you think. For many people, budgeting is a great tool for keeping spending under control. It’s easy to not realize how much charging a cup of coffee here, and a new book there, can add up over the course of the month and get you in trouble. The solution is to plan your expenses and write everything down. Budgeting can be as simple as making a pen-and-paper list of how much money you earn in a given month, followed by a running total of all your expenses. If you know how much money you have left, then you will know how much you can spend. (To learn more about creating a budget, read our Budgeting 101 feature.)

3. Credit card interest rates are expensive

The reason self-control is so important when it comes to your finances isn’t a moral or spiritual thing: it’s a practical thing. Credit card interest rates are high, which can make financing your purchases expensive. If you don’t have the money to pay cash for something in the first place, you probably don’t want to make it even more expensive by adding interest to the price. If you buy an item for $1,000 using your credit card (with its 18% interest charge) and you only make the minimum payment every month, over one year you will end up paying $175 in interest. And to top it off, you will still owe $946 on your purchase.

4. Credit card interest rates increase when you can’t pay off your balance in full

To add insult to injury, that great annual percentage rate (APR) you thought you had on your credit card might have merely been an introductory rate that was subject to increase after a certain period if the balance has not been paid in full. An 8.99% APR can skyrocket to a 29.99% APR in the blink of an eye. “But that will never happen to me,” you might say.”I’ll pay my balance in full as soon as it’s payday.” You may have the best of intentions, but they can easily get derailed by an unplanned expense like a car repair or an unexpected event like losing your job.

5. A poor credit score can affect your insurance rates, being accepted for a job or the ability to finance meaningful purchases like a home.

If your credit card balances go unpaid, your credit score will start to diminish. The next time one of your insurance policies is up for renewal, you may get hit with an unexpected rate increase. Insurance companies that check your credit score when considering your premium seem to assume that if you can’t pay your bills, you might be letting your car or home maintenance slide, or you might be an irresponsible person in general, all of which could make you a higher risk by increasing your odds of filing a claim.

Some employers also run credit checks on potential job applicants, and an employer who is concerned enough to check your credit score will probably be concerned enough to not hire you if it’s poor. If purchasing or refinancing a home is in your future, your credit score is particularly important, as it will determine the interest rate on your mortgage, or whether you’re even eligible for a mortgage at all.

6. Poor financial habits can jeopardize your relationships

Money is probably one of the main reasons couples and families fight. It can be an extremely touchy subject, especially when there’s not enough of it. Budgeting for expenses should be done with your family and significant other in mind. (For more, read The No.1 Reason Why Couples Fight.)

7. Financing purchases can lead to higher spending

Some people spend more money, either by purchasing more items or by purchasing more expensive items, when paying on credit than they would with cash. Purchasing a $1,000 laptop might be easy to accept if you just sign a piece of paper. On the other hand, if you pay with cash, you can physically feel the $100 bills leaving your hand. This will give you a better sense of not only how much that laptop truly costs, but also how much money you have left in your now-lighter wallet.

8. In a worst-case scenario, the habit of financing your purchases can lead to bankruptcy

If you go on enough spending sprees without a plan for paying them off, or if your plan goes awry because you lose your job, or get hit with massive medical bills, you may find yourself hopelessly in debt. Declaring bankruptcy will scar your credit history for up to 10 years, and even when it finally goes away, you’ll still have to slowly build up good credit again. An ounce of prevention is worth a pound of cure. (If you’re facing bankruptcy, see What You Need To Know About Bankruptcy.)

9. Avoiding financing can bring peace of mind

If you don’t owe anyone money, you won’t have to worry about late fees, interest, annual fees or over-the-limit fees. The best way to treat yourself to something nice is to save up for it and buy it when you can truly afford it. The peace of mind that will come with not financing your purchase will be like treating yourself twice.