New Credit Card bonus categories for Q1 2017

A new year is here, and with it, new bonus categories for cards with rotating bonuses (Chase and Discover).

Chase Freedom

5% cashback on up to $1,500 in gas and ground transportation.

Discover, Discover it

5% cashback on up to $1,500 in purchases at gas stations, ground transportation, and warehouse clubs.

New Categories for Q3 2016

Chase Freedom‘s new bonus categories are Restaurants and Warehouse Clubs, both paying 5%. This bonus pays up to $75 for the quarter. This category is notable because Costco now accepts Visa cards, and the cash back at Costco is better than the Costco Anywhere card.

Discover’s new categories are Home Improvement and, both at 5% up to $75.

Also, the new Costco Anywhere visa is active and you can apply for it. It pays 4% on gas, 3% on restaurants and travel, 2% at Costco, and 1% everywhere else.

New bonus categories for Q2 2016

It is now the first day of Q2 2016, and there are new bonus categories for Discover and Chase.

Chase Freedom

5% cashback on up to $1,500 in purchases at grocery stores (excluding Target and Walmart) and Warehouse stores (like BJs or Sam’s Club)

Discover, Discover it

5% cashback on up to $1,500 in purchases at Restaurants and Move Theaters.

In other news, the Costco Visa card from Citi is looking like it will be a great cashback card – 4% on gas (up to $7,000 per year), 3% on travel and restaurants, 2% on Costco purchases, and 1% on everything else. We’ll have more info on this card once it launches in June.

Comparison of different debt repayment strategies

Scientific American recently asked, why don’t people manage debt better? It is a really good question, and the article does a good job of showing how people make seemingly-irrational decisions about how to pay down debt. The authors argue that the most optimal way to pay down debt is to use extra money to pay down the debt with the highest interest rate first – and they are correct in stating that it is the most mathematically optimal way to do it.

It isn’t the only, way, though and there are some good arguments that the mathematically optimal approach may not be optimal for other reasons. The “Snowball” approach, popularized by Dave Ramsey, is another approach that works well for a lot of people – it is less optimal from a mathematical perspective but more optimal from a psychological perspective in a lot of cases, and that is important.

We’ll compare 2 methods of paying debt down more quickly – paying the highest interest rate first, and the snowball method. This comparison assumes a few things – 1) You have more than one debt, 2) You have at least $1 beyond the minimum monthly payments to pay down your debts more quickly, 3) You aren’t accruing new debt.

Let’s assume you have 2 debts:

Name Amount Rate Minimum Payment
Car Loan $10,000 5% 100
Credit Card $24,000 15% 480

Now, let’s assume you only pay the minimums. How long will it take to pay them off and how much will you end up paying?

Name Time Interest Total Cost
Car Loan 10 years, 10 months $2,963 $12,963
Credit Card 6 years, 7 months $13,899 $37,899

You end up paying $16,862 in interest, or $50,862 total on an initial amount of $34,000.

Now, let’s assume you have an extra $250 per month to apply to your loans, and when you finish paying on one, you’ll apply the payment you were paying before to the remaining one.

1. Paying the highest interest rate first

In this method, you pay $730 per month on the credit card until it is paid down while paying only $100 on the car loan, then when the credit card is paid off, you apply the $730 per month to it for a total payment of $830 per month. Here is what that looks like:

Name Time Interest Total Cost
Car Loan 4 years, 4 months $1,710 $11,710
Credit Card 3 years, 7 months $7,103 $31,103

Your debt is paid off after 4 years and 4 months, instead of almost 11 years. You pay $8,813 in interest, or $42,813 total on an initial amount of $34,000. This is the most optimal way to pay the debt down, from the perspective of paying the least amount of interest.

2. Snowball (pay the one with the lowest outstanding amount first)

In this method, you pay $350 per month on the car loan until it is paid down while paying only $480 on the credit card, then when the car loan is paid off, you apply the $350 per month to it for a total payment of $830 per month. Here is what that looks like:

Name Time Interest Total Cost
Car Loan 2 years, 7 months $669 $10,669
Credit Card 4 years, 8 months $9,609 $33,609

Your debt is paid off after 4 years and 8 months, instead of almost 11 years. You pay $10,278 in interest, or $44,278 total on an initial amount of $34,000. You end up paying $1,465 more with the same set of parameters, except which debt you pay off first.

$1,465 is no small chunk of change. So, why would you consider this method? There are two reasonably good reasons:

a) The psychological effect. For a lot of people, making more progress on a smaller debt may motivate them to stick to their plan to pay off debt and increase the likelihood that they will be successful. If that is the difference between sticking to a debt repayment plan and not, then the $1,465 is a small price to pay.

b) There is another benefit in that in a shorter amount of time, you get some more free cash flow ($100 per month in this case) that can be used to absorb other unexpected expenses and help you avoid getting into more debt. In this case, we get more cash flow after just two and a half years, versus over 3 and a half years for the more optimal solution.


The method you use is largely up to you – do you value saving the most amount of money, or is the psychological effect of a quicker win more appealing? The important thing is you make a plan and stick to it, and that you are aware of the tradeoffs of each method.

Children Should Know The Cost Of Borrowing

Where I Came From

mother-child 2

When I was a child my parents were fiscally responsible.  They paid their bills, avoided debt, and conserved wherever they could. Despite having an average income they were able to eventually pay off their mortgage and gain some financial independence.

You may think this translated into a child who also had good financial habits, but unfortunately for me, that isn’t the case.  I struggled with excessive debt and poor budgeting well into my 20s.

During many of the most difficult times I found myself wondering exactly how I got into such a mess.  The answer came to me many years later. I had to have a few close calls with disaster, stand on the brink of financial ruin, and talk to a lot of smart people before I became open minded enough to really look for a solution.

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Ally adds Touch Id login feature to iOS app

A recent release of the Ally app for iOS has solved one of my biggest gripes with it – lack of Touch ID authentication. This allows you to login to your account with just your fingerprint, and makes logging in on a mobile device a lot easier.

My old bank – Capital One 360 – had this feature in their app for some time and I really missed it when I moved to Ally. You’d think it is a really small thing, but it is pretty handy to have. The only thing to consider is that if you allow Touch ID to unlock your bank account, anyone who can login to your phone can also login to your bank account – so be careful with it.

New features like this are one of the reasons Ally continues to be rated highly by those who use it.

My favorite personal finance book

Semit Rethi’s I Will Teach You To Be Rich is the best personal finance book I’ve found, and it’s the one I recommend to people who are starting to get their financial house in order, are new to investing, or are in their early 20s. If you’re older and are already in good shape financially, this book will be less useful.

Sethi’s book is a fairly easy read – it’s only a few hundred pages of easy-to-understand information, written in a pretty informal tone. He first explains credit cards and credit scores, and talks about things you can do to get fees waived, optimize your credit cards, and avoid falling into the trap of spending a lot of money on interest every month.

Next, he talks about finding a low-fee, high-interest bank account to keep your money in – in an era with low/no fee accounts that pay around 1% interest rates (at the time of this writing, at least), it is amazing how many people continue to pay unnecessary fees at banks that offer negligible interest rates (as a side note, our site – Best Savings Rates – can help you find the best place to keep your money).

Then, he tries to demystify investing. Investing your money wisely is the easiest way to become rich over time, but it is confusing for many people and it is easy to invest in ways that aren’t optimal. For years, I invested in individual stocks and watched as I paid lots of money in commissions, only to see less of a return than if I’d just stuck it in a boring index fund.

The section on investing is probably the most useful and important for people starting out – the sooner you start investing wisely, the more money you’ll have.

Sethi also goes over tracking your expenses (which is really important – how else will you know where you are spending more money?) and tries to keep things in context – rather than making you feel guilty for a latte here and there or eating out a lot, he tries to get you to focus on the important things.

The only things that aren’t great in this book are: 1) His examples of high-interest accounts are out of date, and 2) his advice about negotiating a car deal isn’t very good. Don’t follow it.

Overall, this book won’t make you rich quickly, but it will teach you how to save and invest your money wisely, so that you will be rich at some point in your life. It is available for less than ten bucks at Amazon, and I highly recommend it.

Best online savings accounts of January 2016

Best Savings Rates tracks online savings accounts, shows the ones with the highest interest rates, and collect reviews from users of those accounts. This is a summary of the best banks track by Best Savings Rates in January 2016.

Best Interest Rate

CIT Bank and Ally tied, both offering 1.0% APY. The median interest rate offered by banks tracked on our site was .65% APY, and the mean rate was .52%, so both of these banks are well above-average in that regard.

Best Overall Rating

The best overall ratings went to Ally (4.8/5.0 stars) and Discover (4.7/5.0) stars – both of these banks were given consistently high ratings by customers.

Best Customer Service Rating

We also gather feedback on customer service satisfaction – the winners of those were Citibank e-Savings (4.7/5.0 stars) and Ally (4.6/5.0).

Overall Winner

The “Best Savings Account for January 2016 from Best Savings Rates” goes to Ally – they were tied for the highest interest rate and received consistently good reviews from customers. Congrats Ally!

My ideas for dealing with excessive 401k fees

President Obama has recently turned his attention to retirement plans, as outlined in the The Wall Street Journal. One area of focus is the so-called fiduciary rule that would impose stricter regulations on advisors and force them to act in the best interests of those they advise, rather than taking actions to make more money at the expense of those they are advising.

I don’t think this is a bad idea, but there has been a lot of pushback from the financial industry (who wants to be able to continue to overcharge captive investors) and Republicans.

Indeed, companies and individuals who manage and advise employer-sponsored retirement plans often charge high fees, and many employees complain about this. I’ll give you one point of reference:

My employer uses Nationwide (who is most definitely not on my side) to manage our 401k. One example (that is more favorable to Nationwide than most of the other options) is the S&P 500 Index Fund. Nationwide’s expense ratio is 0.57%, whereas this same index costs me 0.17% in my Vanguard account (it actually costs .05%, because I have Admiral shares, but I’m trying to be fair) – the Nationwide one costs over 3 times as much for the exact same thing.

How significant is this difference? Assume a monthly contribution of $1,000, an average annual return of 7%, and a time period of 30 years – my fund at Nationwide would be worth $1,058,896, while the similar one at Vanguard would be worth $1,139,708 ($1,165,240 for the cheaper Admiral fund). That is a difference of over $80,000 – a really nice car! Keep in mind, this was one of the comparisons most favorable to Nationwide (many of the funds have a difference of 5 or 6x) and many 401Ks are even worse.

Why do 401K providers and advisors charge so much? Because they can. Employers setup plans and most fees are usually passed along to employees who have no say in which provider is used. Many employers setup plans when they are small and have little negotiating power, and as they grow, finding a better provider is never a high priority.

The Labor Department’s proposed rules would aim to alleviate this problem, by making it so providers have a fiduciary duty to plan participants but, as mentioned before, there is a lot of pushback on this. It still remains to be seen whether or not this rule will become law, and if it does, how effective it would be. Personally, I would prefer to see solutions to this problem that involve increasing competition. Specifically, I have two ideas:

1) Allow funds to go directly to an employee-specified qualified retirement account

In this scenario, employers can deposit retirement funds (including matching funds) directly into an IRA. The benefits to the employee are that they can choose their provider, and their retirement account is unlinked from their employer. The benefit to the employer is reduced complexity, reduced compliance costs, and reduced overhead in managing the program.

It would require a little more work in employee onboarding, but ultimately would benefit companies by sparing them the expense and effort involved in maintaining compliance, record keeping, and dealing with audits.

By allowing employees to choose where their funds are managed, they can shop around for the best management and lowest fees. If they want personalized advice for retirement, they can hire fee-based financial planners or go with a firm that advises them as part of their service, but they aren’t forced to pay for advisor services they aren’t using. This would encourage more financial service providers to offer competitive rates and service.

There are two downsides to this plan: Loans from your retirement account are no longer possible (at least under current rules), and dealing with matching funds that aren’t immediately vested is tricky.

The first problem – loans that are currently possible in some 401K accounts – doesn’t seem like that big of a deal to me. Most financial experts agree that this isn’t a great idea in the first place, so losing this ability isn’t the worst thing in the world. Alternatively, current rules around IRAs could be changed to allow for loans, but this could cause other problems.

The second problem – employer matches that don’t vest immediately – is a bit harder to solve. One solution is to simply say this option only applies to employers with no vesting schedule for matching funds. Another would be to allow the employer contribution to sit in another account and be eligible for transfer once the vesting period ends, but this adds additional complexity that doesn’t seem worth it. Ultimately, I think employers should be incentivized to provide plans with immediate vesting and provide alternative solutions for ones that choose not to.

Finally, what do you do about employees with no existing retirement accounts to contribute to? Employers could contract with a financial services company to provide default IRAs for employees, but employees would still be free to change providers at a later date, and the cost to an employer to change the default provider would be minimal (whereas changing 401K providers now involves a substantial amount of effort).

2) Allow annual in-service rollovers to IRAs

Another option (that could be used in addition to my first proposal) would be to make it so 401K participants can perform one in-service rollover to an IRA per year. Currently, participants can only do this when they terminate their employment, but allowing it to be done while they are still employed would let employees move their money to a more competitive provider.

This option is a little more complicated, and affords somewhat less cost savings to employees, but it requires fewer changes to the system as a whole. It also deals with the problem of partially-vested accounts – you can only roll over the vested portion of your account.

If providers knew participants could easily move their money elsewhere, they would be likely to offer better service and lower fees. If not, participants would be free to choose a better provider.

Ultimately, I think both of these proposals would be good for 401K participants and don’t significantly harm the goals of the 401K program. Plan providers and advisors accustomed to large, easy commissions may not like them, but they are good for everyone else involved.

I’d love to hear what other people think about these proposals? Are their better ones? Are there holes in these ideas that I’ve missed?

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Savings accounts with sub-accounts

Having a bank that makes it easy for you to maintain multiple savings accounts can come in really handy – it can make organizing your finances simpler, budgeting easier, and saving for specific goals a lot easier.

How does it work?

Banks that support multiple savings accounts make it easy to create sub-accounts and give them friendly names (like “Emergency Fund” or “Trip to Hawaii”), and also make it easy to do instant transfers between them (and your checking account). For example, my setup in Ally looks like this:

Screen Shot 2016-01-23 at 2.30.09 PM

As you can see – I have a checking account and three savings accounts (one for part of our emergency fund, one to keep money we set aside every month to pay for car insurance and registration, and one for big purchases). Every month, I transfer a set amount to the car savings account, then split whatever leftover money we have between big purchases and our emergency fund. This is really simple – it took about 10 minutes to set it all up on Ally, and I spend about 3 minutes per month managing it.

Why do it this way?

Setting your account up with multiple accounts makes it easy to keep money separated and know how much you have for various expenses/needs. It also makes it easy to keep your emergency fund separate and not accidentally (or purposely!) spend it on things that aren’t really emergencies.

Do all banks support it?

Not all do, and even fewer make it simple. We have a full list of them here, and the best ones seem to be Ally and Capital One 360. If you know of another bank that supports this, please leave us a note in the comments.

How many accounts should I have?

It is up to you. Some people like to have more granular savings goals – ie, saving for a trip or other specific thing. I prefer to just have a few – one for an emergency fund, one for all big purchases, and one for all expenses that are fairly large but only happen a few times a year (this makes our budget smoother).

Can’t I just track it all in a spreadsheet?

You certainly can, and it isn’t terribly hard to do so. Many people – including me – really like the convenience offered by having them separated in the account itself, though.