Achieving Financial Stability in America, 4th ed. (2023-2024)

Achieving

Financial Stability

in America

2023~2024 Edition (4th)

Misook Yu, CFP®

Copyright © 2018 by YU & Money Inc.| YUandMoney@Gmail.com

All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means without written permission from the author.

The author has made every effort to ensure the accuracy of the information within this book was correct at time of publication. The author does not assume and hereby disclaims any liability to any party for any loss, damage, or disruption caused by errors or omissions, whether such errors or omissions result from accident, negligence, or any other cause. The author’s opinion in this book should not be considered as investment recommendations. Consult qualified professionals for your personal financial matters.

Published in the United States of America

First Edition: [November 2018]

Fourth Edition: [December 2023]

ISBN: [979-8-9878709-1-4 ] English, ebook

I dedicate this book to my husband, Terry, without whose full support I wouldn’t have been able to go back to school to study finance, quit a job to work for myself, and write this book.

Introduction

Most Americans are in great financial pain. They may appear to be fine because they don’t express their suffering, but the overwhelming majority, about three out of four, are living paycheck-to-paycheck with less than $1,000 for emergency savings. Many parents are still making payments on their own student loans while scraping together every dime they can find, to send their children to college at the same time. People even with health insurance often hesitate to see a doctor because they fear what they may have to pay under deductible and coinsurance requirements. Seniors often skip a meal because they can’t afford three meals a day.

How could that be? Among many reasons, the costs of college education and medical expenses are two areas of the economy that have been increasing faster than inflation, while wages have been stagnating over the past several decades. High inflation and interest rates, along with skyrocketing housing costs – issues arose coming out of the recent pandemic – have exacerbated the financial struggles already burdening the majority of Americans.

Lack of basic financial literacy among Americans also contributed to this crisis, in my view. Many studies reveal that an overwhelming majority of Americans say they don’t understand what inflation is and don’t know how to do simple interest rate calculations, let alone understand stocks, bonds, and funds. An increasing number of states now require high school students to take a personal finance class, which is excellent news. But a class or two in high school is not nearly enough to adequately prepare young adults to manage their own finances, which requires in-depth knowledge in many areas. Financial professionals who could greatly help individuals with ‘regular’ income or assets tend to prefer serving those who already have accumulated significant wealth, leaving most Americans underserved. Working hard and being frugal is no longer enough for most people to be financially stable as it had been for previous generations.

What choice do you, an ordinary person, have to survive in this reality? Save as if your life depends on it and educate yourself every day, even for 10 minutes, on personal finance as if it’s a job. At the very least, know who to hire and hire professionals who can guide you on where and how to start to achieve your financial goals. Arming yourself with financial literacy and knowing how to utilize professionals for your advantage is such a powerful force that it will make all the difference in achieving financial security. I hope this book will help awaken that power within you.

Sincerely wishing your financial stability,

Misook Yu, CFP®

These days, boundaries between traditional banks and investment companies have largely disappeared, as most banks now offer investment services and investment companies provide typical banking services. In this chapter, I discuss the basics of banking, regardless of where you open your account.

Checking Account

Savings Account

CD

FDIC Insurance

Checking Account

◑ A Checking Account Is Necessary

Checking accounts are used to deposit money and pay bills. Without a checking account, your life can be quite inconvenient, so you should get one when you have income and bills to pay. If you don’t have a bank or credit union branch nearby, consider an online bank.

To open a checking account, you typically need a picture ID such as a driver’s license or passport and proof of address. A utility bill, credit card statement, lease agreement, or any similar document can be used. A Social Security number or ITIN(Individual Tax Identification Number) is also required. If you do not have a Social Security number or do not want to use it for any reason, you can obtain an ITIN by filing IRS Form W-7 (free). See more information on ITIN on IRS.gov (How Do I Apply for an ITIN?) With free and instant money transfer methods such as Venmo, Zelle, Paypal, etc., personal checks are not used as commonly as they used to. But once in a blue moon, you may need to write a paper check, so I recommend ordering one when you open a new checking account.

◑ Account Maintenance Fees

Many checking accounts used to be free with no strings attached, but most banks are now charging maintenance fees that can add up to several hundred dollars a year. Carefully review all the fees that are charged by the bank you intend to use and see if you can avoid them. Different banks have different rules and fees, so shop around.

Internet banks tend to offer free or cheaper options for checking accounts because they don’t have the expenses that physical banks with traditional branch offices do. Some people prefer to go to a local branch office to take care of their business, and some complete all necessary money transactions online. No matter what you prefer, be sure to understand the fine print in any banking agreement, to avoid unexpected fees.

If you already have a checking account, see if you are being charged any fees. Do not assume that you are not paying any fees just because you’ve had that account(s) for a long time without being charged. I recently visited a local bank for about five minutes. During that short time, I saw two angry customers who complained about fees that they were not previously paying for holding their account.

Banks may have conditions for free checking accounts, which you need to fully understand. For example, you may get a free checking account if you have your paycheck automatically deposited, but if there is any lapse, (whether due to various factors such as job loss), then the bank is likely to charge monthly fees during the time period you did not have monies directly deposited. If this is the case, you could politely ask your bank’s manager to waive the fees.

◑ Other Fees

Two other common fees charged by many banks are ATM fees (charged for using another bank’s ATM), and overdraft fees. Overdraft fees are charged when you write a check or make a debit card purchase for more than the cash you have in your account. Most banks provide overdraft protection service, which is designed to cover the deficit amount for a fee. It is possible to opt out of this service, but your banking institution may charge your account for this option. You also need to pay attention to the order in which your bank clears checks. For example, let’s say you have $500 in your checking account. Anticipating a direct paycheck deposit of $1,000 soon, you send out two checks: one for $1,000 and the other for $200. If both checks are deposited before you get paid, your bank may clear the $1,000 first and then the $200 one, effectively charging two overdraft fees. If it deposits the $200 check first, you’d pay only one overdraft fee, instead of two. It costs you money to miss small details, so protect your money by monitoring all the transactions. By the way, if you find yourself in a similar situation as the example above, complain to the bank manager and ask for your money back. As for ATM fees, make sure to use a machine that is from your bank to avoid the charge.

◑ Checks

Once you open a checking account, you may be given some temporary checks. You will need to order permanent checks with your identifying information printed on the document, such as your name and address. Generally, the cost of these checks will be deducted from your checking account balance, unless you order elsewhere.

When writing checks, it is important that you fill out all the areas accurately. If you give a check to an individual for future payment, make sure you write that future date, so the recipient won’t be able to deposit it earlier. If you forget to sign a check, it won’t be accepted at a bank, although it may be in case of recurring payments such as credit card or utility bills.

Once again, the issue of overdraft protection can be beneficial yet costly at the same time. That’s because while it can be a useful service that may save you from other problems, it is essentially a short-term loan that most banks charge a hefty fee for. If you don’t have this service and your check has bounced (meaning your bank has refused to transfer money to the depositor), then it can become a criminal offense, depending on the amount and the state laws in effect where you live. But because it usually is a flat fee, the annualized fee on a small amount ‘protected’ can be outrageous. Making a habit of documenting and balancing your account records each time you write a check or swipe your debit card is the best way to avoid the problem. If you seem to keep paying these fees, I strongly suggest you use cash only: no check or debit card.

◑ Debit Card is Not a Credit Card

With your new checking account, you will get a debit card. Most debit cards these days have either a Visa or MasterCard logo on them, allowing debit cardholders to use them like credit cards, however, there are three significant differences between a debit card and a credit card. First, using a debit card is a modern way of writing a check; purchases you make using a debit card are paid from your checking account, even if you select the credit button on the card machine at checkout. Therefore, do not use the card if you don’t have money in your checking account to cover the purchases. Secondly, even though you can use your debit card like a credit card, it does not help you build credit. Finally, it can be cumbersome to dispute fraudulent activities on debit cards. Debit card transaction disputes can take longer, and there’s a risk that you may not fully recover from fraudulent charges, as opposed to credit cards that usually have quicker and better protection for any identified fraud. It is generally better, in my opinion, to use a credit card for purchases and pay the bill in full each month.

Savings Account

◑ Account for Keeping Emergency Funds

Savings accounts are, as the name implies, for saving. In a savings account, you may keep cash for unexpected emergencies or for any expenditures in the near future. Many people who are afraid of losing their hard-earned money in investment accounts tend to prefer keeping funds in a savings account. But keeping money that you’re planning to use in the distant future, say for retirement in a ‘safe’ bank account can be a very costly mistake because the money will lose its purchasing power to inflation. Understanding this concept is very important in financial planning, so I’ll discuss it throughout the book.

◑ Very Low Interest Earnings

Interest rates are very low now in mid 2020, so it is not surprising that consumers are earning close to zero percent on their savings accounts. Savings and checking accounts are places to safely park your cash for a short amount of time and should not be treated as investment accounts, therefore, do not expect any growth of your money in those accounts. Any interest earnings that you receive from these accounts is subject to an ordinary income tax for the year earned. As you should with any other accounts, watch out for any fees in your savings account.

CD

◑ Deposit for A Specified Term

A CD (Certificate of Deposit) is often purchased by people who want to secure their principal amount and earn interest income. The way it works is that you lend money to your bank for a specified period and receive a small amount of interest. The term can vary from months to many years, and interest rates are usually higher for CDs with a longer term. Since CD’s are guaranteed (to a limit) even in the case of a bank failure, the interest rates tend to be lower compared to other financial products such as bonds that do not provide the same protection on the invested principal. Penalties are imposed if you sell CDs earlier than the original term purchased, so, don’t buy a five-year CD to get a higher rate when you expect to use the money within one year, for example.

◑ CDs as Long-Term Investment?

Although many individuals with risk aversion favor CDs for ‘safety,’ low interest payments that CDs provide hardly make them an efficient vehicle for long-term asset growth. If you buy a CD that pays an interest rate that is lower than the inflation rate in any given year, your money actually loses its value. Yes, investment can be risky by nature, but most people cannot afford not to invest, in my opinion, because the alternative to not investing, such as keeping money in cash and CDs that return less than the inflation rate, is a certain way to lose its value in the long run. What benefits do you get from keeping your money ‘safe’ if it keeps losing value over time?

FDIC Insurance

◑ Government Guaranteed Insurance

Cash deposits in bank accounts and CDs are insured by the FDIC (Federal Deposit Insurance Corporation) in case of bank failure. The FDIC was created during the Great Depression to restore public trust in the banking system. It is self-funded by the member banks, and no taxpayer money is involved according to FDIC.gov (When Banks Fail: Facts for Depositors and Borrowers).

◑ Per Person, Type of Ownership, Institution

If a bank becomes insolvent (fails), the consumers’ deposits of up to $250,000 per person per type of ownership and per institution are protected by the FDIC (2020). See the following table to understand how FDIC works.

As shown in the table, Sue’s total deposits of $500,000 will be protected if both Bank A and Bank B were to fail because she has accounts in two different institutions. All of Bob and Jim’s $1,000,000 will be protected as well because they are in a joint account in two different banks. But only 50% of John’s $500,000 will be protected because it is in one category (individual ownership) in one institution. John can keep his money FDIC insured either by keeping it in a joint account or depositing $250,000 each in two different banks.

◑ Check if Your Bank Is an FDIC Member

Your bank must be a member of the FDIC for your money to be federally protected. Most commercial banks are members, but make sure that you open an account in a member bank. You can ask a bank representative or look for an FDIC sign.

◑ Investment Accounts Are NOT Insured

Be aware that monies that are invested in stocks, mutual funds, bonds, and insurance products are not FDIC insured, even if they are in accounts at an FDIC member bank. Items in a safe deposit box situated in a bank are not FDIC insured, either. One thing that can be confusing is money market accounts vs. money market mutual funds in investment accounts: money market accounts are FDIC insured, but money market mutual funds are not, regardless of where the accounts are held. That is because buying mutual funds is an investment, while keeping money in a money market account is considered a deposit. Only cash and cash equivalents (checking, savings, CDs, and money market accounts) are FDIC insured. See more information on what is FDIC insured and what is not on FDIC.gov. (The Importance of Deposit Insurance and Understanding Your Coverage).❖

Bad credit can cost a lot of money throughout your life. You can pay higher interest rates on loans, and insurance can be more expensive. It can also affect your job prospects because most employers pull the applicants’ credit. Understand how credit can affect your overall life and take good care of it.

Why Credit Matters

Credit Rating System

How to Build Good Credit

How to Fix Errors on Your Report

Why Credit Matters

◑ Bad Credit Can Cost You a Lot of Money

I cannot stress enough how much credit can affect your life because it can save or cost you a lot of money for the same purchase or service. If you have lower credit scores than what credit card companies or banks like, then they will charge you higher interest rates on your credit card or loans.

BusinessInsider.com reported in November 2022 that consumers with good credit (781+) who buy new car pay 2.4% in loans, while those with bad credit (501~600) pay almost 11% on their loan. Those with the lowest credit (300~500) pay whooping 14.8% for a new car and about 21% in used car loans. (See the table below). To put it in numbers, say you buy a new $35,000 car with a five-year loan. If your credit score is 800, you’d pay about $37,121 for principal and interest over five years, whereas if it is 590, you’d pay about $45.659. In the used car case with the lowest credit group, you’d end up paying over $56,800!



As if paying so much more for the same car is not enough, even a bigger problem for those with low credit score may occur when an expensively financed used car breaks down before the loan is paid off. Let’s assume that you bought a used car three years ago with a five-year loan, and the engine failed today. You don’t have the money to get a new engine or cannot borrow from anyone. Even if you can borrow the money today, you know you won’t be able to pay it back anytime soon. If you don’t go to work tomorrow, you’re jeopardizing your employment. What choice do you have here? In desperation, many people go back to a used car dealership where they know they can get another car immediately. Since you still owe thousands of dollars on your worthless old vehicle, you have no choice but to consolidate the old loan with the new one for another used car. I have seen people paying over $1,000 a month, which is almost half of their paycheck, on a used car that is worth maybe a few thousand dollars in resale value. You can quickly fall into this trap if you go through a few used cars that give you trouble before the loan is paid off. At this point, you are in a financial black hole that you may not be able to get out of, even if you keep working full-time until retirement. The sad reality is that more and more Americans are falling into this trap even with a job known to be respectful and stable such as teacher and nurse.

◑ Good Credit = Savings and More

People with good credit can save money in various ways. Let’s say you and your friend with similar income each buy a house with a 30-year, $300,000 mortgage, for example. If your interest rate is fixed at 3% and payments are made as originally scheduled, you’d pay about $456,000 for principal and interest, but if your friend with less-than-optimal credit has a rate fixed at 4%, he’d pay a total of about $516,000. That’s about $60,000 difference, which is 20% more on interest payment on the same loan! Your friend is likely to pay higher interest payments on other loans and insurance premiums as well. Even his job prospects can be negatively affected because employers typically consider an applicants’ credit when they look to hire new people. The bottom line is that those with good credit can save money in many ways, allowing them to save more. That would help them financially advance much farther than those with bad credit.

Let me be blunt: having bad credit sucks in many ways. Bad credit makes your loans more expensive, which makes it harder for you to save. It is also humiliating to deal with loan officers acting as if they are doing you a favor by ‘giving’ you a loan with a high interest rate, (where the only beneficiary is the loan officer who receives a commission from that abysmally high interest loan). Now consider what that scenario would look like if you have excellent credit. It is a different world because life becomes much easier and nicer. You can choose which lender to use for your loans, and salespeople will do their best to get your business, assuming no issues on your ability to repay. Even if someone is not kind to you for whatever reason, you have options to go to other places that will welcome you. Having such options gives you power to get better deals throughout your life, which further enables you to accumulate more wealth. Good credit is a vital building block for financial stability.

Credit Rating System

◑ 3 Credit Bureaus

There are three credit bureaus that collect consumers’ credit data: Equifax, Experian, and Trans Union. Despite the names (credit ‘bureaus’ or credit ‘agencies’), they are not government agencies or nonprofit organizations. They are for-profit companies whose practices are subject to some government regulations. These companies gather consumers’ payment histories and use them to calculate their credit scores. Companies are not obligated to report their customers’ payment history to credit bureaus, and the credit bureaus don’t share information with one another as a general business practice. Since it costs money for companies to report to credit bureaus, small companies may choose to report to only one, while some may not report to any. That is why FICO scores are often different between companies.

◑ 3-Digit FICO Scores



Most commonly used credit scores called FICO (Fair Isaac and Company) range between 300-850, and they are categorized as followed: Poor (under 580), Fair (580-669), Good (670-739), Very Good (740-799), and Excellent (800+). Less frequently used as a credit score is VantageScore which ranges from 501-990, but I focus on FICO in this book.

Let’s see what affects your FICO scores in the graph on myFICO.com. As shown on the graph, payment history (35%) is the most crucial area, followed by amounts owed (30%) and length of credit history (15%). These three make up 80% of your FICO score. When you think about it, building good credit requires common sense: minimize borrowing and make payments on time. Many people are eager to chase after ‘good deals’ and frequently open/close credit accounts. They may be able to save some money by doing it, but that does not help build good credit, as 15% of your FICO score is determined by the length of your credit history.

◑ 20% Errors in Credit Report

According to a study conducted by the Consumer Financial Protection Bureau (consumerfinance.gov), one in five (20%) consumers found at least one error in their credit reports (Common errors people find on their credit report- and how to get them fixed). The error rate is shockingly high, which is why it is critical to check your credit reports for accuracy.

◑ Seven Years of Records

Most credit information including late payments and Chapter 13 bankruptcies remain on your credit report history for seven years. Chapter 7 bankruptcies and judgments such as liens and settlements may remain for up to 10 years, although that standards may differ by various state laws. Simple mistakes or errors on your credit report can ruin your scores in a short time but recovering can take many years, so always pay attention to what’s on your credit report, especially before you apply for a loan.

◑ Free Credit Report Every Year

You can check your credit report