Larry's Dollars and Sense

Dollars and Sense – November 29, 2017

Question: Can you explain why banks penalize their customers when they cash a CD in before the maturity date?

Answer: There is a very sound and fair answer to your question. I will give you an example. Let’s say you borrowed money from your bank for a period of 4 years at a fixed rate of interest. Twenty-four months into the contract, the bank notices that rates have gone up significantly. What would you say to your banker if he or she called and said, “Hey, rates have gone up and I’m not happy with the rate on your loan. So, I would like to raise the rate to current market rates.” There is not a doubt in my mind as to what you would say. You would tell your banker to go fly a kite. You wouldn’t agree with it. The same goes for a CD. Your bank quotes you a rate for a specific term at a specific rate of interest. If CD rates go up sometime during the term of the CD and you are unhappy about it, you will either have to pay a penalty to get your money or, live with the rate until it matures. It’s purely a business transaction.

Question: Why do banks tie variable rate mortgages to U.S. Treasury Bills?

Answer: Lenders usually offer two different rate structures on mortgage loans. The first one is a fixed rate for the entire term. In other words, the rate you start out with will remain the same until you pay off the loan. The second rate structure is a variable rate which is typically lower than the fixed rate. The mortgage lending industry must choose a rate for an index to tie the loan to that they have no control over. The most popular index is U.S. Treasury instruments. Historically, these rates are pretty accurate in terms of what’s happening with the economy. Variable rate loans re-price every 12 months. The loan documents will state what rate the loan starts at and they will state that the adjustments will be tied to the index plus a margin over that index. For instance, if U.S. Treasuries were at 1.5%, the documents might quote a margin of 2% above that rate or 3.5%. This type of pricing is fair to both parties.

Question: Do a lot of people set up budgets for utilities so they won’t fluctuate so much?

Answer: I have no idea about the percentage of households that have their utilities budgeted. Budgeting is usually done so that families on a tight budget can have consistent monthly payments for electric, gas, water and sewage. This is an especially good practice for low income families. However, I’m sure there are some families that are not considered low income that do it simply to better manage their monthly costs. There is nothing wrong with this practice regardless of what your income level is. Some may choose to budget utility expenses simply because their personality is one that does not like surprises. So, they budget the expense so that they will know what to expect. Others are willing to pay higher fees in the winter and summer months so that they can enjoy the lower bills in spring and fall when gas is not needed for heat and electric is not needed for air conditioning. It’s just a preference. I believe most utility companies offer this service.

Dollars and Sense – November 22, 2017

Question: What is the reason some people buy bank stocks?

Answer: Most individuals who buy bank stocks are looking at two things. First, they look at the dividends paid which at the current time are yielding a higher percentage compared to current prices on bank CD’s and the bond market. This isn’t the case 100% of the time but often it is. The second thing individuals look at is the increases in valuation. In other words, long term growth potential. Bank stocks are not for short term investors. It needs to be looked at as a long term investment. The majority of shareholders in small community banks are local investors. They know management and the board members. This gives them a sense of security knowing the bank is in good hands. While bank stock is a great investment, it’s not for everyone. However, I’m not soliciting stock purchases. That is completely up to you to decide.

Question: Why don’t banks offer CD’s for longer periods than 60 months?

Answer: Some banks choose not to offer CD’s for even 60 months. Some won’t go more than 48 months. The reason for this is the same reason most people will not buy a CD for that long of a period. It creates an interest rate risk. A bank would have to pay a higher rate to attract customers to go out 5 years or longer and the rate offered might not be profitable for that long and the bank would be stuck paying it anyway. Customers would look at it the same way. What if you agreed to a 5 year term and the rate offered turned out to be low compared to the current market halfway through the term of the CD? Banks do not like to take too much rate risk and depositors don’t either. Sixty months is taking a risk. I don’t think you will see CD’s offered for a longer period than currently offered any time soon and maybe never.

Question: Why do people buy long term government bonds but not long term CD’s?

Answer: People do not buy these as much as they used to. Treasury Notes and Treasury Bonds used to be bought frequently for various reasons. One reason was the safety of knowing they would get their money back. Some bought them out of patriotic duty to support our country. However, many things have changed over the years and they are just not that popular these days. In addition, rates have been very low the past 10 years or more and not many people are willing to tie up their money for 10, 15 even 20 years at low rates. It doesn’t make any sense. I’m sure that the disenchantment with the way money is spent in D.C. has impacted the desire to purchase them as well. Whatever your reason might be for wanting to invest in Treasury’s, I won’t discourage you from doing so. It’s a personal choice you must make.

Dollars and Sense – November 15, 2017

Question: Why do Washington politicians feel a tax cut would benefit our economy?

Answer: Not all of them agree on this topic. However, the theory on tax cuts helping the economy is a two stage issue. First, there is the corporate tax rate. The lower the rate, the more likely it is that businesses will expand and add employees. Those new employees pay income tax so the loss in taxes at the corporate level would theoretically be offset by new payroll taxes. On the personal income tax level, it’s a simple expectation. Reduce the tax rate for families and they will use at least a portion of that tax savings to make purchases they have been putting off while waiting for the economy to improve. Do these two theories work? To a point they do work but never as much as anticipated. Many will just save the extra money which doesn’t help the economy. I think a tax rate cut is in order. However, it would not be a good idea to cut it too much or they will be back talking about tax increases shortly.

Question: Why don’t politicians ever follow through on campaign promises concerning the economy?

Answer: If you know anything at all about politics, you know most of the promises they make are not within their power alone to follow through on. They should be saying that they will do these things if they can get the support from politicians instead of telling us they are going to get it done. It has always amazed me how politicians work and we seem to just accept it without much questioning. I believe that most of the promises they make in order to be elected are sincere. They just aren’t realistic. The people we elect in Washington, D.C. are supposed to make decisions that make our lives better and safer. Unfortunately, all they do is vote against anything proposed by the other party whether it is good or not. It’s really disgusting to see them play these stupid games at our expense.

Question: Is there any law that allows me to protest paying federal taxes?

Answer: You can protest anything you want any time you want but it probably won’t do any good. The IRS is not going to give you a pass on paying taxes and if you try to not pay them, you will probably get put in jail plus pay a heavy fine. The only thing you might be able to do is fight with them over a deduction you want to take that they tell you is disallowed. Even then, you will probably lose. You cannot beat the federal government or the IRS which is part of the government. I know that most of us, at one time or another, have been angry over how our tax dollars are spent but very few act on this anger. There have been many important and famous people who have tried to avoid paying taxes on a lot more income than any of us will ever make and they lost the battle. Some even went to prison for tax evasion. If I were you, I would put my energy into something where you have a chance of winning because you won’t win this one.

Dollars and Sense November 8, 2017

Question: Why do banks charge for cashing a check that is not written on their particular bank?

Answer: If you don’t have an account at a bank and you ask them to cash a check written on another bank, they are taking a risk. In most cases, they will probably not cash it for you. If there is a circumstance under which they would consider cashing it, they will at least charge for it and rightly so. You are asking them to take a risk that the funds are in the other bank to cover the check. If there are not sufficient funds to cover it, the bank will return the check to the bank that cashed it and if you are uncooperative in making the check good, the bank takes a loss. The best solution to this problem is for you to take the check to the bank it is written on and they will cash it if funds are available. Although banks do their best to provide services to their communities, they are under no obligation to take risks by cashing checks where they don’t know the person who wrote it or the person trying to cash it.  

Question: Will the level of spending for the Holidays be a good indication of economic conditions?

Answer: In my opinion, the Holidays are the worst time of the year to judge the condition of the economy. Many people, especially parents of youngsters, lose their heads at Christmas time and spend more than they should. The credit card comes out and they begin charging knowing full well they can’t pay it all back in January when they get the bill. “Tis The Season To Be Jolly” turns into a nightmare financially for many. Don’t do this to yourself. If you do it because your kids will be angry if they don’t get what they want, you might want to take a look to see if you have taught them proper values in life. I understand the urge to want everyone happy at Christmas time. However, use your head and don’t spend more than you can pay for within 30 to 60 days. It’s just not worth it. So, even though news reports will try to tie Christmas spending to economic conditions, I don’t think it’s an accurate indicator.

Question: Why are more children remaining at home after they graduate high school or college? Is it the economy?

Answer: Based on what I have read, it happens for multiple reasons including the economy. In addition, young people are getting married at a later age than they did 50 years ago. Back then, most parents told their children that it was time to be an adult and make a life for themselves after they completed their schooling. Today, some don’t leave home until well after they graduate and some parents encourage it. I’m sure some contribute to the household expenses but there are probably some that don’t. I don’t claim to understand this type of situation but it’s not my problem to understand. Do I think it is a bit odd? Yes, I do. I think most young people are anxious for the day to come when they can cut the strings with Mom and Dad and be on their own. However, each family can make their own decisions on this and it’s really no one’s business. The only word of caution on this topic is, allowing your kids to stay at home as adults does not make you a better parent and it doesn’t mean you care about them more than parents who encourage them to leave after graduation.

Dollars and Sense – November 1, 2017

Question: Do you ever see a business venture that is doomed from the start?

Answer: I wish I could say no but I have seen many business ventures and projects that I felt had very little chance from the first time I looked at the proposal. People sometimes proceed even after being advised it won’t work.  All too often, they let their heart and desires get in the way of common sense and they plow ahead without regard for their banker’s opinion. I’m not saying I couldn’t be wrong but based on 45 plus years of experience, I have a pretty good feel for what will work and what won’t. There have been instances where the individual or individuals left my office unhappy because I didn’t share their passion for their venture. The truth is it is as much my responsibility to help people avoid a disaster as it is for me to approve loans to qualified applicants. I can count on one hand the number of times someone has been turned down and thanked me for helping them avoid a personal loss. The most frequent response is irritation over the fact that I gave them an honest opinion. There are various red flags that we know to look for in a new business proposal based on many years of experience.

Question: How difficult is it to reject a loan applicant?

Answer: I don’t enjoy saying no because lending money is part of my job. However, I don’t lose sleep over having to say no. Why? Because when I have to reject a loan applicant, whether personal or business, I feel I am saving them from heartache later. I have no interest in seeing people get hurt because I didn’t have the strength to say no when it needed to be said. More often than not, the applicant thinks we are wrong in our decision but we still have to do what we think is right. A comparison might be raising our kids. We sometimes have to say no for their own good whether they like it or not and we shouldn’t feel guilty about it. I completely understand the disappointment this may bring to someone. However, there are a lot of things that come into play when approving a loan and we don’t expect everyone to look at it like we do. Saying no is not fun but I do what I think is best for all concerned. Bankers who can’t say no when it is called for won’t be in this business very long.

Question: At what age should I be debt free?

Answer: There is no magic age at which you should be debt free. It has more to do with your abilities to generate income to pay the debt. In most cases, individuals reach an age where their income diminishes due to retirement and that’s usually between 62 and 72 years of age. Some are fortunate enough to retire with no decrease in income although this is rare. I think the key to your answer has to do with this diminished income issue. Do not go in debt for a term that goes into your retirement years if you will not be able to meet the obligation with your retirement income. This is different with each individual. Some can handle debt well into their retirement years and some cannot due to their change in income. No one can answer that question but you. Before committing to a debt at any age, make sure you have the capacity to handle it. For these reasons, we do not consider age when approving a loan.

Dollars and Sense – October 25, 2017

Question: How do people with 3 or more kids manage to take care of them financially?

Answer: Well, I can tell you they don’t do it successfully without some good planning. Having children is very expensive. It costs a lot of money to feed, clothe, educate and pay for the many activities kids get involved in as they grow up. Based on what I have witnessed over the years, not many couples think this through thoroughly before deciding to have several children. However, one thing is for sure. Couples cannot go in debt to do these things. It is very important for families to live within their means. If they do not, it will create financial problems for them beyond what they ever anticipated. Do not allow yourself to fall into the trap of trying to keep up with other families. It is very important that you determine what your limits are based on your income. If you plan properly and inform your children on what you can and cannot do, they will understand. If they don’t, it doesn’t change anything. Everyone has limits and you should find yours.

Question: Do you advise people to not make purchases unless they can pay cash for it?

Answer: The majority of people would have nothing if they waited until they had the cash to pay for it. My answer is no, I do not advise people to avoid financing purchases. It is not realistic to think that most people could even do that. Very few people could afford to buy a home without financing a portion of it and not everyone can wait to accumulate the necessary funds to purchase and automobile. However, there are some things that are not considered necessities that probably should not be financed if at all possible. Having said that, I know some individuals would rather finance a purchase than to use up their savings and I understand that if they can afford the payment. This topic is not as easy as it may seem because every situation is a little different. I don’t think it’s wise to go in debt for vacations or Christmas presents but perfectly acceptable to finance a home, car or other large purchase if you can afford it.

Question: I get all these telemarketer calls wanting to sell me an extended warranty on my car. How do they know I own it and should I have an extended warranty?

Answer: Getting your phone number is easy and there are public records that can be searched to determine what kind of automobile you own. Don’t bother with the “Don’t Call” program because it doesn’t work. My advice is, when you get a call like this, immediately hang up and block the number from future calls unless you are interested in an extended warranty. I’ve heard mixed reports on extended warranties. Some say they are worth it, others say they are not. My suggestion is to read the fine print very carefully before you sign anything. I guess it’s like any other kind of warranty. It’s something you would prefer not to pay for but if you ever need it, you will wish you had purchased it. If you are driving a new or late model car, check with your dealer to see what their opinion is about extended warranties. I’m not sure what they would tell you.  Also, ask the dealer about the particular company that contacted you. They may know the ones you can trust.

Dollars and Sense – October 18, 2017

Question: Can my bank take my money and send it to the state if I let it sit too long?

Answer: If someone were to let an account sit with no activity for 7 years, it is considered to be a dormant account and subject to being classified as unclaimed funds. The bank is required by law to send those funds to the state. The state will then retain the funds until they are claimed by the owner or the estate of the owner. There is no time limit for someone to claim the funds. This happens more often than you might think. Literally millions of dollars are held by states across the country. Some of it never gets claimed. The intent of this law is to protect consumers and I think it does. We must abide by the unclaimed funds laws of the state. I believe most, if not all, states have a law like this in place. In most cases, it’s a small amount. However, there are instances where it is a substantial amount. By the way, it isn’t just bank deposits. It could be stock in a company or other assets that have been abandoned for years.

Question: Is it the responsibility of my bank to tell me when I have too much sitting in an account that is not earning interest?

Answer: I believe most bankers would tell you that asking them to do this is unreasonable. You would be asking your banker to question your decisions and how do we determine what is “too much” in your account not earning interest. That figure would vary from one person to another. Your bank has thousands of accounts and thousands of customers. If a customer comes to us asking questions about what they should do with their money to maximize income, of course we would tell them if we thought too much money was sitting idle. However, would be presumptuous for us to make a judgment call on your money and as a general practice we would not feel comfortable doing that. We could actually risk insulting someone by telling them how to manage their money.

Question: Would there ever be a situation where my bank would call to ask me to verify my account information?

Answer: I highly doubt your bank would do that. Banks hire external accounting firms to perform audits. The audit firm will sometimes send out written requests to verify your account information and the notice will typically have your information on it and it will ask that you contact them if you don’t agree with the information. Even then, I would call your bank and make sure the request is legitimate. However, if you receive a call from someone telling you they are from the bank and they want to know your account number, it’s a scam because your bank would not do this. If you are uncertain as to what you should do, ask for their name and phone number for you to call back. They will most likely hang up at this point if it’s a scam. Check to see if the phone number they gave you matches your bank’s number. If you know someone at your bank, call them to see if the call is legitimate. You have to be very careful when giving out information over the telephone. The crooks are getting smarter and sophisticated.

Dollars and Sense – October 11, 2017

Question: Small banks are being swallowed up by big banks. How has your bank been able to avoid this with the cost of federal regulations?

Answer: Banks in small communities have been disappearing for many years. The reason most small banks sell is the lack of skilled people to keep up with the ever changing regulatory environment. Fortunately for us, we have the talent and expertise to stay in compliance with these changes. It is expensive and time consuming. However, we believe community banks are important to communities our size. Something happens to a smaller town when they lose their locally owned and operated bank. Having a community bank headquartered in a small town is part of its identity. Locally operated banks are more involved in charitable endeavors and they make contributions to deserving organizations. We are involved in many different ways. Also, larger banks cannot give the same level of personal service. Customers become a number and not a person. These are a few of the reasons we maintain our independents and we are proud of what we do.

Question: Why do banks charge less interest on a 24 month loan than they do for a longer period?

Answer: I assume you are referring to fixed interest rates for the entire term of the loan. If you were to go to your bank and request a loan for an automobile for a term of 24 months, it would likely be a lower rate than if you were to ask for a loan for a term of 60 months. The reason for this is the same reason why you would expect a higher rate of interest for 60 months versus 24 months on a deposit. Your bank is taking more risk that interest rates may go up in a 60 month period compared to a 24 month period. If you were depositing money for a fixed period, you would expect a better rate the longer you committed to the deposit. We are not asking our customers to do anything they wouldn’t want their bank to do on a deposit. Internally, bankers use the term “rate risk” meaning the longer the term, the more risk we take that our rate will be acceptable.

Question: How do you feel about escrowing taxes and insurance on a mortgage loan?

Answer: Escrowing occurs when a borrower divides up the taxes and insurance over a 12 month period and adds it to the payment amount. They send it to the lender who escrows the money until taxes and insurance are due and they pay them for you. If the borrower bought the home with a down payment of less than 20% of the purchase price, the lender would likely make it a requirement. Here is how I feel about escrowing. If you struggle to come up with the semi-annual tax bill and annual insurance, escrowing may be your best option. If you don’t struggle with it and you have a sufficient amount of income and savings, you probably don’t need to escrow. Some borrowers escrow simply because they don’t want to bother with it. It’s much easier to send it in with their monthly payment and let the bank deal with it. Why do banks require escrowing if you do not have 20% down? Historically, it has been proven that the less someone puts down a home mortgage, the greater the chance of default on the payments.

Dollars and Sense – October 4, 2017

Question: Is it true that excessive usage of a debit card in a short period of time could cause rejection?

Answer: Yes, it can and it’s for your own protection. It normally happens when someone exceeds their total dollar limitations in a 24 hour period. Again, these limitations are for your protection. Your bank normally has a $500 to $1,000 daily limit. If you anticipate that you will be using over this amount in a 24 hour period, you should contact your bank and ask them to raise your limit temporarily to accommodate your needs. They can reverse it back to normal limits when you are done. The reason for this security measure is to protect you if your card is stolen or the number is being obtained through fraud. When an individual’s card is stolen, the criminal will normally use the card quickly and often before the theft is discovered. Also, stolen cards are often used at places that most people would not frequent. This triggers an alert in our computer system to halt the transaction.

Question: Do real estate appraisals take into consideration the improvements that have been made?

Answer: It is highly unlikely that you will ever recover all of the cost of improvements in your home. If you are planning on selling your home soon, certain things may need to be done to get a fair price for your home. For instance, if your furnace needs to be replaced, putting a new furnace in will only help you get the price you want for your home. You may not be able to add all the cost to what you were planning on asking for your home. Fresh paint, new kitchen appliances, new plumbing are all things your home may need to put it in selling condition but you won’t recover every dime of it. It will simply help you get the price you want for your home. If you don’t make the improvements, it will devalue your home and it may even make it impossible to sell depending on what needs to be done. When a home sells and an appraisal is done either the buyer, seller, realtor or lender is going to be unhappy. Sometimes more than one is not pleased with the appraisal. However, it’s a necessary part of the deal.

Question: Is it important to do estate planning to protect your assets from taxes?

Answer: I would have to know how extensive your assets are to answer that question. However, this is a better question for an attorney who has a background in handling estates. If you have the basic assets like a home, automobile and a retirement fund, a Will might be enough. If you have a substantial net worth, I would highly recommend you seek advice from a professional who deals with this sort of thing on a daily basis. Be careful though. It probably isn’t the best idea to get advice from someone who wants to sell you something. I would strongly suggest you reach out to an individual or company that works on a fee basis for providing you the assistance. I’ve seen many instances over my career where individuals passed away with no document in place to protect heirs or their assets. Once again, if your assets are minimal, maybe all you need is a simple Will and not estate planning. The reason is if you have just the basic assets, your estate probably won’t be taxed anyway.

 

 

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