An AARP Tale

for all those who may be interested in purchasing an immediate annuity from AARP and New York Life, please read this tale.  I apologize to my younger audience but remember one day, this may apply to you and you must know the difference between the payout rate and the rate of return.

An Actual Tale

for those that want to understand how the stock market calculates rate of return.  If you think that the stock market averages 10-12% per year for example—you better understand what that means to your pocketbook.  It does not mean you will make 10-12% per year.  You will make less.  If you’re asking yourself, “What is the difference between average returns and actual returns,” this tale will answer that question.

By Odysseas Papadimitriou, CEO of credit card comparison website, CardHub.com

This tale is about checking account fees.  It sort of starts as a nightmare, but don’t worry, it ends happily.  These days we are seeing an influx of new checking account fees, marring previously free banking services.  For many of us, this has come as quite the shock, especially because the reasoning behind the change is not widely understood.  However, these fees do not apply to all banks, nor do they apply to all customers at the banks that adopt them.  There are also a few different ways to escape new fees, which makes this tale one of practical importance.

Imagine this:  You wake up one morning from a mid-week slumber cut far too short by your morning alarm clock.  As you lay in bed treasuring those last few warm, glorious minutes before your feet hit the floor, you hear the familiar voice of the local morning news radio host say something about your local bank launching a new $9 monthly checking account fee.  You’re certainly awake now.  With eyes open wide, you reach for the smartphone that, of course, graces your bedside table and quickly learn that your eyes were not deceiving you.  Why the change, you wonder?   Before long, your mind turns to the options at hand.  After all, no one wants to pay $108 extra each year for something that was once free, right?

This is certainly true, but customers of some of the nation’s largest banks have experienced mornings just like that.  With the Federal Reserve-mandated cap on debit card interchange fees taking effect on October 1, major banks have been forced to look for ways to recoup roughly $9.4 billion in lost annual interchange fee revenue, according to a Card Hub study on the Durbin Amendment, the part of the Dodd-Frank Wall Street Reform Act that originally directed the Fed to explore a cap.  The logical substitute for lost interchange fees is obviously a fee of a different color, and banks—including Wells Fargo, Chase, Citi, SunTrust and Regions—have forwarded the financial burden of the new law to their customers.  This doesn’t mean that you must resign yourself to higher banking costs or excise a leisure-time activity to stay on budget, however.

No, you still have options.  First, you could change banks.  You see, the Durbin Amendment only applies to banks with at least $10 billion in total assets.  Small local banks therefore have no reason to raise prices, so to speak, and many may also offer debit card rewards, which are on the way to extinction in the large-bank market.  Another simple solution, the money envelope system, is defined in A Green Tale.

Alternatively, you could replace your checking account with prepaid debit cards, also excluded from the Durbin Amendment.  Though many people don’t know it, prepaid cards are actually tailor made to be checking account substitutes for those people who care about online bill pay, but couldn’t care less about having an actual paper checkbook.  While they were previously used as such by people whose history of bouncing checks or making other mistakes prevented them from qualifying for a traditional checking account, prepaid cards offer online bill pay, direct deposit, ATM withdrawals, etc.  And now that major banks have an interest in taking prepaid cards more mainstream, don’t be surprised if they are not only comparatively cheaper than some checking accounts, but also become more rewarding as well.  It wouldn’t be a stretch to predict that a future tale will explain how prepaid card rewards became the new debit card rewards.

According to a Card Hub Prepaid Card Study, the Green Dot card can basically be a free checking account, since there are no monthly fees or ATM fees as long as you load $1,000 each month (think your paycheck) and withdraw money from in-network ATMs (Green Dot has 18,000 of them).  Beep.  Beep.  Beep.  Hold on, is that the alarm clock?  Maybe the whole monthly checking account fee was just a bad dream, or maybe that’s all is has to feel like if you wake up and exercise one of the options laid out above.

In the next series of Tale releases I will start focusing on particular solutions as I see them.  I will explain how rate of return actually works, then explain what a High Mar Ratio is and why it my chosen path towards long term money management and then review certain products, stocks, indices, money managers and mutual funds to see how they fare when judged in the harsh light of the Mar Ratio.  I think of the Mar Ratio as a Behavioral Ratio where the lower the Mar Ratio on a product or strategy the more likely it is to get abandoned.

I have also started including an Ask Financial Tales portion to the site so that readers can ask me questions directly.  These I plan to answer on an ongoing basis and then assemble in a case study or solutions tab at a later time so that readers can see how I would solve certain situations as they arise.  I have already received a number of questions such as

1) Is this a good time to buy a house? or

2) I am interested in buying an indexed annuity is this right for me or

3) I own a portfolio of actively manged mutual funds but I’m thinking of switching to passively managed exchange traded funds, what do you think?

Keep sending your questions.