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2010

One of the most popular services available surrounding tax season is also one of the most expensive. Refund anticipation loans (RALs) are great products from a lender’s point of view; they are low risk and they are expensive. From a customer’s point of view, they provide a means to get cash when a household files its tax return rather than waiting for a check from the IRS. Tax preparation services like those offered by H&R Block sell these expensive loans in partnership with banks and other lending institutions. Since most customers who use these products need cash right away, they seem to be more willing to pay the high fees associated with these loans.

With the IRS sending direct deposits faster than ever, one might wonder why these products, and their cousins, the refund anticipation checks, are so popular. Millions of Americans simply don’t have bank accounts. Living paycheck-to-paycheck, these families see little need to store their money somewhere safe because they don’t have much to store in the first place. I am still amazed that 40% of H&R Block’s clients used these products last year, though, considering the high fees. I consider refund anticipation loans one of the worst forms of debt, second only to payday loans.

While I understand the function of thees products in the marketplace, I don’t like the concept of charging someone in a difficult financial situation to borrow his or her own money — and charging the borrower a high fee from an annual interest rate perspective. In a perfect world, no one would be living paycheck-to-paycheck, unable to make the rent or mortgage payment, and one step away from homelessness. Unfortunately the reality is that many households are facing these troubles.

In 2011, H&R Block will not be offering refund anticipation loans. A federal regulatory agency, the Office of the Comptroller of the Currency (OCC) has barred HSBC from offering these products. HSBC was H&R Block’s exclusive partner for refund anticipation loans. The customers who would be interested in these products will be directed to refund anticipation checks as a similar alternative, although it doesn’t provide the cash as quickly as a loan.

HSBC is not the only bank offering refund anticipation loans, and I am unsure why the OCC has singled out this one bank. If the bank was handling the sales of these loans in a reputable manner, the regulation should be applied consistently across all institutions. For H&R Block, these loans provided a significant portion of revenue, $130 million in 2010. Earlier this year, when HSBC was considering on its own not offering the refund anticipation loans to H&R Block, the tax return agency sued the bank.

Unless the situation changes, competitors like Jackson Hewitt will still be able to offer this product to their customers. TurboTax does not offer refund anticipation loans.

H&R Block, Wall Street Journal, Fox Business

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Whenever you make a purchase with your credit card, the wise move is always to pay off the purchase before the bill is due to avoid interest charges and late fees. If you know that won’t be possible in the short-term, the best thing you could do is keep your interest payments low by choosing the card with the lowest interest rate. The PenFed Promise VISA Card can make sure that you pay as little interest as possible, with one of the best purchase APRs currently available.

PenFed Promise VISA CardThe PenFed Promise VISA Card Issuer Details: .99% APR promo balance transfer rate for 12 mos. After that, the APR for the unpaid balance and any new balance transfers will be 7.99% to 16.99%. APR will vary w/the market based on Prime Rate. Subject to credit approval. $100 bonus after spending $1,500 in purchase transactions within 3 months of account opening.
• Rate and offers are subject to change.
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The PenFed Promise VISA Card does not carry an annual fee, so the card is always free to own. You need excellent credit as well as meeting other credit standards set by PenFed and you are required to be a member of the Pentagon Federal Credit Union (PenFed) in order to be considered for approval for this card. To be considered for membership into the credit union here are some examples of eligibility criteria:

  • Member of the United States Military or Uniformed Services
  • Member of an eligible military association
  • Employed by the US Government
  • Employed by an eligible place of business
  • Family member of someone in the United States Military
  • Employee or volunteer of the American Red Cross
  • Reside on a military base
  • Make a one-time donation to the National Military Family Association
  • Make a one-time donation to Voices for America’s Troops

This year, one of your many New Year’s resolutions should be to pay absolutely no credit card interest. For those unable to obtain this goal, consider the PenFed Promise VISA Card for big purchases.

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When asked about what it means to be financially independent, most people think about retirement and the amount of money needed in the bank and investments in order to be worry-free for the remainder of their lives. For many, this is why we work, why we suffer through a job we may not enjoy. The reward down the road is worth putting up with micromanaging supervisors, unfair office politics, and uneducated clients. The pattern and habit of earning and saving will help us reach the point at which we can lean back, relax, and live off our nest egg until we die.

The key to the above is that nest egg. If it’s large enough, it can sustain any life through its expenses. How large? Traditionally, experts have suggested taking what you believe your expenses would be in a year of active retirement and multiply that by 25. If the result were, say, $1 million, then that is the amount you should have invested in a broad equity index now in order to be able to withdraw 4% this year and adjust that amount for inflation each your for the rest of your life. Theoretically, you’ll never run out of money. If your first year of living off your nest egg won’t occur for another 30 years, you’d want to adjust your first number, what you believe your expenses would be that first year, by estimated inflation. A necessary nest egg of $1 million today could be more like $5 million down the road.

This type of financial independence doesn’t inspire completely security; stock market crashes could wreak havoc on the supposed 4% safe withdrawal rate. That’s why people like Suze Orman, who have millions of dollars to put away, put their own money in bonds — a much less volatile investment option — but need only 2% or less of their nest egg each year to meet their expenses. And Suze hasn’t stopped working; she’s financially independent now but still writes books and speaks publicly.

You don’t have to stop working completely in order to be financially independent. Another approach to financial independence focuses on passive income sources. That’s not much different from the above example of living off your investments; the gains and dividends that the stock market as a whole returns over time can be seen as passive, if not for the fact that you still need to pay attention to your investments and react to the market in some cases. In fact, most of the income sources generally labeled passive and somewhat active. You could create a business like real estate empire, where you could live off the rent income, sourcing all the “hard work” to contractors and management companies. Even reducing your work, you can never be completely hands-free when you run any business.

The key to financial independence may be finding a calling — some type of career you can do — and do well — while earning a living. You may still work for someone else’s company or perhaps build your own company, but the important thing is that thanks to the fulfillment you get from your activities, you may never want to retire.

As flexible and personal as the definition of financial independence is, I can’t imagine a scenario in which someone can be in debt and consider himself financially independent. Being in debt is like having part of your income owned by someone else. You are not free to do what you want with your money because you are obligated to repay a loan of some kind. This includes all the things traditionally classified as “good debt” like mortgages and student loans.

I asked around to gather more opinions about the personal meaning of financial independence. Here are a few of the responses I received on Twitter and Facebook:

  • It means to have a passive income that gives you the freedom to say, “Go to hell!” to your boss (via @rullopat). I prefer tact, but the underlying message is the same.
  • Sleeping on a big pile of money, because you’re too rich to be bothered with buying a bed (via @gl3media). If Scrooge McDuck were alive today, he’d be smiling.
  • Financial independence is being able to do something you want without worrying about the financial consequences. Can be a candybar for some, vacations for others (via @DanielPacker). Anyone can do something without worrying about financial consequences; in fact, that’s how many people end up in debt. The difference is that with financial independence, you know what the financial consequences are, and you know you can handle them.
  • There’s being financially independent of others, meaning you don’t need cash from Mom and Dad. Or being independent of finances which would mean that your passive/investment income is greater than your expenses (via @calebhicks) This is a great distinction. You could say the college graduate who finally moves out of his parents’ house is now financially independent, but that’s only one of the first steps.

To me, the core of financial independence is being able to make important life decisions without the constraint of your finances. How do you financial independence, and how do you know when you have achieved it?

I apologize to everyone who left a comment on this article on December 30. I needed to restore a day-old back-up of Consumerism Commentary and all of the comments for about 24 hours were lost.

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The recession can shape a generation. With many college graduates over the past few years unable to find jobs right away, many opted to move from campus back home with mom and dad. The proliferation of this trend has led to concepts like the Boomerang Generation and Prolonged (or Extended) Adolescence. Both refer to the idea that young adults are not gaining the maturity and independence they’ll need to function well later on in life.

I disagree. College graduates, for the most part, do not want to move back in with their parents, and will only do so as a last resort. I have some personal experience. After college, I lived with my father for a few months before finding a roommate to live with. Several years later, after going broke working for an arts organization, I eventually accepted defeat and moved back in with my father one more time — for four months.

This was the beginning of my financial awakening. I got back on my feet quickly and moved out as soon as I could; at this point, I didn’t want to be a burden to anyone. Those who have fallen victim to the Boomerang Generation probably have the same point of view; this living arrangement is a temporary solution and is not impeding the development of a capable, independent approach to living.

I know I’m much better for this non-traditional living situation. I was lucky both times to have the opportunity to get myself started or restarted. Some people are not as lucky. The New York Times recently featured an article about a young married couple with a young daughter who moved in with the mother’s parents’ house due to unemployment. The living situation is difficult, and it probably illustrates the difference between one family moving in with what is in effect another family and one individual moving in.

In the New York Times example, the parents who opened their house to the second and third generation of their family were having financial struggles of their own — not far-fetched in this economy that is supposedly in recovery but still sports high unemployment. A tough financial situation, tight living quarters, and philosophical differences particularly when raising a young child all contribute to making this situation volatile. This is a colorful example of how this type of living situation can tear a family apart.

I think families should continue to support each other to the best of their abilities. How could parents refuse to help when their children’s other option is a homeless shelter? I’m pretty sure that I could have survived either time if I had to live on my own, but I would have had to rely on credit for meeting my everyday expenses, including rent. Not everyone is as fortunate as I was, and for those who aren’t, a homeless shelter is the only other possibility.

Is it a good idea to move back with your parents? The answer seems to be, like it usually is, that it depends on the situation. From a financial perspective, having an “easy” living situation with minimal expenses could be what someone needs to get a start — or a fresh start — particularly in a difficult economy. On the other hand, personalities can clash and it could ruin relationships.

Would you offer to share your living space with your adult children, and possibly their family, if their financial condition deteriorated? Would you consider moving you or your family in with your parents if your income and savings dried up?

New York Times

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Gas Prices: Are You Ready for $5.00 per Gallon at the Pump?

by Luke Landes

One of the benefits of no longer having a daily commute is I’ll be spending much less for fuel in my car. When I traveled to an office five days a week, and even when my travel schedule was changed to four days a week to allow one day for remote access, I filled up […]

24 comments Read the full article →

Goals and Resolutions for 2011

by Luke Landes

Every new year provides an opportunity for self-renewal. The relatively arbitrary custom of recycling the dates on the calendar is like having a second (or a third, or fourth, etc.) chance to change the world. Although its history is a bit murky, the tradition of new years’ resolutions probably stemmed from this feeling. It took […]

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20 Ways to Use the Payroll Tax Holiday

by Luke Landes

When Congress passed the Tax Hike Prevention Act earlier this year, it included an economic stimulus in the form of a payroll tax holiday. As Leigh Mutert, CPA explained in our podcast interview, the payroll tax will be reduced in 2011 from 6.2 percent to 4.2 percent. As a result, paychecks will be a little more than […]

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Goldman Sachs Will Tie Bonuses to Long-Term Performance

by Luke Landes

A big criticism of Wall Street bonuses throughout and after the collapse of the financial industry has been the idea that executives were awarded over-sized bonuses while their companies fell apart. Wall Street fought back against this criticism, usually with the explanation that bonuses were paid in accordance to contracts that were signed before the […]

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Traffic Cameras, Salad Dressing and Capital Losses

by Luke Landes

The snow is falling hard in my corner of New Jersey. After Christmas in Queens, New York, I rushed home last night to stay ahead of the storm. The current weather reports are calling for 12 to 18 inches of the white stuff on the ground by the time the storm has passed. We’ve stocked […]

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Podcast 88: Leigh Mutert, H&R Block, The New Tax Laws

by Luke Landes

On today’s episode of the Consumerism Commentary Podcast, Flexo speaks with Leigh Mutert, CPA and Community Manager at H&R Block. Flexo and Leigh discuss many aspects of the new tax laws including the extension of the Bush-era tax cuts, the payroll tax “holiday” and its impact on many self-employed people. Consumerism Commentary Podcast #88 Leigh […]

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