Chase Freedom Experimenting With Quarterly Rewards Auto-Enrollment

While flipping through the mail, I recently ran across a missive detailing a test of a new cash back feature for the Chase Freedom card.

As you’re likely aware, many credit cards (including this one) have adopted a rotating bonus category model, where you get 5% on purchases in certain categories for a limited time, and 1% on everything else.

In the past, you’ve had to re-enroll each and every quarter to get 5% cashback on the select categories. Annoying. But that’s (hopefully) changing…

Because I’m a “valued Chase Freedom cardmember,” I’ve been invited to participate in a test of a new auto-activation system. In short, I just have to sign up and agree to receive text reminders.

The text reminders (no more than one per month) sound fairly non-invasive; they simply remind you of the reward categories. In return, you’ll be auto-enrolled in the bonus categories each quarter for the remainder of 2012.

If you discontinue the text reminders (which you can do at anytime) you’ll also lose the auto-activation, so you can’t easily game the system.

If you’re interested, you can sign up at chase.com/freedomoffer — but hurry, you have to do so by February 10th to qualify.

Note: According to a reader (thanks Jonathan!), this is a targeted offer, so you may not be eligible. But if you’re interested, it can’t hurt to try signing up.

Don’t forget the $200 bonus…

And don’t forget… If you don’t already have the Chase Freedom card, you can get a $200 cash bonus by applying for one, getting approved, and spending $500 within the first three months. There’s no annual fee. Technically, you’ll get 20,000 points, but you can easily redeem these for a $200 check.

For what it’s worth, we’ve had this card for years and have never had any problems getting Chase to hold up their end of the bargain. You just login, request the check, and it shows up in your mailbox within a week or so.

Income-Based Repayment Plans for Student Loans

No one can argue that college costs have become exorbitant. Even during the recent recession, schools continued increasing tuition. Student loan repayments are thus taking even longer to pay off, as college graduates are having trouble finding a decent job, or any job at all.

Amidst this gloom and doom, there is some positive news. President Obama seeks to accelerate changes to Income-Based Repayment, a student loan repayment program available for many federally-guaranteed student loans.

Geared for low-income families, the unemployed, and people with lower-paying, public service jobs in education or non-profit organizations, this program caps monthly payoff amounts at affordable levels relative to your income, family size, and the state in which you reside.

Currently, the IBR program forgives debt still owed after 25 years of consistent repayment, and caps payments at 15 percent of discretionary income. Under the President’s proposal, students who took out their first loan during or after 2008 and opened at least one additional loan during or after 2012 will see the cap drop to 10 percent and the forgiveness period reduced to 20 years.

This change would not only expand the number of people who are eligible for this program, but also make it even more useful to qualifying students. Is this a program that will benefit you? Here’s what you need to know.

Who is eligible for IBR?

This program is available to federal student loan borrowers in both the Direct and Guaranteed (FEEL) loan programs, and covers most student loans, with the exception of those made to parents.

This includes all Stafford, PLUS, and Consolidation Loans, but not ParentPLUS or Consolidation Loans containing Parent PLUS Loans. Private student loans don’t qualify for IBR. Bottom line: to qualify for a reduced payment, you must have enough debt relative to your income.

How are payment amounts determined under IBR?

This program uses a sliding scale to determine how much students can afford to pay. For example, if you have a family income of $40,000/year with four family members, you would pay 2.4% of your income towards student loans. That amount jumps to 8.9% if your household has only one family member.

If your income is $100,000/year and you have a family of four, you would pay 10% of your family income versus 12.5% if you were in a single-person household. Under this program, you are required to submit updated income documentation each year.

Obviously, the repayment amount will increase if your income rises.

What about interest under this program?

IBR typically extends the loan’s term, so be prepared to pay more interest than you would with a traditional 10-year payoff period. You should also be aware that, in some cases, the IBR payments may not cover the interest on your loans.

If this is the case, the government will pay interest on Subsidized Stafford Loans for your first three years in the IBR program. After this period, and for other loan types, interest is added to the total amount owed. Keep in mind that loan amounts still owed after 25 years of qualifying payments (or 20 years when the President’s IBR changes are implemented), are automatically forgiven.

What are IBR’s qualifying payments?

According to the Department of Education, payments that count toward IBR’s forgiveness period include payments made in the Income Contingent Repayment (ICR) plan before July 1, 2009; all payments made on or after July 1, 2009 in the IBR, ICR, and Standard 10-year Repayment plans; if your income is at or below 150% of the poverty level and you have calculated a payment of zero in IBR or ICR; and periods on or after July 1, 2009 if you have been granted an economic hardship deferment.

What are the advantages of IBR?

Not only will monthly payment amounts be less under IBR than under a 10-year standard repayment plan, but the government will pay your unpaid accrued interest on Subsidized Stafford Loans for up to three consecutive years from the date you began repaying your IBR loan.

In addition to having your loan forgiven after a period of time, if you work in public service, the IBR payments will count toward the required monthly payments for you to receive loan forgiveness through the Public Service Loan Forgiveness Program.

What are the disadvantages of IBR?

It’s important to note that you may pay more interest under this program, since it typically extends your repayment period. Also, you are required to submit annual documentation about your income and family size to qualify. If you don’t provide this, annual payment amounts will change to a 10-year standard repayment plan based on the amount you owed when you began repaying under IBR.

Your student loan servicer can provide additional information about IBR, including whether you qualify and how to apply.

Will the IRS Disallow Backdoor Roth Contributions?

I’ve talked quite a bit about making “backdoor” Roth contributions if you’re over the income limits for contributing to a Roth IRA. In short, you can make a non-deductible contribution to a traditional and then immediately convert it into their Roth.

This strategy has become so popular that mainstream publications such as Forbes have started talking about it. But is it legal? That was the topic of a recent discussion over on the Bogleheads forum.

This discussion was prompted by an article by Michael Kitces, who is a financial planner extraordinaire and the Director of Research for the Pinnacle Advisory Group.

According to Kitces, while the individual steps of the backdoor Roth maneuver don’t run afoul of IRS regulations, these contributions could be disallowed under the step transaction doctrine.

The step transaction doctrine is a legal principle that essentially allows the IRS to look at the overall effect of a multi-step transaction and treat it as a single, integrated event.

In other words, rather than looking at the legality or tax treatment of individual steps, the IRS is free to look at the overall result of the transaction — i.e., that an individual over the contribution limits was able to make a Roth IRA contribution — and tax (or penalize) it accordingly.

So… The question is whether or not the IRS would balk at backdoor Roth contributions. I’m not particularly concerned about it, in part because the removal of income limits for converting funds to a Roth IRA appears to have been specifically intended to allow high income individuals to do just that, but…

It seems at least theoretically possible that the IRS could view this as an over-contribution, which comes with a recurring penalty of 6%/year (albeit with a 3 year statute of limitations), and these transactions could be messy to unwind.

At the same time, it’s worth noting that IRA expert Ed Slott weighed in on this issue last spring, arguing that the step transaction doctrine is a non-issue for backdoor Roth contributions.

My pal TFB has also tackled the subject. The short version is that he’s recharacterizing his recent conversions, and will re-convert at a later date to reduce the odds of his conversions being viewed through the lens of the step transaction doctrine.

What about you? If you’ve been making backdoor Roth contributions, are you concerned about running afoul of the IRS?

Four Hidden Dangers of Leasing a Car

For some people, there is an appeal to leasing a car vs. purchasing it outright. Leasing a car is one way for many would-be car owners to be able to finance a more expensive car with a lower monthly payment than they would have otherwise been able to afford.

This low monthly payment is not all it is cracked up to be, though. In fact, there are several hidden dangers when you lease a car that you do not typically find when making a purchase.

With the popularity of leasing on the rise and new commercials hitting the airwaves every week, it’s important to understand how these hidden expenses can wind up costing you more money in the long run than if you had simply purchased the car.

Here are four of the biggest hidden dangers that people face when leasing a car instead of buying a new car.

Lack of equity

While most financial experts are quick to point out that your new car loses value as soon as you drive it off the lot, they also often fail to mention that you will eventually have some sort of equity in the car.

When you finish making payments on your car loan — if you are a buyer — there is still a residual value to your paid off car. This is the value that you can sell the car for in the end. Granted, your car’s value may just be a fraction of what you paid for it initially, but it still has some value.

If you had leased the car instead, that wouldn’t be the case. When you lease a car, you agree to return the car at a predetermined point in time, typically three years after signing the lease. At the end of your agreement, you simply return your car and are left with nothing but memories.

Also can be the risk that if you wreck the car or have it stolen, your auto insurance will only cover the market value – which may be less than you owe on your lease.

Mileage limits

When you lease a car, you are typically limited to driving between 10,000 and 12,000 miles/year. If you want the best deal on a new car lease, you may find yourself stuck at the low end, with a 10,000 mile annual limit.

Many lease agreements charge 18 cents per mile or more when you go over your limit. So, for example, if you drove 15,000 miles each year during a three year lease that only provided you with 10,000 miles annually, you could be looking at an extra $2,700 in charges when you your leased vehicle to the car dealership at the end of your agreement.

Damage fees

A car lease requires that you return your car in good shape, and dealerships can vary in terms of what they consider to be satisfactory condition. What you may view as simple dings and chips from normal wear and tear may be unacceptable to the dealership when you return your car.

One friend of mine found himself penalized thousands of dollars for damage thanks to stains on the carpets of his car from coffee spills. ProTip: You may be able to take your car to the dealership for a pre-inspection before returning it, thereby allowing you to fix/clean it up before being charged.

Lots of legalese

Both leasing and buying a car can both be tricky, and car dealerships don’t make things easier on their customers with all their legalese.

You’re bound to hear terms such as money factor, residual value, capitalized cost reduction, and capitalized cost when you look at leasing a car. One of the most important figures to focus on is the money factor, which is essentially the interest rate on your lease.

You have to multiply the money factor by 2,400 in order to find the annual interest rate that the dealership is charging you. For example, with a 0.002 money factor, the interest rate is 4.8%.

Closing thoughts

Leasing a car is starting to make a big comeback in mainstream America as more consumers are looking for new cars while trying to minimize their monthly payments. According to the Automotive Lease Guide (ALG), which tracks industry leasing trends and residual values of cars, the popularity of leasing is expected to continue to increase over the next four years.

ALG estimates that leasing will grow to over 17% of the mainstream car purchasing market by the end of the year, with 43% of all luxury cars being leased. Leasing a car may be a viable option for many consumers, but you need to go into the transaction with an understanding of all the requirements, potential fees, and hidden dangers that lie ahead.

Have you ever leased a car? If so, did you run into any unwelcome surprises?

How to Save Money on Plane Tickets

Are you looking forward to a nice Spring Break vacation? Or maybe a summer trip to visit family? If so, and if you’re planning on flying, then read on…

According to a study by Airlines Reporting Corp., which is company involved in ticket transactions between airlines and travel agents, the best time to buy a plane ticket is six weeks before your intended travel date.

This study, which was based on millions of transactions over the past four years, found that passengers buying tickets six weeks in advance paid roughly 6% less than the overall average fare.

The study also showed that ticket prices can rise dramatically about a week before the departure date, and can be as much as 40% higher if you try to buy the same day you travel.

This isn’t to say that you’ll always get the best deal by booking six weeks in advance but, all else being equal, that’s when you’re most likely to score the lowest price.

As an aside, a colleague once raved to me about the Bing travel predictor, which tells you whether you should by now or wait (along with a percent confidence indicator) based on whether they expect fares to rise or drop.

While this sounds great in theory, my experience has been that the predictions aren’t particularly accurate, even when their confidence is high.

As I’ve noted in the past, another good trick for saving money when you travel is to consider alternative airports. This won’t work for everyone, but some airports are consistently more expensive than others.

Source: LA Times via The Consumerist

Does the IRS Accept Scanned Documents?

I’ve spent a good bit of time digitizing paperwork over the past couple of years. My primary weapon in this battle has been a sheet-fed scanner, though I sometimes snap pics with my iPhone and turn them into “scanned” pdfs using JotNot.

While it feels to good to be working toward a paperless financial world, however, the issue of whether or not these scanned documents would be acceptable has always bothered me. Having a store refuse a return because I didn’t have the original receipt would be annoying; having the IRS reject my documents could be a disaster.

So… Does the IRS actually accept scanned documents?

As it turns out, yes… They’ve actually accepted electronic documentation since at least 1997, when they issued IRS Revenue Procedure 97-22, which states:

This revenue procedure provides guidance to taxpayers that maintain books and records by using an electronic storage system that either images their hardcopy (paper) books and records, or transfers their computerized books and records, to an electronic storage media, such as an optical disk. Records maintained in an electronic storage system that complies with the requirements of this revenue procedure will constitute records within the meaning of § 6001 of the Internal Revenue Code.

Section 6001 of the IRC essentially requires you to keep and make available sufficient records to show whether or not you’re liable for taxes. It further states that such records must be retained “so long as the contents thereof may become material in the administration of any internal revenue law.”

The general requirements of the “electronic storage system” referenced in the quote above are that it:

…must ensure an accurate and complete transfer of the hardcopy or computerized books and records to an electronic storage media. The electronic storage system must also index, store, preserve, retrieve, and reproduce the electronically stored books and records.

There are some additional requirements, but the essence is that you can digitize your documents as long as they’re clearly legible (both on-screen and in hard copy) and easily retrievable. Just be sure to keep your data safe. In our case, we maintain both local and online backups of our data, so our digital documents are probably safer than hard copies.

And don’t forget to secure your files to protect them from prying eyes. The last thing you need is for your cache of sensitive data to fall into the wrong hands.

Of course, I’m not a tax pro, so I suggest that you check out the details and decide for yourself. The relevant guidelines can be found in this document from the IRS. The pertinent section (Rev. Proc. 97-22) starts on page nine.

E-Filing Saves the IRS $3.10/Return

As January winds down, you should have received most of the paperwork that you’ll need to file your taxes. If you’re like most FCN readers — and most Americans in general — you’ll be e-filing this year.

Sure, e-filing is convenient. But guess what? It’s also much cheaper for the IRS to process your return if you file electronically. As it turns out, it costs the IRS $3.29 to process a paper return vs. $0.19 for an electronic return — a savings of $3.10 (or nearly 95%!) per e-filer.

Looking back at last tax season, more than 100M individual federal tax returns were e-filed. Thus, the e-filing program saved well over $300M last year alone — not to mention an awful lot of paper waste.

Source: GAO via Don’t Mess With Taxes

Home Economics

I have long contended that, at its most fundamental level, keeping a household’s finances in the black has much in common with operating a profitable business. In both cases, you have to try to generate the greatest revenues, while at the same time keeping expenses in check. It’s not rocket science or brain surgery. In both worlds, success boils down to making – and keeping – more money than you spend.

These thoughts were percolating in my mind last fall, when I covered one of the printing industry’s largest conventions, the Graph Expo Show at Chicago’s McCormick Place. The show is both a showcase for printer manufacturers and suppliers, and an opportunity for printing companies large and small to learn about the latest technology.

On day one, I sat down to take notes at a presentation billed as “Heidelberg Presents the State of the Industry with Andy Paparozzi.” As vice-president and chief economist for the National Association for Printing Leadership, Paparozzi had been called on by printer maker Heidelberg to offer attendees an hour of well-chosen economic illumination.

If you ever get a chance to witness a talk by Andy, don’t miss it. Knute Rockne could have taken lessons from Paparozzi in exhorting listeners to greater glory. As impressed as I was by Andy’s gifts at a microphone, however, I was even more taken by the universal nature of his insights.

While Andy’s talk was geared to an audience of printing company honchos, it could just as well have fit virtually any other industry. Beyond that, almost every lesson he imparted to business held some parallel for those trying to hold household budgets together.

Let’s take a look at a few of Andy’s key points, and see how effectively they translate to the American household of Joe and Jane Sixpack and their 2-1/2 precocious youngsters.

Managing uncertainty

Paparozzi started by noting that as he talked to printing industry professionals, he sensed an aura of uncertainty from each. They didn’t know what to expect next.

“I’ve never seen that in my 28 years in this great industry,” he said. “Recovery has been maddeningly slow, irritatingly sporadic and uneven. But recovery is nonetheless occurring. This recovery is not what we want it to be, but what we make it. That requires making smart investments, managing uncertainty, and learning from the last recession.”

Translation: We’re not happy with the bounce-back from the economic abyss of 2008, but why waste time and effort complaining about it? We can still exert some control over how we recover, and that in itself is energizing. We’re not helpless pawns in the recovery, but masters of our own ship. We can put extra time and consideration into what we spend, and manage uncertainty by husbanding our household savings and avoiding risky purchases. We can also avoid mistakes made last time, which for many centered on assuming good times would last.

“Nothing is more important to the future than getting capital investments correct,” Andy went on. “We can’t pass inefficiencies on to our clients. The industry’s too competitive.”

Translation: One of the “capital investments” any family can make is in education and training. Being good is no longer good enough in the workforce of 2011. A struggling economy may be the best time to invest in training, because as the economy improves, it stands to make us more marketable in an ever more competitive employment landscape.

“We must stay lean,” was Andy’s next message. “Recovery no longer provides a margin for error. And you can’t let being busy be an opportunity for not getting better. We’re getting better or falling behind. Retain multi-taskers and release those who can’t or won’t multi-task. And set up a cost-watch task force on the production floor.”

Translation: Let’s excise the fat from our household budgets, while also seeking an opportunity in our spare time to improve our financial circumstances. Let’s look at landing a second, part-time job, selling some unneeded camping equipment, clipping coupons or taking in a boarder. Let’s find a way to convert some of our relaxation time into productive use, and while we’re at it, set up a reward program for the kids when they identify places to cut costs.

“If we learn, we win,” Andy next exhorted his listeners. “If we don’t, the Recession wins. If you aren’t doing things differently, you’re not in business. You can lose it all quite easily if you aren’t prepared to change your business model. We can do more with less. We have to keep our costs light, even in the good times.”

Translation: There’s nothing like tough times to force agonizing appraisals on any household. This is probably one of those times for re-examining. Can we find a lower-cost place to buy groceries? A more cost-effective phone plan? Can we trade in our car on a more fuel-efficient model? Can we scan the Internet for Deal-of-the-Day offers? We can do more with less. We have to keep our costs light, even in the good times.

“Create a ‘Recovery Manifesto,’” Andy urged in conclusion. “Improve continuously. Challenge your own success. Never use being busy as an excuse for not improving. Be adaptable and flexible, because those who are get stronger.”

Translation: You may be tired of the slow recovery, but that’s no reason not to embrace principles that make businesses successful, in printing or any industry.

High Deductible Health Plans and Major Medical Bills

I spent yesterday at the hospital. Don’t worry, it sounds a lot worse than it was… Our oldest son had to have his tonsils and adenoids removed, so my wife and I were camped out in the outpatient surgical center for the better part of the day.

In the end, everything went smoothly, and he’s on the road to recovery. But this isn’t a parenting or medical website. This is a financial website. Thus, I thought I’d talk a bit about the financial side of such things.

As you know, we’ve been participating in my employer’s high deductible health plan for the past couple of years. In other words, we’ll be facing a whopping bill once the dust settles. Actually, it will be multiple whopping bills… The hospital, the doctor, and the anesthesiologist all bill separately. And then there will likely be some lab tests, etc.

The good news is that we’re protected on the upside by our $3,000 deductible. The bad news is that, since it’s January, we’ve paid almost nothing toward it thus far, so we’ll be paying that out-of-pocket. In our case, that really just accelerates the inevitable. With four kids in the house, we usually hit our deductible bill mid-year whether or not we have a major medical procedure.

But still, a $3k medical bill to start the year is something that could really set a lot of people back. Fortunately, we have short term cash in the bank, and we also having a well-funded health savings account (HSA) in case we need it.

Truth be told, we’re planning on continuing to use our HSA as a tax-advantaged investment account, so we’ll be paying for this from other sources. But if we weren’t, we could always fall back on that HSA.

As I’ve noted in the past, the lower premiums of our particular health plan more than make up for the higher deductible. But if we hadn’t been planning ahead, a relatively major medical procedure could’ve created a short-term cash crunch. If you’re considering a high deductible health plan, just be sure that you’re aware of, and prepared for the worst case scenario.

Should You Buy Travel Insurance?

If you’ve booked a vacation for your family lately, or sent your kid off on a school-sponsored field trip, you’ve probably considered trip-cancellation insurance. These offers generally promise to reimburse you for the vacation or field trip if you need to cancel. Are these plans worth the cost? It depends on your own personal risk calculation.

What does it cover?

Trip cancellation insurance comes in several flavors. Basic coverage reimburses you if you can’t make your trip because of certain reasons, such as if you get sick, a hurricane rakes the island you were going to visit, or terrorists attack your hotel. The insurance covers non-refundable expenses, so if the tour operator cancels your tour and they refund your fee, for example, the insurance does not pay.

The basic coverage also generally provides benefits if your trip is delayed or interrupted. It also pays for lost or delayed baggage, some medical benefits if you’re injured during your vacation, and emergency evacuation if something horrible happens during your vacay.

You can add to the basics. For example, for an extra fee you can add “cancel-for-any-reason” coverage, which reimburses you for at least part of the non-refundable portion of your trip if you cancel for any reason not covered by the usual terms. Other common upgrades are rental car insurance and accidental death insurance at higher amounts than the basic package offers.

Needless to say, read the terms carefully before you buy so you fully understand what is covered.

What does it cost?

How much does all of this cost? Prices vary, of course. In a comparison of four leading providers, basic coverage for a family of four on a $4,000, week-long, domestic vacation ranged from $82 for a policy from Travel Insured to $275 for a policy form HTH Worldwide.

Those two plans differed mostly in the amount of coverage. For example, the HTH plan included $500,000 in health coverage, while the Travel Insured plan offered $10,000; and the HTH plan offered $1 million emergency medical evacuation coverage, while the Travel Insured plan provided $100,000 coverage for that service.

In addition to the two firms mentioned above, popular trip cancellation insurance firms include American Express, Travelguard, and Access America. Insuremytrip.com is a site that allows users to compare rates from about 20 providers.

Furthermore, many trip providers, such as school field trip organizers, offer their own policies. As do some credit cards — be sure to see if your card provides this coverage before spending money on a separate policy.

But do you need it?

This all sounds good, but you should evaluate this kind of insurance the same way you would evaluate any kind of insurance. Rather than thinking, “Wow, I’d love to get reimbursed for our vacation if my kid gets the flu the night before,” think, “Hmmm, what are the odds my kid is going to get the flu the night before our vacation?”

Use the $4,000 family vacation above as an example. Let’s say you’re considering a plan that costs $200 and will reimburse you for the full $4,000 if someone in the family gets sick and you have to cancel. Forget about the rest of the coverage — emergency medical evacuation, health insurance, death benefits, etc. — for the moment and focus on the real reason you might get this insurance: to refund your purchase price.

If you buy this policy, you are essentially gambling $200 against a potential pay-out of $4,000. What are the odds that you will “win” this gamble? You’ll win if one of you gets sick or a big storm hits the vacation site or whatever. So what are the odds of that? One way to calculate those odds for your family is to look at history: How many vacations have you had to cancel in the past few years? If you have taken ten vacations over the past five years, and cancelled one of them because of a covered reason, you could assume that the odds of you having to cancel your current, $4,000 vacation are one in ten.

So think about it: If your neighborhood bookie put $4,000 on your kitchen table and said you could have it if you drew the right card out of a stack of ten, would you pay him $200 for that one draw? Probably not, unless you’re really into taking risks.

But here’s another way to think about it: If you bought the insurance every time, you would come out even if you were able to collect on the insurance once for every 20 trips. Now it doesn’t sound that risky, especially if you travel a lot.

Obviously, many factors play into your personal risk calculation — maybe you are not traveling with any accident-prone children or maybe you know the tourist destination you are headed to frequently has hurricanes (hmm, maybe you want to rethink this vacation!). The point is, whatever the circumstances, make a rough guess of your odds of using the insurance before you plunk down the money.

Insurance companies do this with highly trained actuaries using sophisticated algorithms and databases full of historical information, but you can make an educated guess without any of that.

That way, whether you get the insurance or not, you will rest easy knowing that you made an informed decision.