Four Traditional Money Rules to Break

Four Traditional Money Rules to Break

Never borrow against a 401(k). Avoid credit cards. Make a bigger down payment on your home or apartment to avoid paying extra mortgage interest. These are among the tried-and-true financial rules consumers have been told to live by for years. But now -- with interest rates still low and credit staging a comeback -- might be a good time to break them.

This solid financial advice isn't suddenly all wrong, but many of these axioms no longer result in higher savings or less debt. That's because the economic recovery has opened up more exceptions and loopholes to standard advice, says David Peterson, president of Peak Capital Investment Services, a financial planning firm. Advisers, for example, typically discouraged clients from taking a loan from their 401(k) -- but this is now the cheapest way to borrow money, with the average rate at 4.25%, lower than most personal loans, to pay back debt they racked up during the recession. But as some parts of the economy have improved -- equities are once again outperforming fixed income, banks are slowly returning to lending, and consumers are spending more -- the rules for making and saving money are changing, at least temporarily.

Here are four traditional money rules you can break -- at least for now.

401(k) Loans

Old school advice: Avoid taking one at all costs.
Now: The most affordable loan available.

For decades, borrowing from a 401(k) plan was synonymous to derailing retirement savings. But right now, the cheapest bank for many borrowers -- especially those who feel secure in their job -- is their own 401(k). Average interest rates on credit cards are 14% and on home equity lines of credit 5.22%. But a 401(k) loan charges a fixed average of prime (currently 3.25%) plus 1%, according to the Profit Sharing/401(k) Council of America. Approximately 90% of employers offering 401(k)s permit employees to borrow from them, according to the PSCA, and the loans can last for up to 15 years. These loans make most sense for consumers stuck with high-interest credit card debt. In a year, a borrower can save around $800 in interest with a loan that eliminates a $5,000 balance on a card with a 20% interest rate.

And the money the borrower pays back goes into their 401(k) -- not to a bank. Repaying can also be easier than it is with a regular loan, says Olivia Mitchell, professor at the University of Pennsylvania Wharton School, who recently coauthored a study on 401(k) loans. About 60 million people contribute to a 401(k), according to the PSCA; once a loan is taken out, any contributions made via automatic payroll deductions first go toward paying down the loan. But, there are still some pitfalls: If you lose your job or leave it voluntarily and can't pay the loan back within 90 days you'll be hit with federal income tax on the outstanding amount, plus a 10% penalty if less than age 59 1/2. And you'll need to reallocate some of what remains into higher-yielding equities until the account is made whole, to avoid missing out on potential gains, says David Wray, president of the PSCA.

Roth IRAs

Old school advice: Convert a traditional IRA into a Roth to save on taxes.
Now: Stick with the IRA.

The Roth IRA's appeal has always been that contributions, rather than withdrawals, are taxed, shifting the tax burden to pre-retirement instead of years down the road when taxes could be higher. Roth IRAs became even more user-friendly last year when taxpayers were allowed to convert from a traditional IRA regardless of income (the limit for conversions had been $100,000 modified adjusted-growth income). But in many cases, staying put in a traditional IRA will lead to bigger savings -- especially for people five to 10 years away from when they plan to withdraw their money, says Peterson. Here's why: It can take years of tax-free growth to make up the taxes incurred during the conversion. For example, someone who converts $100,000 from a traditional to a Roth IRA and pays $30,000 in taxes will need at least five years to make that money back -- assuming a 7% rate of return. And that doesn't address the loss of compounding that would have occurred if that money didn't go toward paying taxes, says Sheryl Garrett, a fee-only certified financial planner.

There's also less time to pay taxes on this conversion now. Savers who converted from a traditional IRA to a Roth IRA last year were able to spread the income from that conversion over 2011 and 2012. But now, all of the income from a conversion made in 2011 (and after) is taxable at once. Also, this conversion comes with the risk of getting bumped to a higher tax bracket during that year because the money counts as income -- so converting might not make sense for someone whose budget is currently stretched thin. Instead, savers might now want to convert a smaller amount gradually once a year that won't put them into different bracket, says Garrett.

Mortgages

Old school advice: Choose the mortgage with the smallest interest payments.
Now: Go with more interest.

Paying the least interest on a mortgage requires two steps: a down payment of at least 20% and paying down the loan quickly. But both strategies can create a setback for a borrower -- especially in still-uncertain housing and employment markets, says Chip Cummings, president of Northwind Financial, a training and consulting company for mortgage firms. With interest rates still low, instead of throwing most of their money into the home -- where some of it could be lost if home values decline -- consumers might want to make a down payment of 10%. Keep the extra cash in an emergency fund in case of sudden job loss or unexpected renovations and take on the added cost of private mortgage insurance.

PMI varies, but on average is 60 basis points. On a $300,000 30-year mortgage, a borrower keeps an extra $30,000 in cash and pays $1,800 a year just in PMI until he or she hits the 22% equity threshold. What's more, a 30-year mortgage, rather than a 15-year one, is one good way to build a savings safety net, says Keith Gumbinger, vice president at HSH Associates, which tracks the mortgage market. On average, monthly payments are 20% to 30% smaller with a 30-year mortgage, he says. That extra money could be stashed in savings for a rainy day or to pay the mortgage if you lose your job.

Credit Cards

Old school advice: Refrain from using them.
Now: Swipe -- with caution.

Stashing credit cards in a bank safe deposit box or freezing them in a block of ice were commonplace for many consumers during the recession in an attempt to lower spending and take time to pay down cards. But now, it seems that in order to hold onto a good credit score and access to credit cards in case of an emergency, borrowers need to make more purchases using them. Prime borrowers who stop using their credit cards will find their credit lines slashed or closed -- largely because their accounts are unprofitable since there's no balance to charge interest on, says John Ulzheimer, president of consumer education for SmartCredit.com, a credit-monitoring web site.

The median FICO score of borrowers with no trigger event, like a missed payment, who've been affected, is 770, according to a 2010 study by Fair Isaac. The result is a higher amount of credit card debt compared to total credit limits available, a ratio that can contribute to about 30% of their credit score. Use your credit cards at least once every three months -- and pay the balance off in full each time -- to avoid this, says Ulzheimer.

Washington: the 'blackest name' in America

George Washington's name is inseparable from America, and not only from the nation's history. It identifies countless streets, buildings, mountains, bridges, monuments, cities — and people.

In a puzzling twist, most of these people are black. The 2000 U.S. Census counted 163,036 people with the surname Washington. Ninety percent of them were African-American, a far higher black percentage than for any other common name.

The story of how Washington became the "blackest name" begins with slavery and takes a sharp turn after the Civil War, when all blacks were allowed the dignity of a surname.

Even before Emancipation, many enslaved black people chose their own surnames to establish their identities. Afterward, some historians theorize, large numbers of blacks chose the name Washington in the process of asserting their freedom.

Today there are black Washingtons, like this writer, who are often identified as African-American by people they have never met. There are white Washingtons who are sometimes misidentified and have felt discrimination. There are Washingtons of both races who view the name as a special — if complicated — gift.

And there remains the presence of George, born 279 years ago on Feb. 22, whose complex relationship with slavery echoes in the blackness of his name today.

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George Washington's great-grandfather, John, arrived in Virginia from England in 1656. John married the daughter of a wealthy man and eventually owned more than 5,000 acres, according to the new biography "Washington: A Life," by Ron Chernow.

Along with land, George inherited 10 human beings from his father. He gained more through his marriage to a wealthy widow, and purchased still more enslaved blacks to work the lands he aggressively amassed. But over the decades, as he recognized slavery's contradiction with the freedoms of the new nation, Washington grew opposed to human bondage.

Yet "slaves were the basis of his fortune," and he would not part with them, Chernow said in an interview.

Washington was not a harsh slaveowner by the standards of the time. He provided good food and medical care. He recognized marriages and refused to sell off individual family members. Later in life he resolved not to purchase any more black people.

But he also worked his slaves quite hard, and under difficult conditions. As president, he shuttled them between his Philadelphia residence and Virginia estate to evade a law that freed any slave residing in Pennsylvania for six months.

While in Philadelphia, Oney Judge, Martha Washington's maid, moved about the city and met many free blacks. Upon learning Martha was planning one day to give her to an ill-tempered granddaughter, Judge disappeared.

According to Chernow's book, Washington abused his presidential powers and asked the Treasury Department to kidnap Judge from her new life in New Hampshire. The plot was unsuccessful.

"Washington was leading this schizoid life," Chernow said in the interview. "In theory and on paper he was opposed to slavery, but he was still zealously tracking and seeking to recover his slaves who escaped."

In his final years on his Mount Vernon plantation, Washington said that "nothing but the rooting out of slavery can perpetuate the existence of our union."

This led to extraordinary instructions in his will that all 124 of his slaves should be freed after the death of his wife. The only exception was the slave who was at his side for the entire Revolutionary War, who was freed immediately. Washington also ordered that the younger black people be educated or taught a trade, and he provided a fund to care for the sick or aged.

"This is a man who travels an immense distance," Chernow said.

In contrast with other Founding Fathers, Chernow said, Washington's will indicates "that he did have a vision of a future biracial society."

Twelve American presidents were slaveowners. Of the eight presidents who owned slaves while in office, Washington is the only one who set all of them free.___

It's a myth that most enslaved blacks bore the last name of their owner. Only a handful of George Washington's hundreds of slaves did, for example, and he recorded most as having just a first name, says Mary Thompson, the historian at Mount Vernon.

Still, historian Henry Wiencek says many enslaved blacks had surnames that went unrecorded or were kept secret. Some chose names as a mark of community identity, he says, and that community could be the plantation of a current or recent owner.

"Keep in mind that after the Civil War, many of the big planters continued to be extremely powerful figures in their regions, so there was an advantage for a freed person to keep a link to a leading white family," says Wiencek, author of "An Imperfect God: George Washington, His Slaves, and the Creation of America."

Sometimes blacks used the surname of the owner of their oldest known ancestor as a way to maintain their identity. Melvin Patrick Ely, a College of William and Mary professor who studies the history of blacks in the South, says some West African cultures placed high value on ancestral villages, and the American equivalent was the plantation where one's ancestors had toiled.

Last names also could have been plucked out of thin air. Booker T. Washington, one of the most famous blacks of the post-slavery period, apparently had two of those.

He was a boy when Emancipation freed him from a Virginia plantation. After enrolling in school, he noticed other children had last names, while the only thing he had ever been called was Booker.

"So, when the teacher asked me what my full name was, I calmly told him, `Booker Washington,'" he wrote in his autobiography, "Up from Slavery." Later in life, he found out that his mother had named him "Booker Taliaferro" at birth, so he added a middle name.

He gives no indication why the name Washington popped into his head. But George Washington, dead for only 60-odd years, had immense fame and respect at the time. His will had been widely published in pamphlet form, and it was well known that he had freed his slaves, Thompson says.

Did enslaved people feel inspired by Washington and take his name in tribute, or were they seeking some benefits from the association? Did newly freed people take the name as a mark of devotion to their country?

"We just don't know," Weincek says.

But the connection is too strong for some to ignore.

"There was a lot more consciousness and pride in American history among African-Americans and enslaved African-Americans than a lot of people give them credit for. They had a very strong sense of politics and history," says Adam Goodheart, a professor at Washington College and author of the forthcoming "1861: Civil War Awakening."

"They were thinking about how they could be Americans," Goodheart says. "That they would embrace the name of this person who was an imperfect hero shows there was a certain understanding of this country as an imperfect place, an imperfect experiment, and a willingness to embrace that tradition of liberty with all its contradictions."

Many black people took new names after the Revolutionary War, the Civil War, and the black power movement, says Ira Berlin, a University of Maryland history professor who has written books on the history of African-Americans.

"Names are this central way we think about ourselves," Berlin says. "Whenever we have these kinds of emancipatory moments, suddenly people can reinvent themselves, rethink themselves new, distinguish themselves from a past where they were denigrated and abused. New names are one of the ways they do it."

But for black people who chose the name Washington, it's rarely certain precisely why.

"It's an assumption that the surname is tied to George," says Tony Burroughs, an expert on black genealogy, who says 82 to 94 percent of all Washingtons listed in the 1880 to 1930 censuses were black.

"There is no direct evidence," he says. "As far as I'm concerned it's a coincidence."

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Coincidence or not, today the numbers are equally stark. Washington was listed 138th when the Census Bureau published a list of the 1,000 most common American surnames from the 2000 survey, along with ethnic data. The project was not repeated in 2010.

Ninety percent of those Washingtons, numbering 146,520, were black. Only five percent, or 8,813, were white. Three percent were two or more races, 1 percent were Hispanic, and 1 percent were Asian or Pacific Islander.

Jefferson was the second-blackest name, at 75 percent African-American. There were only 16,070 Lincolns, and that number was only 14 percent black.

Jackson was 53 percent black. Williams was the 16th-blackest name, at 46 percent. But there were 1,534,042 total Williamses, including 716,704 black ones — so there were more blacks named Williams than anything else.

(The name Black was 68 percent white, meaning there were far more white Blacks than black Blacks. The name White, meanwhile, was 19 percent black.)

Many present-day Washingtons are surprised to learn their name is not 100 percent black.

"Growing up, I just knew that only black people had my last name," says Shannon Washington of New York City. Like many others, she has never met a white Washington.

She has no negative feelings about her name: "It's a reflection of how far we've come more than anything. I most likely come from a family of slaves who were given or chose this name."

As the creator of advertisements, events and http://www.parlourmagazine.com, she works with many Europeans, who often ask how she got her name. She plans on keeping it when she gets married, and likens her attachment to that of some black people for racist memorabilia like mammy dolls and Jim Crow signs.

"I don't exactly love it," she says of her name, "But I have to respect it."

Marcus Washington never thought much about his name as one of the few black people working in the overwhelmingly white William Morris talent agency. That changed after he filed a $25 million lawsuit in December accusing William Morris of racial discrimination.

"I'm sure that for some people there, my name triggered the thought that I was African-American, and automatically triggered biases that resulted in me not being given a fair shot," he says.

One 2004 study conducted by researchers at the University of Chicago Graduate School of Business found that job applicants with names that sound white receive 50 percent more callbacks than applicants with "black" names.

The study responded to real employment ads with more than 5,000 fictitious resumes. Half the resumes were assigned names like Emily Walsh; the other half got names like Lakisha Washington. After calculating for the difference in resume quality, the study concluded that "a white name yields as many more callbacks as an additional eight years of experience on a resume."

But what about those 8,813 white Washingtons? What is their experience?

For the family of 85-year-old Larry Washington, who traces his family tree back to England in the 1700s, the experience has changed over the years. (He says he is not related to George, who had no children.)

When he moved to New Jersey in 1962 to teach at a college there, Larry Washington's family tried to scout housing over the phone, but nothing was ever available. "When we showed up, there were plenty of houses," he recalls. After that, he taught his six children to always apply in person.

Over the years, his name made him sensitive to racism: "We just simply recognized these things, and had full sympathy with the people who were really black and getting the real treatment."

His son Paul, who in the 1970s worked for a temporary agency in Long Island, NY, says people in the offices where he was assigned always betrayed their relief when he turned out to be white. He experienced housing discrimination into the `80s, but says that no longer happens.

He is now a geology professor who has lived in ten states from Louisiana to Pennsylvania. Sometimes he wonders if his name helps him get interviews at colleges looking to recruit a rare black geologist, and if it hurts him when the college discovers that he is white.

Paul's children have had much different experiences — like his 25-year-old daughter, an English professor who teaches foreign students, whose new pupils are always amazed to meet someone with "the ultimate American name."

When Paul's brother Larry Jr. was recently traveling through customs in Japan, the inspector looked at his passport and said, "Oh, Mr. Washington!"

"His politeness and the number of times he bowed clearly indicated that he thought I was the member of a very important family," Larry Jr. recalls.

His sister Ida, a veterinarian who lives in Seattle, says she has never experienced discrimination due to her name as an adult. She is married, but uses Washington as her professional name.

"It's very distinctive. I use it with a certain amount of pride," she says.

Back in high school, she became fascinated with black history. "I think my name has made me much more aware of what African-American folks struggle with. I feel in tune with them."

Perhaps her sentiments bring the name full circle — from blacks making a connection to the greatest white Washington to a white person choosing a name associated with blackness.

"I find it touching that freed blacks wanted to identify with the American tradition and the American dream," says Chernow, the biographer. "It makes a powerful statement."

"I have to think," he says, "that George Washington would be very pleased that so many black people have adopted his name."

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Jesse Washington covers race and ethnicity for The Associated Press. He is reachable at jwashington(at)ap.org or http://www.twitter.com/jessewashington.

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On the Web:

Census surname study: http://www.census.gov/genealogy/www/data/2000surnames/index.html

Nasdaq nears 10-year high; should you be nervous?

Nasdaq nears 10-year high; should you be nervous?

Technology-heavy index nears levels from dot-com boom; why it may be different this time

NEW YORK (AP) -- The Nasdaq finished within 25 points of its highest level in a decade Friday, reminding investors of a time many would rather forget: The bursting of the dot-com bubble.

Today, tech is hot again. Facebook -- which hasn't even gone public yet -- is worth some $50 billion. Online content company Demand Media rose 33 percent on the day of its initial public offering last month. The Nasdaq composite index closed Friday at 2,834, still only a little more than half its all-time closing high of 5,049 in March 2000. But the index of mostly tech stocks is up 26 percent over the past 12 months.

Should investors be worried about another bubble? Not really, because there's a twist this time around: Technology companies are making money and may valued correctly.

"It is night and day compared to 10 years ago," says Barry Mills, the manager of the $400 million Dreyfus Technology Growth fund. "These business models are real. The revenues are real, and the cash flows are real."

Consider this: Judging by diluted earnings per share, a conservative method of valuing what a company's stocks are worth, the companies in the Nasdaq index were collectively earning $39.28 per share in December 1999 and priced at 103.6 times their annual earnings. Now, the index has diluted earnings per share of $127.64 and a price-earnings ratio of 22.11.

The economic recovery in the U.S. is one reason that technology companies are earning such high profits. Companies put off upgrading their computer systems and other large purchases during the worst days of the recession, and are making up for that now. Others are investing in new technology before they add employees.

International growth is another reason to be optimistic. Half of the profits of the technology companies in the Standard & Poor's 500 index come from outside North America, says Bill Stone, chief investment strategist at PNC Asset Management. China is now the world's second-largest market for PCs, and consumers in emerging market countries are showing strong demand for smart phones.

Technology companies in the S&P 500, a close proxy for the Nasdaq composite, are up 8.4 percent so far this year, about 2 percentage points more than the index as a whole. Last year, tech companies returned 10 percent after dividends, compared with the 15 percent return of the full index.

And tech stocks as a whole may be doing better than index returns show. That's because large companies -- with the exception of Apple -- that were hot stocks 10 years ago have matured and their stocks have stalled. "The Microsofts, Yahoos, and Googles of the world aren't growing like they used to," says Michael Sansoterra, manager of the $510 million RidgeWorth Large Cap Growth fund.

Bigger companies have a larger weighting in the Nasdaq index than smaller ones. Microsoft, for instance, makes up 5.6 percent of the index. The company has fallen 6.6 percent over the past 12 months.

And now to the question on the mind of any investor who was once burned by a bubble: Is it too late to get in?

Stock valuations certainly don't suggest so. Tech stocks in the S&P 500 are priced at 13.3 times earnings, which is just 0.3 more than the broad index. Not only that, but they are cheaper than they were a year ago, when they cost 15.4 times earnings. With stocks trading at reasonable levels, it's harder to make an epic mistake. Such as, say, buying technology stocks in June 2001, when they cost 128.3 times earnings.

"I'm still finding a lot of good values out there," says Samuel Dedio, manager of the $108 million Artio U.S. Smallcap fund. "There looks to be a lot more upside ahead of this."