MONEY stocks

The Risks of Banking on Bank Stocks

Gregory Reid; prop styling by Renee Flugge

Be cautious with this sector as rates are set to rise.

This sure seems like a great time to bet on the financial sector. Seven years after the credit crisis, banks are healthy again, says Morningstar analyst Dan Werner. In fact, regulators are finally letting them boost dividends and share buybacks. While S&P 500 profits are flat this year, financial earnings are forecast to grow 11%. And in theory those profits might be even stronger once interest rates rise, since borrowers will no longer be able to refinance into ever-cheaper loans.

Yet despite all of that, there’s trepidation—and rightly so—when it comes to this sector, which let investors down so badly during the global financial crisis.

For starters, investors fear regulations, says BlackRock’s global chief investment strategist Russ Koesterich. Banks are still paying for the sins of the Great Recession, through fines, settlements, and increased oversight, which lead to higher costs. J.P. Morgan Chase alone incurred $487 million in legal fees last quarter.

Moreover, as yields rise, there are no assurances bank profits will benefit. The Federal Reserve controls only short-term rates. “One risk is the Fed raises short rates, yet there’s no sign of inflation,” which affects long rates, says Mark Luschini, strategist for Janney Montgomery Scott. If that happens, demand for longer-term bonds could rise, pushing prices higher but yields lower. That would narrow the gap between what short- and long-term bonds pay, crimping profit margins, as banks borrow short term to lend long.

Until the Fed hikes and you see how long-term rates react, “financial stocks are basically in a holding pattern,” says S&P Capital IQ’s Erik Oja. So it’s critical to hold the right types of financials in this unpredictable environment. These steps will help you find them:

Go with a proven winner. Follow the Hippocratic oath of investing: “Avoid companies with a proven record of screwing up,” says Chris Davis, manager of the Davis Financial Fund. One way is to ignore firms with overly complicated ways of making money.

The biggest holding in Davis’s fund is Wells Fargo WELLS FARGO & COMPANY WFC -0.91% , one of the few banks to emerge stronger from the credit crisis. Unlike other big banks, which have extensive operations in investment banking and fixed-income and currency trading, Wells has a simpler model. It’s the largest collector of retail deposits. That cheap access to capital allows the lender to be highly profitable without taking undue risks. Indeed, the company’s return on equity—a gauge of how efficiently a firm generates profits—is more than twice as high as Bank of America’s.

Think local. Like Wells, most regional banks “just specialize in taking in deposits and making loans,” says Jason O’Donnell, chief investment officer for the Bluestone Financial Institutions Fund. What’s more, a greater percentage of their deposits are in accounts that don’t pay interest—think personal and business checking—compared with the major banks. Rising rates won’t affect that business. Smaller banks are also less reliant on installment debt and fixed-income trading, which are vulnerable to rate increases, O’Donnell says. For low-cost diversification, go with SPDR S&P Regional Banking ETF SPDR SERIES TRUST S&P REGIONAL BKG ETF KRE 0.22% . The fund holds 89 stocks in equal proportion, so the largest player—U.S. Bancorp, which is close to a major bank—doesn’t dominate.

Play defense. The best-case scenario for this sector: The Fed raises rates because the economy is doing so well. And the worst case? The act of raising rates slams the brakes on the economy, slowing lending.

What type of company can thrive even when rates rise or when the economy slows? Insurers. Their business isn’t dependent on a strong economy, and insurers profit from higher rates since they pocket interest income between the time they collect premiums and pay out claims.

Plus they “have demographics on their side,” says Oppenheimer chief investment strategist John Stoltzfus. As global living standards rise and as baby boomers age, demand for life insurance and annuities will only grow, he says.

Shop on price. PowerShares KBW Insurance ETF POWERSHARES ETF II KBW INS PORT KBWI 0.24% charges only 0.35% in annual fees. And the average stock in this portfolio has a price/earnings ratio of just 11.7. That’s 25% cheaper than P/Es for the broader financial sector.

Read next: By This Measure, Banks Are Safer Today Than Before the Financial Crisis

MONEY First-Time Dad

3 Financial Lessons For Dads on Father’s Day

Brightcove:

You may want a tie, or a car. But you should know these three things this Sunday.

One day last August, my then six-month-old son fell face first from his swing onto the wooden floor half-a-foot below. Luke was a mobile tyke even then and I had forgotten to strap him into his seat, despite repeated instructions from Mrs. Tepper who had left him in my charge an hour earlier.

Panic ensued. I rushed into his room after I heard the thud and consoled my understandably miserable infant. A bump quickly rose on his forehead and I phoned our doctor thinking I had caused serious and permanent injury. The pediatrician asked me (in that tone doctors have when you call them off-hours for questions apparently beneath their dignity) if Luke was vomiting or unconscious. No. Any kind of bleeding? No. Keep an eye on him, but he’s probably fine. Which he was.

But I spent the rest of the night in silent terror as the bump deepened. When he finally went to sleep that night, I snuck into his room and put a finger beneath his nose. Yes, he was still breathing.

Fast-forward to last month. Luke had determined to test the limits of his physical universe and ran headfirst into the side of our bathtub. He came away with a bloody, swollen nose. Mrs. Tepper called the doctor for instructions (and a dose of vague condescension), while I tended to Luke. But there was no panic, no unease, no nagging fear that our son had endured some critical blow. I didn’t feel the need to check his breathing in the middle of the night. Parenting, like most things, improves with time.

The same is true of your ability to deal with money. I had just started at MONEY when Mrs. Tepper became pregnant, so it’s not as if we had ample time to set up an emergency fund or sketch out a meaningful budget before his birth. Over the course of our first full year as parents, we’ve had to learn the finances of parenting—even if one of us writes for a personal finance brand.

Here is some of the hard-won wisdom I’ve gleaned from my sometimes beautiful parenting grind.

You’ll Spend More Than You Think

There’s a strange cognitive dissonance that new parents must embrace. The decision to bring a child into the world, at least in my case, tends to be uninformed by finances. Are we ready to care for children is more of a question of values and love than a cold calculation of what you can afford. We didn’t estimate the weekly cost of child care, how long Mrs. Tepper would take off for maternity leave, how much of that was paid, and how we’d afford rent and food without her paycheck. We didn’t look into how a newborn would inflate our insurance premiums, which of our policies should cover the tyke, or how much a delivery would set us back. And we were completely ignorant of the price tag on all the day-to-day items, from strollers and cribs to diapers and wipes, that he would need. We both had jobs and figured we’d figure it out.

But bearing a child is an intimately financial decision, especially since our society does so little to palliate the pocketbooks of new parents (whether it’s paid leave, child or health care.) We’ll likely spend a quarter-million dollars on Luke before he hits college-which could easily cost another quarter-million dollars. How is it even possible to spend that much?

Experience informs. Putting aside child care, which cost us more than $15,000 over the past 12 months, it’s not terribly difficult to see where the money goes. Not only did his stroller run us close to $1,000, but we just spent another $50 on something called the Parent Organizer, a device that attaches to the stroller and holds the coffee you need to drink to stay awake because you haven’t slept well in over a year, and some fabric cleaner that removes spilled milk (and coffee) from the stroller. We spent about $1,000 this year on diapers and wipes and creams that make him happy and don’t cause his skin to break out in hives. Our credit card statements are filled with hundreds of similar purchases.

I’m glad we didn’t budget out our lives before we decided to have Luke. Parenting shouldn’t be a decision based solely on affordability. Life is too short. But, in case you were curious, this is why your friends with kids aren’t particularly enthusiastic about your two-week excursion to Lisbon.

Be an Equal and Honest Partner with Your Spouse

Couples tend to obfuscate when it comes to discussing money and finances. Most avoid the topic, as an American Express survey found, while others lie to their partners about money. While you may know that you need to chat about budgeting and debt and spending, as a recent MONEY survey found, the actual process of doing so can be less than enjoyable.

In the grand scheme of things, Mrs. Tepper and I haven’t been adults for all that long. We’ve been out of grad school for about three years, married for almost two, and parents for 17 months. Crafting budgets that account for all of the expenses surrounding Luke is hard enough, not to mention the difficulty coming up with a plan for saving for college without going broke. For a few pointers, I turned to CFP Board consumer advocate Eleanor Blayney.

First and foremost, says Blayney, learn what money means to your spouse. “For some it means security, so they’re looking to save, while for others it offers prestige.” If your husband or wife is a hoarder or a spendthrift, there’s often a reason why. Knowing where your partner comes from can help decrease tension and clarify his or her point-of-view.

Next Blayney recommends you and your spouse go into separate rooms and estimate how your after-tax income is being spent. That is, each of you should write down how much you believe you’re putting toward three buckets: 1) fixed, non-variable expenses (like your mortgage and child care); 2) non-discretionary, variable expenses (food and transportation, for example); and purely discretionary expenses (like entertainment).

After you’ve complied your list, Blayney suggests, “pour a glass of wine and compare notes. Identify real discrepancies in your outlook and find common ground.”

Everyone should be involved in financial decision-making. When the dynamics of a family evolve, spouses often take different domains of domestic responsibility, from managing the children’s homework to paying the bills. If one spouse is completely removed from any understanding of financial decision-making, or appreciation for long-term goals like retirement, conflicts can metastasize with time.

Therefore, be completely transparent about your financial choices. Both spouses should appreciate the savings rate and investing choices that are being made and what benefits this long-term planning will produce. Think of it as “marriage insurance.”

“Focus on common goals—whether it’s a boat or retirement, “says Blayney. “You’ve got to decide as a couple how much to save together.”

Consider Your Mortality

If you have a child and a spouse who depend on your income to support their lives, you need life and disability insurance. The concern for a lot of parents can revolve around which type of insurance to get and for how long. (Not to mention confronting your inevitable demise.)

“I’ll have clients who have gone to buy insurance and the broker asked how much can you afford?” says Dallas-based financial coach and planner Katie Brewer. “They’ll come away with much more than they need.” That’s money that could be put to better use elsewhere. The best route is to buy a 20-to-30 year term policy that covers about 10 times your income. You should only worry about covering your income for a certain period of time, and term insurance is the cleaner alternative. You can most likely to find low cost options through your employer, but you may be restricted in the amount you can insure. Check out Mint.com’s life insurance calculator for more coverage selections.

When you sign-up, don’t forget disability insurance. Like life insurance you can generally find low-cost options in your benefits package. If you can’t, look to reduce the price on an individual policy by delaying the period before you receive benefits – from three months to six. Brewer also recommends looking for a group discount through an alumni or professional group – she’s insured through the Financial Planning Association. Keep in mind, whatever Social Security disability benefits you receive will be subtracted from your payout, which is also subjected to taxes. That’s why maintaining a robust emergency fund is so vital.

Read next: The 3 Most Important Money Lessons My Dad Taught Me

MONEY Love and Money

Is Financial Responsibility a Turn-On?

MONEY's millennials talk about the importance of financial fitness in romantic relationships.

We may not put it in our Tinder profile, but millennials do care about a potential mate’s financial fitness. We care about it so much, in fact, we rank financial know-how higher than sexual prowess as an important factor in a long-term relationship. Millennials grew up with the 2008 financial crisis, so we know money doesn’t grow on trees.

 

MONEY

Check Out the Summer’s Best Credit Card Deal

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Mike Kemp—Getty Images

A good card just got a bit better for a limited time.

If you’ve ever considered applying for a Discover credit card, now’s the time to pull the trigger.

All new customers who signup for a cash-back Discover card in June and July, which includes the it and it Chrome cards, will automatically have their rewards doubled at the end of 12 months. (The Discover it is a MONEY Best Credit Card.) The announcement comes on the heels of the February release of the Discover it Miles card, which doubles the rewards for all customers at the end of a year.

This can be a profitable proposition for new cardholders. Take Discover it, which offers 5% cash back on categories that rotate every three months. From July to September, the first period new cardholders can participate in, customers receive 5% cash back on all purchases at Amazon.com, home improvement centers, and department stores, up to $1,500. The juiced-up categories for winter will revolve around holiday shopping, and the beginning of 2016 may once again reward gas purchases, as in 2015. Normally if you spent the maximum over the course of a year, you’d earn $300; now it’s $600. A 10% return on shopping you would have done anyway is especially valuable in this low interest rate environment.

Cardholders also earn 1% back on unlimited purchases that don’t fall into the 5% categories and receive a $50 cash back bonus when you refer a friend. That’s doubled too, as is the card’s shopping portal, Discover Deals, where you can earn revved-up rewards at hundreds of retailers. Right now Discover customers can receive up to 10% off of their Hertz rental, for example.

And there’s no annual fee, so you won’t be punished once the extra rewards period runs out.

MONEY First-Time Dad

How to Make Saving for College Less Impossible

Luke Tepper

Use a tool that not that many people know about.

Four-fifths of adulthood is negotiating competing interests. The other fifth is whisky gingers.

One example: paying for college. As a pair of 29-year-olds with graduate degrees who left university at the peak of the higher education bubble, only to descend into the depths of a great recession, my wife and I have a combined student loan bill between five and seven figures. We also have a 16-month-old whom we will drop off at college orientation day in 17 short—or, if we don’t start getting more sleep, long—years.

The word that comes to mind to describe the feeling of tackling historic education debt while saving for your son’s college tuition while planning for retirement, not to mention the rest of life’s expenses, is not euphoria. And Mrs. Tepper wants to double the number of our dependents in the not-too-distant future.

Fortunately, since misery loves company, my family isn’t the only one fretting about the future. In fact paying for college is the biggest worry for those with children under 18, per a Gallup survey.

At times it seems that even the most conscientious and prudent families can only hold their finances together with mud and spit. But there is one valuable arrow in my quiver, only most people aren’t aware of its existence.

Two-thirds of Americans don’t know what a 529 plan is or does, per a recent Edward Jones survey. Even among those earning six figures, 42% couldn’t pick the college savings tool out of a lineup. Perhaps that’s why more than four out of five people surveyed say they cannot afford the cost of college.

Financing any portion of your child’s education is difficult enough. But it’s even harder without this vital tool.

A 529 plan is basically an IRA for college savings, as MONEY explains here. You put money into the account, named after the section in the tax code that created them, and select how your contribution is to be invested. The choices generally revolve around how aggressive (think stocks) you want to be and how old your child is. The money grows tax-deferred and isn’t subjected to Uncle Sam’s treatment when you withdraw it to pay for education expenses. Some states also allow tax deductions on contributions (you can find a list here). Most plans are sponsored by states, but you don’t have to invest in the state you live in.

What should you look for in a plan? I posed that question to Jeremy Thiessen, a senior director with TIAA-CREF Tuition Financing. He boiled it down to three considerations:

Taxes

“Tax benefits are one of the best reasons to choose your home state’s 529 plan, so review that plan first,” he says. Fortunately for me, New York offers a $10,000 deduction on contributions for joint filers, $5,000 for single.

If your state doesn’t offer tax breaks, and even if it does, you’ll also want to take into account the two other key considerations, costs and investment options.

Costs

Investing through a 529 comes with fees: fees for advisers, program management, and the investment themselves. Just as with mutual funds, higher costs lower your returns. In general, you want to look for low-cost plans that invest in index funds. You can find a tool here to compare plans costs and tax savings. My 529 option, for instance, charges $16 per $10,000 invested, which is pretty good.

Investment Options

“You want to make sure that your 529 plan offers investment choices that suit your timeline and risk tolerance,” Thiessen says. By the time Luke goes off to college, the total cost will be close to $160,000 for a four-year in-state school. If I want to pay for a third of that, I’ll need about $53,000, which I won’t be able to amass from savings alone.

By starting early a 529 plan early on, you give yourself the chance to take more risk while your kid is still young. My plan works like a target-date fund. For the first five years or so, I’ll own only stocks. As Luke ages, the portfolio adds more bonds to smooth out ups and downs. This tool at Savingforcollege.com helps you put into perspective how much you’ll need to save and which plan offers the best path to get you there.

There are other do’s and don’ts to keep in mind. Financial planners will tell you to save for retirement before you start putting money away for your kid’s college, since you can borrow for one and not the other. But starting a college fund early, even if you just contribute a month’s worth of coffee expenses, will go a long way. You don’t need to foot the entire bill; it’s nice if your tyke has some skin in the game.

As I teeter on the precipice of 30, I’m easily distracted by the daily errands and deadlines that are right in front of my nose. But by picking a low-cost college savings plan and contributing to it regularly, I’m slowly completing one of the most important jobs I’ll ever do: helping my son earn a degree.

MONEY Economy

5 Reasons Cheap Gas Isn’t Fueling Consumer Spending

Getty Images/Tom Merton

Why you're just not feeling that confident.

The American consumer is difficult to figure out these days.

We currently enjoy substantial, if not strong, tailwinds. Despite a recent hiccup, employment numbers are improving, and wage growth has (kinda sorta) started to kick in. While gas prices have crept up a bit lately, drivers will most likely spend hundreds less at the pump this year than last. And a strong dollar has improved our purchasing power overseas.

Nevertheless, Americans are not translating these positives into more spending—except perhaps at bars (more on that below). And readings of how people feel about the economy and their stake in it are all over the map.

To demonstrate, here’s a snapshot of how consumers are behaving in five key areas:

Spending Is Flat

Last week the Commerce Department announced that retail sales were flat in April, and up only 0.9% from the year before. That’s the smallest year-over-year increase since the fall of 2009. The economy struggled in the first few months of 2015, with GDP increasing by just 0.2%, which economists blamed on, among other things, severe winter weather. But the poor retail figures in April make the bad weather theory a bit less compelling.

One area of the economy that’s seeing lots of cash? The service sector. Spending at bars and restaurants has boomed lately. “It is clear that this is the place where U.S. consumers are spending some of the money they are saving by buying cheaper gasoline,” per Wells Fargo Securities senior economist Eugenio Alemán.

Saving Is Up

In the years leading up to the financial crisis, Americans’ personal savings rate—a ratio of savings to disposable income—bounced between 2% and 3%. These days it’s up to 5.3%. Moreover, household debt relative to GDP has fallen dramatically since the end of the recession. My spending is your income, and vice versa, so more savings and less debt can limit wage growth for workers.

Confidence Is Iffy

All of the above has led to a lot of noise when it comes to gauging the economy’s animal spirits. Consumer sentiment recently hit a seven-month low, as the initial cheap gas sugar high faded. Gallup’s economic confidence index has dipped lately, too, and rests in negative territory. That said, surveys show substantial improvement from a year ago. A recent Bankrate poll, for example, found that only 16% of Americans say their financial situation has deteriorated over the past 12 months, down from 35% in August 2011.

And while you’re paying more at the pump than a couple of months ago, prices are still much lower than last year. The Energy Department estimates that you’ll spend almost $700 less in gasoline, making this summer look to be the least expensive for car travel since 2009. That should boost household confidence a bit.

More People Are Quitting

Though the quit rate has held relatively steady this year, people are quitting their jobs at much higher rates than in the years following the recession, which suggests they are feeling good about their ability to land a new gig. With good reason: The jobs picture is pretty healthy despite a lackluster report in March. Employers have added roughly a quarter-million jobs a month since 2014, and the unemployment rate has dropped to 5.4%. Still, for many people there’s one major thing holding them back.

Wages Are Stagnant

What’s missing is wage growth. Median household income is still well below pre-recession levels, and wage increases have hovered around 2%, which is only slightly more than inflation. That’s pretty abysmal, so it’s not difficult to see why households might be cautiously optimistic in the face of good news—i.e. lower gas prices.

One silver lining can be found in a gauge called Employment Cost Index, which measures benefits as well as salary. The ECI rose 2.6% in the first three months of 2015 compared with 12 months ago. Per the Labor Department, that’s the best showing since the end of 2008. While it’s still in the early days, workers may be in for the raises they so desperately need.

MONEY First-Time Dad

The 3 Things All Millennial Parents Should Be Saving For

Luke Tepper

MONEY writer and first-time dad Taylor Tepper asks some financial pros for help prioritizing his competing financial goals.

No one aspect of parenting is in itself particularly difficult.

What makes it the hardest thing I’ve ever done in my life, however, is that one discrete task continuously leads into another and another, until you’re ground down and raw. Bedtime follows a bath, which follows dinnertime, which follows a walk, which follows a trip to the playground, which follows…which follows…which follows…

It’s exhaustion by a thousand baby steps.

Family budgeting presents a similar Sisyphean sequence. I know I should have a healthy emergency fund and contribute up to the match in my 401(k) and save for Luke’s college education. But in which order? And how am I supposed to do those things while also paying for child care, Brooklyn rent and the occasional whisky ginger?

Each financial responsibility can be fixed easily enough. In aggregate, though, it’s nearly impossible to see the forest through the trees.

One of the small advantages of reporting on personal finance, however, is that financial planners will take my calls and answer these questions for me for free. So I took advantage. What I learned may help you, too.

First: Start On Emergency Savings

“Emergency savings is about avoiding an immediate cash flow problem,” says Leesburg, Va.-based financial advisor Bonnie Sewell. “It’s the number one thing you should focus on.”

Here’s why, she explains: Without a sufficient rainy-day fund, your family is vulnerable to the vicissitudes of life (see: layoffs and car repairs and illnesses).

Now for the scariest part. Depending on your obligations and savings, and from whom you solicit advice, you should have anywhere from three to 12 months worth of expenses sitting in a bank account.

That’s madness. Between child care, rent, transportation and food, we spend at least $4,500 a month, or more than $50,000 a year. I can’t envision a world where I have $50,000 in cash, much less putting it to no use in a near-zero-rate savings account.

Pensacola, Fla. financial planner Matt Becker helped quell my panic.

He recommends tackling emergency savings in two steps: First, get about a month’s worth of expenses stowed away and then turn my attention to other priorities (see below). After I’ve found firm footing with those, I can try to build up my fund.

Next Step: Get a Start on Retirement

The next thing for me to consider is retirement.

Every expert I spoke with noted the costs of procrastinating on this one are significant. That’s because, by putting money aside for use at a later date, I’m giving up the power of compounding returns. To end up with $1 million in my 401(k) by 65, I’ll need to save almost $15,000 starting at age 30. If I wait to begin until I’m 40, I’ll need to put away around $23,500 more a year.

Of course, retirement accounts are illiquid by nature. They’re designed to reward people who wait to tap them until they’re nearing the end of their career.

Since I could also use liquid funds for things like a down payment on that house Mrs. Tepper hopes we’ll one day buy and savings for the college degree we hope Luke will one day get, Sewell says I should contribute up to my employer match and deploy the rest as follows…

Third: Set a Course for College

After I’m set up on retirement, Luke’s college savings comes into focus.

Everyone tells me to fund a 529, which allows me to invest tax-free so long as the money is used for higher education. I can also get a break on my state taxes. (Check out this article to see if you get a break on yours.)

As Melville, NY financial planner James J. Burns points out, every little bit I contribute for Luke’s college will go a long way.

For example, let’s assume that I contribute $200 a month and enjoy an average annual return of 8%. After 16 years, I’ll have amassed more than $73,000.

“That’s pretty darn good,” says Burns, who estimates that will go along way toward paying for two years of in-state tuition by the time Luke goes off to school.

Of course there’s a reason the 529 comes after retirement. “You can borrow money for college,” says Burns. “You can’t borrow money for retirement.”

Last: Grow Some Liquid Savings

Burns also recommends going over my budget annually, seeing if I can’t find more to save. If I do, I can divide that money between my emergency fund, retirement, Luke’s 529 and a taxable account through a portfolio of broadly diversified, low-cost funds for the house and our other goals.

Now that I’ve heard from the experts, I’m willing to take a more holistic approach as they suggested—patiently building up our anemic rainy day fund, contributing as much to our retirement accounts as we can afford, and making incremental additions to Luke’s college account. Whenever we earn a raise or unburden a significant cost like child care, we’ll judiciously target those extra dollars into the different buckets that will fund our lives.

But we’ll also set aside money for vacations and a few fancy dinners, even if that money could be leveraged elsewhere. The universe may be infinite, but our lives are short, and I intend to relish the occasional whisky ginger without pangs of guilt.

More From the First-Time Dad:

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