Money mysteries solved
Marketplace Money is devoted to solving money mysteries — terms and concepts about personal finance that are used every day, but that are puzzling.
Have a money mystery you’d like us to solve? Leave a comment below and we’ll get our team of sleuths right on it!
COST-OF-LIVING ADJUSTMENT/COLA
Jordan Goodman, editor of MoneyTalks.com and author of Master Your Debt, explains the ins and outs of the Cost-of-Living Adjustment or COLA:
“The idea is that when people receive some kind of benefit, it should be adjusted annually to keep up with the rising cost of buying necessities. COLAs applies to employment contracts, pensions and government entitlements, the biggest of which by far, is Social Security. Right now, with official inflation rates quite low, COLAs have only been adding 1 to 2 percent to what people get each year. Even so, that can amount to billions of dollars a year for something like Social Security.”
“Right now, the COLA that Social Security recipients get is based on annual changes in the Consumer Price Index, also known as the CPI. One proposal floating around Congress these days is to change that COLA to what is known as the Chained CPI. The Chained CPI updates the weighting of each of the 211 different categories of goods and services in the CPI each month to account for people’s different buying patterns. So for example, if the price of apples goes up in a month and people buy more oranges instead, then the weight of orange prices will be boosted, while the weight of apple prices will be reduced.”
“So COLAs may sound like they account for a relatively small amount of money, but because they are applied so widely to so many kinds of benefits, they add up to really big bucks.”
CREDIT CARD MINIMUM PAYMENTS/APR
Robert Brokamp, a certified financial planner and Senior Adviser with The Motley Fool, breaks down how credit card companies calculate our minimum monthly payments and what APR is:
“The minimum payment is the least you have to pay each month to meet the terms of your contract so it’s basically enough to let the credit card company know that you care about the debt. The terms of the minimum payment vary from the company. Generally speaking, it’s 1% of the balance plus fees and interest so on the whole, it’s about 2% and unfortunately most of that payment goes toward the interest and the least goes towards the principle.
APR stands for Annual Percentage Rate. It’s basically the amount of interest you’ll pay over the next year if you don’t pay off the debt. The truth is, you probably won’t pay the APR for various reasons. First of all, if you pay off your balance each month, you won’t pay any interest. Also, your credit card debt is probably a mixture of various things — maybe a promotional rate, maybe a balance transfer — and all those will have different APRs. When you send in your monthly payment, generally about the minimum amount will go toward the debt that has the lowest APR and then the rest, by law, has to go towards the debt that has the highest APR.”
Do you remember your first credit card? How old were you when you got it? What was your first purchase? Do you still have that card? We’re collecting those stories on Twitter @radiopiggybank. Be sure to use the hashtag #MyFirstCard.
THE DOW
Paddy Hirsch, Senior Producer of Personal Finance at Marketplace, describes how the Dow Jones Industrial Average – or The Dow – is calculated and why investors should care whether it’s up or down:
“Imagine we discovered an island in the Pacific. Fifteen thousand men women and children live on the island, divided into several tribes. Now, imagine a bunch of scientists wanted to measure the productivity of this island population. They could study just one of the tribes, but that wouldn’t give them an accurate picture. The best way, of course, is to track the output of every single man, woman and child on the island. But that would be unimaginably difficult and expensive.
So the scientists look for a shortcut.
They select 30 people, men and women, from a variety of tribes, and monitor them. The people are in their most productive term of life and the scientists can swap them out with other people when they become sick or aged, or of course, if they die.
The Dow is just like those 30 study subjects – it’s a careful selection of 30 of the biggest and healthiest of the roughly 15,000 publicly traded companies in the US. And we watch the Dow closely because it’s a quick way to take the temperature of the stock market, which so many of us are invested in.
When the Index was created, in 1885, the scientists were journalists. Today they’re researchers, employed by a company called the CME Group. But their mission remains the same – to monitor the health of corporate America by studying a carefully chosen sample of 30 of its biggest firms.”
PIGGY BANKS
Piggy banks have been symbols of saving money for centuries. Megan Cohen, Senior Information Management Specialist at the Federal Reserve Bank of New York, shares its origins:
“Piggy bank actually originates from a term they used in the Middle Ages called ‘pygg jars.’ Pygg jars were made of pygg, which is a form of clay. Essentially, these pygg jars were used to store all kinds of household items including money and over time, people began to refer to them as ‘pygg banks.’ It really had no connection to pigs at all. At some point, people got the humor behind ‘pygg’ and ‘pig’ and they started making the jars in they shape of pigs.”
Click here for more on the origins of the piggy bank, courtesy of Cohen. And if you’d like to show off your favorite piggy bank on Twitter, send us a pic @radiopiggybank and tag it with #PiggyBankPic.
FDIC
Author John Steele Gordon explains the FDIC:
“The FDIC is the Federal Deposit Insurance Corporation [and] was founded in 1933. What it does is that it insures deposits in banks up $250,000 per account.
The federal government started the FDIC in order to insure bank deposits so it’d stop bank runs, cause what would happen was that people would hear rumors that a bank was failing, and they’d go lineup outside the bank doors in order to get their money out while the getting was good.
And of course the more people who wanted to take their money out the more likely the bank was to fail, because all banks have depositors money out on loan. So in order to prevent a banking panic, they started the FDIC, and there basically hasn’t been [a banking panic] since.
In the recent ‘great recession’ a couple of hundred banks failed, and the FDIC made their depositors’ money good.”
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