Published April 03, 2013
Just before the Enron scandal broke, the company's CEO immediately put his money into annuities—in his wife's name.
Why? Because those assets are creditor-protected, so they can't be seized (in this case, by the government).
This is just one example of many—remember the 14% tax rate Mitt Romney paid on his $13 million income?—illustrating how extremely wealthy people get the most from their money. And most of them do it legally.
Much of their success comes from knowing where to find loopholes in the financial system—"hacks," if you will. While we would never recommend any illegal or dishonest money moves (seriously, don't break the law!), there are a handful of legal personal finance hacks that are available to all of us—like these seven incredibly useful, low-profile tricks.
This hack is for homeowners, but it's good for everyone to know about should you ever decide to buy a home.
How It Works: Instead of having the bank front you the money you need through a personal loan, you borrow against your home's equity. (As a reminder, equity is the difference between the total of your mortgage and the appraised value of your home.)
The benefit here is two-fold: Since you've already been approved for a mortgage, the process will be less involved for this loan. You'll need to get your home appraised, but your lender should be able to walk you through the process. Second, interest payments on home equity loans are typically tax-deductible, unlike interest on personal loans.
Lenders probably won't give you an amount equivalent to the entire equity—you'll get more like 75%, at most. But if you have equity of $100,000, that's $75,000 you may be able to borrow. This is a great option if a.) you're planning to stay in your home for a while and b.) your home is worth more than what you paid for it.
If your home is worth less than your mortgage, you have little equity or you'll be moving soon, this hack is not for you. And a word of caution: If you go this route, you must be vigilant about making timely payments on your loan—since you're borrowing against your home, you could lose it if you fall behind on those payments.
For this hack, you need either a respectable credit score in order to apply for a new card or an existing credit card with zero interest.
How It Works: The most insidious part of carrying a large balance on your card is the interest that you're paying on that balance, which can be as much as 20%. With this hack, you're making a balance transfer to another card to avoid paying that interest.
This maneuver only works with cards that don't charge interest. Luckily, many credit cards offer an initial promotion of 0% interest for up to 18 months when you open a new card. If you're carrying considerable debt that you intend to pay off within the 0% period, you can do a balance transfer (essentially, you're paying off the interest-bearing card using the new card, so your balance appears on a new bill) to pay down your debt without interest.
There is a charge for the balance transfer—usually around 3% of the amount that you're transferring—so if you have a very small balance on your card, this might not be the hack for you. The idea is that your would-have-been interest payments cost more than the balance transfer fees. You can figure out how much money you'll save with this maneuver by using a credit card balance calculator. Note that your credit score will get dinged when you open a new card because you're changing your utilization rate, but in the grand scheme of things, this ding doesn't compare to the full-on wreck that is major credit card debt.
This hack is useful if you're saving for a child's college tuition because it gets around the limited use of 529 accounts. That said, Roth IRAs do come with income limitations: You can contribute to a Roth IRA to the limit if your adjusted gross income is less than $112,000 filing alone, and $178,000 if you're married, filing jointly, so consult your tax advisor before giving this idea a try.
How It Works: A 529 plan is a state-run college savings account (you can look into the particulars of your state's program here). It's not federal income tax-deductible (although some states let you to deduct some of your contributions on your state income taxes), but it does allow you to pull out funds for college tax-free. The downside of a 529 plan is that if and when you apply for financial aid (by filling out the FAFSA form), the money in this account is considered part of the family's assets. For some families, having savings in a 529 counted as an asset lessens the chances of getting financial aid.
One of the things that we say again and again is that you shouldn't take money out of a retirement account. There are penalty fees, and it's basically self-sabotage ... with one exception. That exception is withdrawing the principal—the money you contributed, and not the interest it has earned—from your Roth IRA.
We don't generally recommend this maneuver, but if you're in a tight spot, it might work for you. Money saved in retirement accounts doesn't count toward a family's assets, so you can save money for college in a Roth IRA, apply and possibly qualify for financial aid without declaring those assets, and then withdraw those savings when it's time to pay. For example, you and your spouse could each contribute $5,500 (the maximum contribution for 2013) for a total of $11,000 a year for the both of you. In 15 years, your principal will be $82,500, which you can withdraw to pay for college without penalty.
Something else to know: Retirement accounts are generally creditor-protected, so they can't be seized by creditors—with 529 accounts, the rules vary by state.
This hack is great if you're saving for college—particularly if it's for someone who isn't your child, such as a niece or nephew, grandchild or godchild.
How It Works: Nowhere on the FAFSA form (it's used to apply for financial aid for college) does it ask about assets that belong to people other than the student or student's parents. So to save money that isn't counted when colleges take stock of your assets, you can have a grandparent open a 529 plan, with your child as the beneficiary. Then parents and grandparents (or even just parents) can make contributions to the account.
And it doesn't have to be grandparents who open this account—aunts, uncles, godparents or anyone else can contribute to your child's education. Just make sure the account holder is someone whom you trust, so they don't abscond with the money!
This also works in reverse: If you're a grandparent, aunt, uncle, godparent or vested bystander, you can open an account for the child or children you love.
But be warned: This is a particularly complicated financial hack to execute. When the funds are taken from the 529 plan and given to your child, that money is counted as untaxed income for the year. It takes careful planning to figure out when it's best to withdraw the money—and forfeit your chances at further financial aid—so we recommend strategizing with a financial planner if you're going this route.
If you have an insurance policy that you plan to keep for at least one year, then this hack could be a good idea for you.
How It Works: People typically make monthly payments for policies like life insurance and auto insurance, but you don't have to go this route. In fact, insurance companies prefer that you don't—if you pay in one lump sum, they know that the payment is fulfilled for the year. But companies allow monthly payments as a courtesy—and they charge you for the privilege by multiplying each month's payment by .08 to .09%.
So let's say that your life insurance premium is $400 a year. If you pay monthly, it will cost you $36 a month. Multiply $36 by 12 months, and you're paying $432 for the year. That's an extra $32, or 8%.
There is a catch, however, with paying one lump sum: You need to have the money available to pay when the time comes. if you decide to hack your insurance payments in this way, we recommend setting up a separate savings account specifically for your yearly insurance payments, so you can auto-contribute a little each month.
This is another hack that could work for proactive people who can manage their own investment accounts.
How It Works: When you make a securities trade (like a mutual fund investment), you pay a fee, called a commission. But most companies will waive that fee if you set up an auto-draft—you sign on to contribute a certain amount automatically every month—because it guarantees that you'll continue paying, instead of just paying to make a trade every once in a while. You can ask your broker upfront if they'll waive the fee.
Of course, this only applies to people who have the money to contribute to their investments each month without coming up short when it comes to other financial obligations. One more important note: Before making any investment moves of your own, be sure to speak with an investment advisor or financial planner.
This hack is for you if you prefer to use a debit card for daily spending, but you aren’t receiving the same rewards you could get using a credit card.
How It Works: Every card has two entities behind it: the credit card company (like MasterCard or Visa) and the bank.
When you use a credit card, the merchant pays money to the credit card company, and the credit card company gives some of that money to the bank. But when you use a debit card, more of that money goes directly to the bank.
You know when the cashier asks, "debit or credit?" When you make a debit payment, you're pulling money straight from your checking account—and your bank makes money in fees. But when you swipe your debit card as credit, some banks make extra money—and many of them will share some of that money with you in the form of rewards, like cash back. So if your bank isn't giving you rewards—or it's charging you to be part of the rewards program—it might be time to shop around.