What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. Closing a credit card
2. Estate planning and shared accounts
3. Personal finance percentages
4. “Nerdy” hobby
5. FHA loan question
6. Umbrella insurance
7. Caucus season
8. Real estate investing question
9. How long should I stay?
10. Cancellation of Community
Some weeks, it feels like all I manage to get done is juggling several things in the air at once: a child’s project, a family Thanksgiving meal, a holiday visit with extended family, a contract, and all of the other ordinary things that go on in life.
It can be really, really exhausting, but there’s always light at the end of the tunnel.
Q1: Closing a credit card
I have around $5000 in credit card debt, and a little over $13000 in student loans. I own my own vehicle (although I mostly bike) and don’t have plans to buy a home anytime soon (my savings account is mere dollars over non-existent). I don’t think my credit is stellar, but I don’t think it’s horrendous either (although I have been denied a few times for another card). Although I’ve cut up every credit card and plan to move to a cash-only system as soon as I’m free of the credit cards, I’m not sure what closing those credit cards will do to my credit. I made a final payment on one yesterday (yay!!) but I’m not sure when I should close down the account. My question is: should I close it now? I’ve made the decisions to close these cards to avoid further temptation, and to avoid the yearly fees, but I’m not sure WHEN it’s the right time to close. Should I close it today, or should I wait a few months? I won’t be using it, which is the argument for today, but I didn’t know if keeping it open with a $0 balance would do anything positive for my credit score (which could be the argument for waiting a few months). I’ll be paying off the others ones in consecutive months, so I’ll probably want to do the same thing then, too. What do you think?
I wouldn’t close it. Instead, I’d leave the thing completely dormant and live with a cash-only lifestyle. Put the card in your closet and forget about it.
Why? It keeps your credit report current and keeps your credit score up. You’d be surprised how many things check your credit score when determining how to handle you, from your insurance company to your employer. A good credit rating will help you. A dormant rating might not.
You can choose to live a cash-only lifestyle whether you have the card open or not.
Q2: Estate planning and shared accounts
My ex has inherited a few hundred thousand dollars. I don’t know the exact amount, but I’m thinking it’s around $300 K. His health is not all that great and he is concerned about having it all taken away if he has to go into a health care facility. This happened to his dad. He has 2 children from a previous marriage and we have 3 together. He wants to put this money in an account in my name with him as personal agent so that if something happens then I can distribute the money to all his children and it won’t go to a health care facility. As personal agent he would still be able to withdraw but the account would not be in his name. I don’t have a problem with this and he knows he can trust me – I’ve had access to his bank account for many years. My question is – Is there a downside to this for me? Will this affect me negatively in any way, e.g. taxes, etc.?
If he puts that money into a checking account with just your name on it, it constitutes a gift and you’ll have to pay a gift tax on it. I’d avoid that route.
It sounds like the plan is to have a checking account with both of your names on it. This will actually work, but you’ll want to be sure you act in perfect accordance with the terms of his will when the time comes or you could be in legal hot water.
The best route would probably be to set up some sort of trust with this money and have you as an administrator of that trust. This is pretty easy to set up – a lawyer can handle this for you very quickly.
Q3: Personal finance percentages
I’ve read a lot of personal finance resources and they all recommend saving a certain percent of your income (10%, 20% whatever). That makes sense to me. My question is: what is included in those %? Is it just retirement savings? Does it include emergency savings? What about house/car repairs or money to replace a car? My husband and I budget smaller amounts into multiple categories that act as short/medium-term savings accounts, but I’m not sure if those count toward this “savings” benchmark, or if the savings benchmark is only for long-term savings (retirement, kid’s education, etc)? I’m curious how you interpret it.
Generally, it just includes all goal-oriented savings. If you’re putting aside money for a specified purpose, then it’s included in that percentage.
So, an emergency fund would count, retirement savings would count, a house/car repair fund would count… they’d all count.
The reason for doing this is to make sure you’re not regularly spending more than, say, 80% of your income and that the other 20% is going for your future.
My biggest hobbies are reading and playing board and card games. I’m guessing that these are the things you find nerdy?
I really don’t actually care whether other people think my hobbies are “nerdy” or they think they’re “cool.” I generally think anything that someone is passionate about is pretty cool as long as it’s non-destructive.
Besides, you can make virtually any hobby sound rather idiotic. Think about it: ten million people spend their Sundays watching men in tight pants hug and push each other because they can’t agree on where an inflated piece of pig’s skin should be sitting on a field of grass. My wife loves spending hours spreading rotten vegetable scraps all over the ground in one corner of our yard.
It’s all cool. What other people think doesn’t matter one bit as long as you’re enjoying it and it’s not hurting anyone else.
Q5: FHA loan question
I am a first time home buyer and I have saved enough for a 20 percent down payment for a 300k house. Do you see any benefits in me looking into a FHA loan? I hate have to pay extra for PMI and I rather not to pay it. Are there any advantages to a person to look at a FHA loan if he can pay 20%?
There’s no real reason for you to have a FHA loan.
The FHA program exists to help people in special situations buy a home. People without down payments fall into that group, as do people who want fixer-uppers.
I don’t think you fall into any of the categories on that link, and since you have a full down payment, I think you’d just be getting an ordinary mortgage from your preferred bank or credit union.
Q6: Umbrella insurance
I am wondering if I need umbrella insurance. I’ve talked to friends and co-workers about it. I can’t find anyone who has it. But I want more perspective. Here are some facts if they help with the assessment: I’m 45. My income just scratches 6 figures. My mortgage is the only debt I have, but I still owe over $300k on it. I have solid home insurance, car insurance, and health insurance through work. I don’t have life insurance, as I’m single and don’t have kids or dependents. My retirement savings: about $110K (yes, I know, I’m aggressively saving more!). Emergency savings: about $5k.
Umbrella insurance is mostly a good idea for people with a significant amount of assets that they might want to protect against things that are beyond the protection of their other insurance policies.
For example, if you had a net worth of $2 million and got into a car accident that was completely due to your negligence and only had a small amount of car insurance, the umbrella policy would step in and supplement the car insurance policy, protecting your net worth.
Unless you have a significant amount of assets to protect beyond the value of your home, umbrella insurance isn’t going to be worth it.
Given your situation, I would consider it much more important to have life insurance than to have umbrella insurance.
Q7: Caucus season
It seems like a person can’t go a day without hearing about the latest polls and politics coming out of Iowa as we run up to the primary and caucus season early next year. As a politically tuned-in person, what’s it like living there?
I get a lot of “robo-calls,” which are basically pre-recorded messages from politicians wanting me to vote on January 3 in the caucus, preferably from their candidate. We get so many of them that Sarah and I joke about them. Similarly, we get a lot of flyers in the mail from various candidates.
There is a lot of access to the presidential candidates if you’re willing to make an effort. There’s usually an opportunity to go meet at least one of the candidates every day somewhere within 100 miles of where I live. There have been a lot of events within five or ten miles of where I live, too.
Honestly, though, it all just becomes noise at a certain point. They’re all using more or less the same tactics that they used four years ago… and eight years ago… and twelve years ago.
Q8: Real estate investing question
My husband and I recently made our last house payment and are officially debt free. We are jumping right back into the fray by buying a duplex . We have done our research and feel comfortable with our decision . The property is in a nice area with a good rental history. My first question is can you recommend any particular reading material on this particular type of investing? We hope to buy another one in a few years with the goal to retire with three units. At that point our children may buy them from us or manage them.
What do you think about this type of investment? I am 48 my husband is 50. We are very active and are “ fixer uppers”. We have remodeled our entire house, so we are able to do a lot of our own minor maintenance. We no longer feel comfortable investing in the stock market and I have cut back on investing in my 401k and am only contributing to the employer match. My husband is doing the same. I want to decrease contributions to our Roth’s as well and divert it to paying off the mortgage principle of the investment property. Do you think this is a wise move? We recently moved the majority of our Roth investments into more conservative funds at the recommendation of our fee –based financial advisor. The return on these investments will be modest, but we will be giving up the tax advantages of the Roth’s. If the tax laws change and we can’t deduct or mortgage interest it would probably more advantageous to pay down the principle of the mortgage ASAP. Am I missing something or do you think we are on the right track?
Are you willing to handle many of the issues that come with being a landlord, such as fixing problems and handling tenant issues? I think that’s the real question here.
Some people revel in this. I’ve had friends in the past who deeply enjoyed being landlords. I’ve had other friends who owned property just to end up hiring someone to manage it. I’ve known others who didn’t do their homework and wound up with tenants that stripped every piece of copper from the house in the middle of the night and disappeared, resulting in a long dispute with their insurance company that remained unresolved for years and wound up in court.
If you’re up for this, then I think you’re on the right track. You can get a good return on your money here if you’re willing to handle the issues and the work.
Q9: How long should I stay?
A little about me: I graduated law school in June of 2009 with around $120,000 worth of student loan debt. This was right around the time the world was falling apart and my law firm informed me they didn’t have much work for new associates. I’m pretty much the luckiest person in the world because my law firm didn’t fire me – they “deferred” me for a year. In essence, they gave me about a third of my salary and enough to cover my minimum student loan payments for a year. I threw some of my deferral money at my loans, but most of it was spent traveling the world. I started working as a corporate attorney in October of 2010 and lived very frugally. I got a roommate, got rid of my car, brought my lunch to work, etc and threw every extra penny at my student loans. In October of 2011, I paid off my last student loan and am now completely debt free. (When I’m feeling down, I often remind myself of that little fact and it perks me up most days).
So now I’m 29, single with no children and making around $9,000 a month net with expenses of around $1500. I have my requisite emergency fund and $100k in my 401k (I’ve always been frugal and worked before law school, contributing the max each year). I’m a little afraid to do the math to see how long I should stay at this very lucrative, but soul-sucking job. One year? Two years? 10 years? If I continue to live the way I do, I could build up a very nice bank account and I feel like this would open a lot of doors for me. So, my question – how do you decide how much money is enough? This job makes it very difficult to date. It takes up my whole life. I don’t hate it – I appreciate the knowledge about corporate governance and think it makes me a better citizen and better voter and I like the people, but I don’t think I’m doing anything worthwhile for the world. But, obviously, the money is good and I wonder if now isn’t the time to do it when I have no other obligations.
How much money is “enough” depends entirely on what your plan is for after you leave this job.
For example, if you intend to essentially do nothing at all, then you had better have enough to live off of for the rest of your life.
What do you want to do after you leave? You need to sit down and do some soul-searching with that question in mind. When you have a goal in mind and a plan to reach that goal, then knowing how much you need becomes a matter of filling in the blanks.
Q10: Cancellation of Community
I just read that Community was cancelled. Didn’t know if you’d heard. I know it was the only sitcom you watch, so I’m guessing you’d want to know.
Obviously, I’m disappointed, as it’s one of the very few shows on television that I enjoyed.
However, the reality is that it just wasn’t getting the ratings. Television runs on ratings. If people aren’t watching, they’re not going to put shows on the air. NBC is a business, and if having Community on the air isn’t making them money, then pulling it is probably the right move.
I think the big problem it had is that the audience for it is people who own and use DVRs. Everyone I know who watches Community regularly would record it and watch it at a later time, fast forwarding through the commercials. It’s hard for a “free” network to make enough money to pay for the episodes that way.
Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.