Reader Mailbag: Juggling Act

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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?

- Shauna

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.?

- Laurie

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.

- Jennie

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.

Q4: “Nerdy” hobbies
I think it’s awesome that you’re so out and open about having such nerdy hobbies.

- Reggie

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%?

- Roger

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.

- Lenore

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?

- Jeff

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?
- Susan

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.
- Evan

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.

- Alan

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.

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67 thoughts on “Reader Mailbag: Juggling Act

  1. Q10: Community wasn’t cancelled. It was pulled for mid-season. So far as we know, all 22 episodes of season 3 will air at some point. What’s left to be seen is if it will get renewed for a season 4. Which, is still possible considering how terribly NBC is doing in ALL of their ratings.

  2. Lawyer at a mid-size law firm here – I’ve never heard anyone say they regret leaving a large, corporate law firm, and those are people with debt. Without debt, it seems like an easy question to me unless you’re one of the few people who truly does love it (which you’re obviously not). Without debt, there are other ways to build up a nice bank account more slowly while still keeping your sanity in place.

  3. Re Q2: I have always heard that the GIVER pays the gift tax, not the recipient. So that, what is it, $13K annual limit does not affect the recipient, but if the giver goes over that, then the Giver pays taxes. The whole protecting-assets realm is stuffed with pitfalls and paying for a few hours of legal work to get a trust properly set up is definitely the way to go.

  4. @Carmie: I’ve heard Sony is going to push for a fourth season so at least there would be enough episodes for syndication. I must admit I panicked a little bit when I saw the heading for question 10, Community is my favorite show!

    Trent’s description of football made me lol. My boyfriend would agree 100%.

  5. Q2: As I understand it, unless ex-Mr. Laurie has given a lot of large gifts over the course of his life, the $300K won’t be subject to the gift tax. It will, however, count against his lifetime exemption (currently $5 million).

    I’m not quite sure what Laurie means about “having (the money) taken away if he has to go into a healthcare facility.” Are you worried about fraud on the part of the healthcare facility (or someone else)? Or are you talking about your ex getting rid of his assets so he will qualify for Medicaid? Either way, it sounds like a visit with a lawyer is the way to go. This is too big a deal to be left to an entertainment column on the internet – especially Trent’s, since he doesn’t even bother to do ten seconds of Google-based research on stuff like this.

  6. Laurie @2 – basically every paragraph of Trent’s answer is WRONG. First, there is no gift tax payable until the gifts exceed the maximum estate and gift tax exemption, and then it is payable by the giver, not the recipient.

    Second, if Laurie’s ex is concerned about “losing” the money if he goes into a health care facility, he should consult an estate planning lawyer and set up powers of attorney so that there is someone who can manage his money if he can’t.

    If he wants to avoid having to pay it down before he can qualify for Medicaid, he will need to consult a specialist to make sure he’s not committing fraud himself; just putting the money in Laurie’s name is not enough to immediately qualify him for Medicaid. There are look-back periods and other safeguards to try to prevent free-loaders from ripping off the taxpayers.

    Not to mention that he SHOULD spend his own money on his own care before becoming dependent on the taxpayers.

    Finally, who’s to say that Laurie herself won’t be the first to become unable to manage the money, or find herself needing to go into nursing care, or won’t get hit by a truck and end up with that money as part of HER estate?

    For heaven’s sake, Laurie, tell your ex to consult a lawyer. Whatever he’s concerned about can be handled much more safely than what you’re contemplating.

  7. OK, I’ll throw a question out to the commenters here :) My husband and I are both first time home buyers. We’re saving our money, and hope to have the down payment in to put down on a house in the next year. Ideally we’d move mid-year 2012, but we’re willing to wait until we find the perfect house for us. Right now, we have about 10% of a down payment in our price range, and if we move next year, I assume we’ll have about 15% (closer to 20% if we wait until late 2012 or 2013). There is a house that we love in a neighborhood that we love, and I have some inside info that the owner is looking to sell within the next year. If we have less than 20%, is there a benefit to the FHA over a standard 30 year mortgage?

  8. Q 6: If no one relies upon you to maintain their lifestyle, no need to insure for it. You’ll need an umbrella policy to protect your assets from a law suit instead of life insurance.

  9. Q6–Once again, Trent is wrong.

    Umbrella insurance is incredibly cheap (I pay $150 per year for $1 million worth of coverage) and is worth the cost–even if you have no significant assets a judgment against you can include liens on FUTURE assets and salary. Umbrella insurance guards against that risk.

    And why is Trent advising that a person with no dependents get life insurance? This makes no sense whatsoever.

  10. Q6- Why, oh, why is it important to have life insurance if not a single soul is financially dependent on you? A trust will suffice to see your assets go where you want.

    I would make sure I had fabulous health insurance, and very good dental insurance. Dental bills can start running into the thousands these days.

  11. Kristine–I would love to agree with you, but there is no such thing as very good dental insurance. Dental insurance runs the gamut from OK to totally inadequate– and if you need procedures like implants you’re basically on your own.

    I’ve spent over $20,000 on my teeth in the past 10 years and that’s despite having a well-known dental policy.

  12. One more thing–I agree completely that Laurie and her ex should see a good estate / eldercare attorney as soon as possible. There are far too many pitfalls with this kind of planning to do otherwise.

  13. Good comments 1-11 (all that are up as I write this).

    My personal juggling act this past week has included: 8 hr/day job responsibilities, major case of the flu – day 7 so far, one night of total gastric distress (to be discrete) for 5 hours, and initiating a high elevation back-country helicopter search and rescue for my husband who didn’t return from a long hike (he’s fine & back home now – the trail conditions just got so awful he couldn’t get out on his own).

  14. And the REAL reason why Trent doesn’t like Big Bang Theory. The last new episode of Community earned a paltry 3.5 million viewers; Big Bang Theory scored 15.9 million.

    Oops. Blame NBC for poor scheduling, not the competition for being good.

  15. @Q9 – If your monthly expenses are $1500, you could easily work at Starbucks (a pretty fun job where you meet lots of people) and not have to touch any of your savings. Find some company whose values you admire and try to get a job with them, even part-time!

  16. So I’m noticing a pattern. Any time I start a post with a question (such as, Why does someone without dependents or even a spouse need life insurance?), the comment gets sent to moderation purgatory. Apparently questions are offensive to a general audience.

  17. Q2 sounds more like a way to hide assets than “estate planning”. It seems to me that if someone has the money to pay for a service they should be willing to pay for it, rather than looking for a way to hide the money so it doesn’t get “taken away”.

  18. Re: Q4–Whoa! I don’t think Reggie meant to be insulting. I will proudly admit to a few conceivably “nerdy” hobbies myself. If he’d said the same to me I’d have responded with a “Heck yeah!”

  19. Q2 left a really bad taste in my mouth. Her ex wants someone else to pick up the tab for his health care, so he can keep his greedy hands on his $300,000? There’s something horribly, horribly wrong with that, and I’m very disappointed that Trent completely ignored the ethical aspect of this question.

    Why should taxpayers subsidize Laurie’s ex’s medical care if he’s got $300,000 hidden away somewhere? That’s precisely the type of fraud the laws are specifically crafted to TARGET.

    You’re supposed to pay for your own care. If you can’t, then the taxpayer will pay for you. But employing sleight-of-hand accounting loopholes to try and dodge the rules is dirty, underhanded, and disgusting.

  20. @Carl:

    Are you saying Big Bang Theory and Community are on at the same time (on different networks), and that’s why Community’s ratings are low?

    I have to be honest – I watch both shows and didn’t know they were on at the same time. I assumed everyone DVR’d all these shows and just watched them whenever. Being on simultaneously isn’t an obstacle, because a dual-tuner DVR (aren’t they all dual-tuner?) will record 2 shows at once, while we watch a third pre-recorded one.

    Throw in re-running the shows later on that night, plus the timeshifting channels, and I don’t see how “time slot competition” is an obstacle at all these days.

  21. Johanna @9 – My memory is that we’ve always agreed on the fact that Trent doesn’t have a clue when it comes to tax and legal issues — his infatuation with Roth IRAs for everybody springs to mind. Not that our collective efforts to educate him have made a dent.

  22. Q2: Laurie, please pay no attention to the amateur moralizers. There are (I presume) rules in place that specify what is and isn’t allowed in terms of Medicaid eligibility (if that’s what you’re talking about). Do some research on your own, talk to an attorney, learn those rules, and follow them. And let your own conscience be your guide as to whether what you’re doing is ethical.

    @amateur moralizers: You realize we’re talking about healthcare here, right? It’s not some luxury purchase like a fancy car or a big house. Honestly, if you had a life-threatening medical condition, would you be perfectly happy to lose your life savings in order to get the treatment you need? Or would you prefer to find a way not to do that?

  23. Q3 Given that most sources recommend 10-20% of your salary be saved just for retirement, I’m a bit leary of adding emergency fund, car fund, and college loans to that percentage and possibly thinking you’re doing okay when you’re saving 15% of your salary when a third is for the roof on the house in three years, a third is college education for the kids, and a third is retirement. 5% of salary ( assuming no matching) for retirement isn’t likely to work well for most folks down the road.

    Q6 Most insurance companies will require a pretty hefty amount of coverage on your auto and home insurance before they allow you to buy umbrella insurance to begin with. For example I had to have personal liability on my homeowners of $300K and on my auto of $250K before they would let me tack on an umbrella policy of $1M or $2M. You might be fairly comfortable at those levels or below those levels and not need the insurance. Note that the insurance is basically in case of liability, not for home replacement, etc. I didn’t see a point in it until my kids started driving while covered under my insurance. That said, it was pretty cheap ($150 to $250 a year) prior to my teenagers getting their license which is what I envision you would likely pay.

  24. @Johanna:

    “Honestly, if you had a life-threatening medical condition, would you be perfectly happy to lose your life savings in order to get the treatment you need? Or would you prefer to find a way not to do that?”

    If by “find a way not to do that” you mean “slough the cost off onto the already overburdened taxpayer,” then yes, I’d pay for my own treatment.

    Johanna, I hear what you’re saying, but health care isn’t free. SOMEONE has to pay for it. And if the person receiving the care has the money, but just plain doesn’t want to pay for it (but, of course still wants the service), then why should the taxpayers pay for it for him?

  25. @Lenore, Q6, umbrella insurance is pretty inexpensive, but it does require that you raise the liability coverage of your other insurance to the maximum available, which could raise your other premiums a little.

    A 45-year old single person with no kids who is still in good health might want to get life insurance if he/she had any thought of ever establishing a family, or becoming financially responsible for aging parents or other relatives. The cost of term life insurance for a healthy 45-year old is not that much, and the one thing about life insurance is that it’s MUCH cheaper to get when you’re younger and healthier than when you’re older and have developed life-shortening ailments.

    But a 45-year old with no dependents, only $5,000 in emergency savings and a $300,000+ mortgage should probably concentrate on those issues. That’s a totally inadequate emergency fund when your mortgage payment alone would wipe it out in two months or less. And as you know, your retirement savings are on the low side as well.

  26. I have an umbrella policy, and I don’t even own my own home. My husband works in one of those fields where people get sued, and this is just a relatively cheap way for me to buy some more peace of mind, over and above the errors and omissions and liability insurance he has to carry to keep his license. And it protects us in case of accident/slip on the sidewalk out front, etc. My policy in particular helps with attorney’s fees, and even though we don’t own the house, proving that we aren’t responsible for the (example) lip on the sidewalk that someone tripped over is something I’d prefer to leave to a lawyer. I think our policy is between $80 and $120/year, and is $1M cash, and a quarter of that for fees (or something in that neighborhood, I’ve had it for a while and don’t keep the numbers in my head anymore).
    The attorney’s fees are a huge concern to me, since defending yourself against a frivolous lawsuit isn’t any cheaper than defending yourself against a legitimate one. They can burn through a lot of net worth in not very much time at all.

  27. Q2:

    Have your ex also look into long-term healthcare insurance (depending on his age and current health, this could still be a reasonable bargain)

  28. @SwingCheese – I did an FHA mortgage and the only advantage is that you do not need 5 or 10% down. There is a premium that you can pay or finance at closing which is a percentage of the loan value, and there is a monthly mortgage insurance that, generally speaking, you cannot get rid of for 5 years. FHA mortgages are more expensive than convential mortgages, and they’ve recently modified how much mortgage insurance costs to make it even moreso. If you have 10-15% down, you can probably get a “private” mortgage with cheaper private mortgage insurance (required when you’re putting down less than 20%)

    Having mortgage insurance, while tax deductible like interest, effectively raises the APR of your loan. When shopping for mortgages, you should ask your mortgage broker/person what the affect on APR is with mortgage insurance (private or FHA).

  29. @Kevin: First of all, if I had my way, taxpayers would pay for everyone’s healthcare. But that’s neither here nor there.

    I’m not a lawyer, so I don’t know whether there’s a way for Laurie and her ex to legally do what they want to do or not. If there’s not, I’d advise them not to break the law, and to fork over the $300K if it comes to that. But I wouldn’t go so far as to tell them they should be happy about it. And I wouldn’t fault them at all for wanting to look into their options, to see if there might be a way they could hang onto the $300K.

  30. Q8: Check out First Time Landlord by Janet Portman and Every Landlord’s Tax Deduction Guide by Steven Fishman. I read about 5 landlord books before renting my home and those two were by far the most useful.

  31. #23 Kevin – Not at the same time but Big Bang Theory was moved to Thursday night to solidify the line up. It worked to the detriment of Community. Evidently, viewers don’t like changing channels once they start watching TV.

  32. Johanna, obviously you hadn’t read the entirety of my post you mistakenly thought you agreed with.

    What exactly is an “amateur moralizer” and who exactly certifies the professional moralizers?

    No one is “perfectly happy” to spend their life savings (although in Laurie’s ex’s case it was actually an unearned inheritance) on the necessities of life, like nursing home care, and a very large proportion of the population now believes that their necessities of life should be paid for not by themselves but by someone else, as a matter of right.

    But that proportion has not yet grown big enough to win the electoral battle completely, and our Medicaid laws were passed on the premise that they were going to aid the truly needy, not just anybody who had health care expenses and wanted someone else to pay for them. Someone with $300,000 in the bank is not truly needy and there’s no reason for the taxpayers to subsidize his children’s inheritances. (Laurie’s ex has five children; if they want to preserve their inheritances, maybe they can take him into their own homes and care for him that way.)

    The hostility toward welfare programs is precisely because we see all too many people like Laurie’s ex who are letting their all too self-serving consciences guide them into misusing programs that were intended to help those who really could not help themselves.

  33. @Johanna – “Honestly, if you had a life-threatening medical condition, would you be perfectly happy to lose your life savings in order to get the treatment you need? Or would you prefer to find a way not to do that?”

    Would I be perfectly happy losing my life’s savings in order to treat a life-threatening medical condition? Absolutely. Lets see, what would the other options be? Not receive treatment so I can leave the money for my kids or have someone else pay for my treatment? The latter seems to be what the OP was about.

    Having said that, I also support universal healthcare. We do not have that, however, so until we do I believe that people who can afford to pay their own way should.

  34. @6 Cam, the interest deduction is available on a rental property as well as a primary residence.

    Q6: Umbrella insurance is so inexpensive. I think it’s worth the extra $150 a year to ensure that you’re protected.

  35. Johanna,

    I apologize, I think I may be guilty of blurring the discussion between nursing home care, and the more general “health care.” I agree that basic health care should be a right (I’m Canadian, after all). I meant to direct my comments specifically at nursing home care.

    Most elderly people will eventually get to a point where they can no longer care for themselves. Obviously, the humane thing to do is to help people, but that’s expensive. If they’re unable to afford that help, then society (read:taxpayers) will provide that help for them, free of charge. But if they HAVE means, then I don’t think it’s unreasonable to expect them to pay for their care for as long as they’re able. That is, spend down their estate. Once they can no longer do so, then the government will continue to provide care for the rest of their life.

    My (and others’) objection is to some peoples’ idea that society OWES them free nursing home care. That care is extremely expensive, and I don’t think it’s fair to expect taxpayers to pay for their spongebaths and 9-way adjustable orthopeodic bed, just so they can pass on a massive windfall to their children. Medicaid is intended to be a last-resort safety net for those truly in need, who have no other means to care for themselves. I vehemendly disagree with those who would abuse it to preserve a wealth legacy for their descendents.

  36. Q8/Susan: Here’s my take on being a landlord, based solely on my own experience: I rent out a house that I own outright for $1200/month. The house is three hours away from me, so I need a manager. His take is 7%, leaving me with $1116/month. That works out to $13,392 year. But my property taxes are $4500/year and rental dwelling insurance is about $600/year, which brings my annual income down to $8292. That figure assumes zero maintenance costs, which is not realistic. But we’ll go with it for simplicity.

    The house’s purchase price was $164k. So I look at it like any other investment: what is the percentage return based on the asset’s price? 8292/164000*100 is about 5.05%. Definitely better than any savings account, money market, or US Treasury product right now. But it’s harder to say if 5.05% is competitive with other instruments, like stocks, municipal bonds, mutual funds, etc.

    Not to mention, the actual return for me is lower than that when maintenance expenses are considered. This is harder to judge, because they ebb and flow. One year I had to put in a new water heater for $1200 (turns out the town has unusually hard water, which is hard on hot water heaters; I was told they typically get replaced every six to eight years).

    Now consider all the risks: what if I get a crazy tenant who tears the place up, or hurts himself and tries to sue me? What if the house goes vacant for a long time—I’d have to pay for a caretaker, not to mention the risk of vandalism with me being so far away.

    Also, if I had a mortgage on the property, then I would quickly approach zero or even negative returns. (Which was actually the case when I first started renting it out a few years ago.)

    I’m not trying to discourage anyone from becoming a landlord. I’m discouraging it as being looked at as “easy money”. Make sure you run the numbers before you dive in. Depending on how the numbers look, you might be better off investing in some other kind of financial product. FWIW, I’m kind of an “accidental” landlord: that house used to be my actual residence, but I left it to chase a job opportunity. The job was somewhat risky, so I didn’t want to sell the house (but couldn’t afford to let it sit empty).

  37. Q9/Evan: I’m in a somewhat similar situation. My plan is basically this: work the current great-pay-but-too-many-hours job long enough that I have enough money to (1) buy a house outright and (2) generate enough “passive” income to live on.

    To expand on the latter goal: passive income would be money generated from interest, dividends or other investments. Although that may sound like retirement, I’m actually talking about “semi retirement”. Semi-retirement to me is where I can look for a job that has the hours and environment I like, and not have to worry about the pay. With no home mortgage, and a moderate lifestyle, I won’t need a high-paying job. The passive income is there as a safety net only—the intent is to not use it, but let it compound until I need to draw on it when I truly retire.

    You didn’t say if your $9k/month is before or after tax… but assuming it’s post-tax, then after your $1.5k in expenses, you’re left with $7.5k/month, which equates to $90k a year. If you can save that much per year, you can save $900k in a decade, but it should be way more than that when you consider compound interest—but let’s say you have $1 million, for easy math.

    With monthly expenses of only $1.5k, your annual expenses are $18k. Let’s say you use your million dollars you saved up to buy a $250k house outright (that buys a pretty nice house in smaller midwestern towns). Now you’re left with $750k. You need that to generate $18k/year for your cost of living—that’s only 2.4%, which you should be able to do with a fairly conservative investment portfolio.

    If you buy a house, though, your living expenses might go down. Or since you’re a lawyer, perhaps you could do some part-time consulting to bring in some extra income. Either way, the overall financial situation improves.

    Hope my thoughts are of some use to someone!

  38. @Matt:

    “You didn’t say if your $9k/month is before or after tax”

    Sure he did. He said he makes “$9,000 a month net.”

    “Net” means “after taxes.”

  39. Q9:

    Let me get this straight. The guy gets deferred for a year, and receives one-third of his normal salary. He puts “some” toward his loans and travels the world? REALLY? Then when he gets back he claims to live frugally? Sorry, but the two don’t match up. If he was frugal he would have DEFERRED his travel until a later date. What is it with the younger crowd that they have can’t wait for anything. Everything must be “now.”

    He should have paid off his loan first… just get rid of the hassle, piled up a little savings, and then considered finding a new job, and THEN quit his “soul-sucking” job.

    I have a news flash for him. Most jobs are soul-sucking, if you let them be. Try getting a graduate degree while working full time and supporting a family. Welcome to the real world, son.

  40. My husband and I have had single family rental properties. You can screen tenants yourself or use an experienced property manager to screen tenants and have everything look great on paper and still get the nightmare tenant. It can happen with your first tenant or your third or your tenth. They can have great income, great credit and good references (mainly because for liability reasons, landlords hesitate to be completely honest about tenants) and be your worst nightmare. It comes with the risk of being a landlord. It is not a risk free investment.

  41. Bill in Houston (42) —

    Let me get this straight. Evan in Question 9 graduated in June 2009 with $120K of student loan debt and then paid it off completely by October 2011. That’s not good enough for you?

    Please.

  42. Also, he’s 29 years old and has $100K in his 401k.

    Please tell me you didn’t read his question very carefully, because I don’t get your reaction.

  43. @Bill in Houston (#42) – I don’t see the issue. While I admit I had a similar reaction when I first started reading Q9 I quickly changed my opinion when I realized how well Evan is doing for himself. Its not like he put his loans into deferment while he traveled the world. He paid on his loans and also traveled while he had the chance. He has been working his current job for just over 1 year, and is living on 17% of his net income. Would you have rather him take time away from his job, when his employer needed him, to travel, rather than doing the travel when he was not needed?

    Being frugal doesn’t mean deferring travel. Sorry that you disapprove of the “younger crowd”, but Evan seems to be doing well. Do you live on 17% of your income?

  44. Also, also, there’s normal soul sucking and there’s big corporate law firm soul sucking; it’s a matter of degree.

  45. Q1 : Is there a good chance that having those credit cards open and in your hands would tempt you into running up credit card debt again? Do you need a high credit score in the short term for a significant purchase like a car loan or mortgage? If those cards are a real temptation and you don’t need a loan soon then cancel the cards and don’t look back. Don’t let a credit score run your life especially when theres no immediate impact to you from the score. Closing the cards may have a negative short term impact on your score but thats worth avoiding the higher risk of running up card balances again. If you have no real concern or fear about being tempted to use the cards then go ahead and keep em. You do mention annual fees so that also alone could be worth closing the cards. A little higher credit score isn’t necessarily worth paying banks $50-100 for the luxury of not using their credit card.

    Q2 : I agree completely with #8 comments from AnnJo.

    Q6 : You really do not ‘need’ Umbrella insurance. You don’t seem to have any specific liabilities to be extra worried about, so what are you insuring against? If you just want to be safe thats fine. It would make most sense to start by having a high amount of liability on your auto insurance. Auto accidents are relatively common. Extra auto liability can be done for fairly minimal cost. For general liability its very unlikely that a random person will be sued for millions of dollars. I’m talking 1 in a million odds. People worry about giant lawsuits far too much, its just not very likely for most people. Its much more likely you’d get into a major auto accident.

    Of course if you really want to be extra safe then putting another $100-$200 into an umbrella policy won’t hurt except its likely a waste of money in the end. You do NOT need life insurance as you have nobody relying on you.

    Q8 Susan: You should read up on the national, state and local laws regulating rentals and tenant landlord laws. The laws vary a bit state to state and in some cities and its important that you know the laws in your area as well as understand national laws. You need to learn the ropes about avoiding discrimination and stuff like properly notifying with the EPAs lead based paint disclosure. Nolo has some good books on the topic like “Every Landlord’s Legal Guide”. For general landlording the old “Landlording: A Handymanual for Scrupulous Landlords and Landladies Who Do It Themselves” is a good one. Its cheap if bought used. ‘The Unofficial Guide to Real Estate Investing’ is pretty good but is slanted more towards investing.
    There are also some good webisites with tips and info like MrLandlord and The Landlord Protection Agency.

  46. Kevin, Only around 30-40% of households have a DVR. Not all DVRs have dual tuners. So most people are not DVR’ing anything. The % of homes with DVRs is going up rapidly but most people still don’t have em.

  47. Q9 Evan: If you just want to pile up some money then quit, I’d say 5 years more is a decent target. If you are taking in $9000 and spending $1500 then you’re saving $7500/month. If you only spend $1500 then that amount of income isn’t too hard to achieve from savings or other work. If you pile up $450,000 then thats enough to pay your $1500 in expenses indefinitely assuming a 4% annual withdrawal rate. If you save $7500/month you can accumulate $450k in 5 years or less. But you should make sure you account for things like paying your own health insurance, which may be cheap now that you’re only 29 but could go up in cost considerably in 5 or 10 years so plan ahead for that. You may also want to look at where to save your money. so that its accessible for a semi-retirement. Alternatively you might want to just look at alternate employers. Maybe you’d be happier with a job at a non-profit or something like that. Maybe you can switch to part time work in a small town or something.

  48. Kevin,

    Also, DVR stats don’t count nearly as much to the advertisers as people who watch the show in real-time because they know that people will skip their commercials.

  49. On Q2, I agree that is is morally wrong to hide the money for the sole purpose of giving it to his kids.
    Since he has the money now and is concerned that he will be ill in the future, I would reccomend that he use it to better his life now and later.
    Use the money to buy a smaller wheelchair accessible house. If he is over 55, he could consider moving into a development which caters to seniors. Smaller place and more accessible means he will be independent longer.
    He can also look at extra help as soon as it is helpful rather than waiting for a dire enough need to come along that Medicaid people will actually let you move into a home.
    Pay for a nutritionist now, a trainer at the gym to help his health NOW and it will pay off long term.
    And yes, as someone elso mentioned…look into long-term healthcare insurance.

  50. Q9: sounds more like a question for Early Retirement Extreme website. He’s already got the expense to income ratios to go down that path if he wants to.

  51. Q2 : Another thought on this one. He may want to look into Long Term Care insurance. If he’s in his 40′s to early 60′s and his health isn’t failing outright then LTC might be a decent option. Its not cheap but it is good insurance option versus spending all your money on nursing home care. That would give him insurance to pay for nice care if in case he needs it without spending all his money.

  52. Q9 Evan: I’d urge you to do some pro bono work. It sounds like you are at a fairly large firm, so your firm may make pro bono opportunities available to you. There are plenty of opportunities for corporate attorneys to do pro bono work–it’s not just for litigators. If you are giving back, you will feel better about your job. The pro bono work may also help you find a way to use your law degree that will be more satisfying to you. I’d stay as long as you can take it, but try to set some boundaries at work, and be sure to take vacations. I know that is sometimes easier said than done, but I’ve been at a large firm for a long time, and I’ve seen lots of great examples of how it can be done. You should also try to figure out when the best time to jump ship is for your practice area. (For example, if you go in-house, how many years of experience do you need to qualify for jobs?) Most people I know have jumped ship around the 3-5 year mark.

  53. @Tom (#31): Thank you for your comment. I’d been wondering about that, and I didn’t know about mortgage insurance. We haven’t actually made an appointment to talk to anyone about it yet, since we don’t have the 20% that we want, but I feel better having more information about it so that I’m prepared when we do begin to talk to a bank.

  54. “Given your situation, I would consider it much more important to have life insurance than to have umbrella insurance.” WRONG! A person with no dependents doesn’t need life insurance, the person needs an umbrella policy in case he lives a long time and gets sued.

  55. I’ve had as many as 52 rental units and am cutting down on the number now, because after a while managing them (better tax wise to manage them yourself) becomes tiring. In fact, I am selling some of the units to stable, long term tenants and holding the moortgage with deferred sales instead of imm4ediate, so if something goes wrong, I get the placve back quick. No one will pick tenants as well as you. First of all, never take pets, especially dogs (I own dogs) because when the dog bites someone, you as the landlord will be sued and could lose everything you own, tenant gets off scott free because they have nothing. Insurance companies HATE that you have tenants with dogs. Pets are rarely tended carefully and your premesis suffers. Have potential tenants play for credit reports and police reports, this will sift out a lot of problems. Screen all calls on answering machine and if it sounds like they are calling from the zoo with howling, shrieking, super loud music, commotion in background, you don’t want them. When you have agreed to have them come and look, meet them at curb and examine interior of their care carefully. If it is immaculate, clean, uncluttered, this is how they will keep your house / apartment. If car is ankle deep in fast food wrappers, junk, beverage cans, this is how they will keep your place and you don’t want them. Stop by and visit them where they live unexpectedly to see how house is kept. Look at pay stubs to see if they can afford the place, call boss to see what he / she says about potential tenant, do not rent to them unless they have the maximum security allowed by law to give you before the move in, have strict lease and enforce it. Yes, you might still have a problem down the road, like the lovely girl who worked for UPS, loved antiques, kept a super clean house, paid rent on time, got into drugs after three years, and sold them on the loading dock, got fired, became a prostitute using my premesis and did volume business and let each of the clients (they would line up on the porch waiting for their turn) use my water to shower off while she took on the next client in line. But this is rare, if you follow all the steps above. Being a landlord has been a great experience financially and eductation wise.

  56. Q1 I am amazed no one thought to tell this person to stop throwing every penny at the credit cards and get some cash savings ASAP. You can not switch to cash living without some cushion for the ebb and flow of life. Then go cash only and ask about getting the card fee dropped. If not, find another card.

  57. deruiter :
    “First of all, never take pets, especially dogs (I own dogs) because when the dog bites someone, you as the landlord will be sued and could lose everything you own, tenant gets off scott free because they have nothing. Insurance companies HATE that you have tenants with dogs.”

    Well maybe your state/city laws are stupid but it doesn’t work that way in general. Landlords should not be liable in general for dog bites. Least not unless the landlord knowingly allowed a dangerous animal or kept it themselves. Any idiot can file a frivolous lawsuit but that doesn’t mean courts rule in favor of idiots. There has to be liability.
    As a landlord I’ve not had our insurance company even ask about tenant pets. Of course insurance companies vary.

    Theres a lot better reason for a landlord not to allow pets. Pets can do a lot of property damage.

  58. Landlords can lose their entire net worth with a single meth lab in a property, or even if a tenant is smoking meth in the property. And no, it isn’t easy to find insurance coverage — insurance companies don’t get rich paying claims, and these are too common and humongous.

    Personally, I’m not interested in the risk.

    Umbrella insurance is really, really cheap peace of mind. It doesn’t take much to make you wish you had it — the neighbor kid running over her foot mowing your lawn; the unlicensed, uninsured roofer falls off the ladder and lives the rest of his life with quadriplegia, the neighbor’s kid falls into the swimming pool and becomes severely brain damaged after being in the water for 15 minutes, etc. A million dollars may not go far in these scenarios, but they aren’t far-fetched and it goes a long ways in most cases. Reduce you need for umbrella policies by making sure that you only hire people with worker’s compensation insurance for home chores. Costs more upfront, can save a whole bunch of money down the line.

  59. slccom, how would I be liable if an uninsured roofer falls off my roof? Are there any cases where such a thing has happened? Unless the property owner does something negligent then they shouldn’t be liable.

    Meth labs are a potential concern for landlords, thats true. It generally shouldn’t ruin you unless all your eggs are in one property. Typical cost of clean up is more like $5000 to $10000 level. But it can get much higher.

    Owners of swimming pools do have a high risk factor too.

  60. Jim, if you hire an uninsured employee and they are seriously injured, they can and will sue you and you will lose. Hiring someone to do dangerous work who is uninsured is in itself negligent. Whether the homeowner “should” or “shouldn’t” be liable doesn’t factor in anywhere. Whether the homeowner is or is not negligent also doesn’t factor in. In fact, if the uninsured person is up on your roof with the express intent of breaking in to rob you, you remain liable. Welcome to the American legal system.

    Meth labs can cost in the hundreds of thousands of dollars to clean up; if your tenant was so gracious as to dump their chemical waste into the well, or otherwise get it into the ground water, you will kiss your entire net worth goodbye, and probably all the money you can earn the rest of your life. The EPA doesn’t give a fig if you were responsible or not; you get the bill. The entire bill. This can run into the millions of dollars. Oh, they do throw you a bone — you are permitted to sue your tenant at your own expense to recover the money. If you can find them…. And don’t count on them having the money to repay you!

    And when you have the property cleaned up, you have to tell anyone you sell to or rent to in the future. Rather often new people end up having bad reactions to the chemicals, which aren’t usually completely cleaned up. Once you inform them that the place was a meth lab, it is highly unlikely that you will be able to sell or re-rent the place.

    Swimming pool owners are lucky — if their fencing meets the insurance company standards, they can get liability coverage for the pool. But putting in a pool is a calculated risk — future buyers may or may not want one, and you’ll almost certainly have to make sure that your fencing and alarm systems are meeting, or better, exceeding standards.

  61. Check out these links on lawsuits for uninsured roofers: myremodotcomslashbewaredothtml

    And check your homeowners insurance policy. If you hire an uninsured roofer, or other person, and they get hurt and sue, your homeowners policy may not pay a dime.

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