Questions About Insurance, Blogging, Basic Income, Loan Cosigning and More!

What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to summaries of five or fewer words. Click on the number to jump straight down to the question.
1. Credit lines and credit report
2. Modifying bread recipe
3. Blogging and copyright
4. Mortgage process question
5. APR and APY
6. Basic income
7. Cosigning loan with adult child
8. Debt reconstruction question
9. Paying down townhouse mortgage?
10. Storing emergency fund?
11. Insurance questions
12. Whole life after 30 years

If you have children between the ages of, oh, say, five and twelve, there are a couple of free things that you might want to do with them this coming weekend.

For one, Home Depot is offering a free workshop for kids where they can build an Angry Birds birdhouse. From the link: “All kids get to keep their craft, receive a FREE certificate of achievement, a Workshop Apron, and a commemorative pin while supplies last.” These are actually pretty nice activities, though they can sometimes fill up pretty fast so you’ll want to register on the site.

After that, stop by your local comic book shop for Free Comic Book Day. Most comic book stores nationwide are participating and all will be giving out free comics. Some stores give out several comics to each person that comes in. Last year, my two oldest children went and each received somewhere around six comics each, and they were careful to choose different ones so that they could swap them.

While it’s going to be tough for us to make it to the Home Depot activity due to a soccer game conflict, you better believe that our family will be stopping by a local comic shop for some free comics this Saturday!

Q1: Credit lines and credit report

I’ve built a very good credit score thanks in part to the tips I’ve read on your site, one of which is having a variety of credit accounts. I am about to be debt free (woohoo!), with just a few more months left on my auto loan and student loan. Once I am debt free, my only lines of credit will be my two credit cards. Will my credit score suffer from not having multiple credit accounts? If yes, what’s an alternative to opening another credit account
– Joey

If you still have two credit cards open and these cards are more than, say, a year old, your credit score shouldn’t suffer very much (if at all) from eliminating your other debts. In fact, it might even go up a bit.

Your credit score is made up of five elements:
30% is your amounts owed
35% is your payment history
10% is your mix of credit sources
15% is the length of your credit history
10% is your new credit

The only factor that might be negatively impacted by going down to just two debts is your credit mix, which makes up only 10% of your credit score. On the other hand, you’re excelling at your amounts owed and your payment history, which makes up 65% of your credit score. If you decide to get new credit just to fix this “problem,” you’re going to negatively impact the 10% that accounts for new credit.

In other words, you should just sit tight. You’ll be fine.

Q2: Modifying bread recipe

Just want to ask… How if add some flavors like chocolate or something inside the bread instead to make the whole bread?
– Gavin

Gavin is referring to my homemade bread recipe, which I still make on occasion (I actually just eat less bread than I used to).

You can easily modify this recipe by adding extra ingredients to the bread. I would recommend adding them very late, as you’re folding the dough into a loaf shape just before baking. If you’re adding chocolate, for example, add it just before rolling up the bread and making it into a loaf shape.

Adding ingredients earlier can change the composition of the bread significantly, so be very careful about adding a lot of ingredients earlier in the mix. I sometimes add dry herbs to the dough while mixing it, but that’s about it. Anything like chocolate would get added at the end.

Q3: Blogging and copyright

I studied a subject for years for my own benefit, now I’m considering writing a book about it or starting a blog. However, I’m concerned about losing my copyrights with a blog. Yet, publishers would be looking for a blog following before they’d be willing to publish it. In one sense, I’m sure a blog would help me to do it rather than feel overwhelmed by a book length project but I’ve never done one before and tend to be shy so it also feel risky. Thoughts?
– Nina

Blog postings are copyrighted by default by the author. The simple act of storing the post on a hard drive counts as “fixation,” which is the key element of copyright. However, you’ll probably want to take the additional steps of making sure that there’s a copyright notice on your blog. You’ll also want to consider putting a copyright notice on each post that you make, though in general a sitewide copyright notice should suffice.

Registering the copyright is tricky for blogs, as blogs are inherently updated and modified and added to over time. The advantage of registering the copyright on your blog is that it gives you the legal grounds to go after attorney’s fees and “statutory damages” in the event that you sue someone for violating copyright; without the registration, you have to pay attorney’s fees out of pocket and can only go after direct damages. However, the drawback is that you undo your own copyright registration if you modify or add to the blog. Generally, it’s not considered worth it to register a copyright on a blog.

If I were you, I would just put a sitewide copyright out on your new blog and start making posts.

Q4: Mortgage process question

I am making a research about a subject, I mean I wonder whether you have the same fiscal policy in the United States, so an example would be: let’s say that I want to buy a property valued at 200 000 thousands dollars, so to be able to buy this property I sold my apartment for 100 000 dollars BUT there is still another 100 000 dollars needed, so thanks to my savings I was able to get the 100 000 dollars needed, so I bought the property but I had to justify where did I get the funds from to tax collectors. In the process they approved the sale of my apartment as being the source of my fund but on the other hand they didn’t recognize my savings that I saved for the last 3 years or more, depending on them this doesn’t count. And this is really outrageous, I want told this fiscal policy is the same in other countries including France. So my question do you have the same system in the United States?
– Ron

In the United States, I can’t think of any situation where the tax collector cares where the funds for buying a property come from. To them, the source of the funds does not matter – it might come from a mortgage, or from personal savings, or from the sale of another property. It’s all the same to tax collectors.

What tax collectors care about here is whether you actually pay the amount due by the due date. The source of those funds is not something they tend to care about.

There may be situations where there are other ongoing legal matters where the source of funds may be relevant, but that’s outside the norm.

Q5: APR and APY

I need to open a money market savings acct but I hear the terms compounds monthly @0.01% and 1% APY. Should I divide 1% by 12 to get the compound monthly rate? So confused but I need to do something now for bill due a few years from now and have been putting off bc I do not have the minimum balance.
– Anna

From your question, the numbers you provide don’t make sense. So let’s back up and look at some terms first.

The APY of an account is how much your account should earn over the course of a year, or, in the case of debt, how much debt you’d have to pay out over the course of a year. The APR is your actual interest rate.

So, how are they different? Let’s say you have a 0.12% APR account that compounds monthly. In that case, to figure out the APY, you divide the rate by 12, giving you a 0.01% return each month. Make sense?

For the first month, it’s easy. Let’s say you have $1,000,000 in the account (I’m using a big number so you can clearly see what’s happening). You’d earn $100 during the first month – that’s 0.01% of $1,000,00. However, now you’d have a new account balance of $1,000,100. During the second month, though, you’re actually going to earn $100.01, because that’s 0.1% of $1,000,100. So, after the second month, your account balance is $1,000,200.01. During the third month, you’re going to earn $100.02 (and a tiny fraction of a cent), because that’s 0.1% of $1,000,200,01. So, after the third month, your account balance is $1,000,300.03.

After the course of a year, your account balance will be $1,001,200.66. So, your APY is going to be $1,200.66 divided by $1,000,000, or 0.120066%. The APY is just a little bit higher than the APR because of the additional interest you earn in later months on the interest you earned in earlier months.

A bank, when advertising a savings account, is going to quote you the APY. It’s going to be a higher number and make the account look better. A bank, when advertising a credit card, is going to quote you the APR. It’s going to be a lower number and make the credit card look better.

In short, dividing the APY by 12 on an account compounded monthly will not get you the amount you earn each month. It’ll get close, but it won’t be exact. If you want to convert APY to APR, you can use this tool.

Q6: Basic income

I’m not sure if this is the way to submit questions, but I was wondering what do you think of the concept of “basic income”? I think it’s a terrible idea because taking away the money of the rich (and hardworking) to fund the lazy lifestyle of the masses creates a society of entitlement. When I look at kids who receive a basic allowance for doing nothing vs. kids who have to earn their money by working, the kids who usually grow up to be more productive are the kids who learned to work. Everyone I know who has a “basic income” (post college kids living off their parents, long term welfare recipients, people who receive a large inheritance), have chosen not to work.
– Kevin

This is a tricky question to answer.

Right now, the idea of a basic income is a terrible one. We live in a society with pretty low unemployment where there is some work available for pretty much anyone who wants it and is willing to put in the effort. As long as that remains true, then basic income is a poor idea.

Where my viewpoint changes is when unemployment gets really high. Let’s say unemployment suddenly spikes to 50%. At that point, a lot of functions of society are having serious problems. If something doesn’t change, you’re going to have a government overthrow, it will probably be violent and bloody, and the currency becomes worthless.

At that point, I think a basic income in some form or another makes a lot of sense. Does it need to take the form of just handing out dollars? I’m not sure of that – I’m not an economist. However, I do know that if you have a lot of people who want to work and there are no jobs available for them that at least somewhat reward their efforts, you’re going to have a lot of angry people who are going to channel that desire to work into something far more destructive for everyone.

The thing is, I think that such a situation is coming with automation. The amount of effective automation that’s nearing the point of being ready for prime time is astounding. There effectively won’t be any blue collar jobs any more, and many white collar jobs are going to vanish, too.

There will be no need for taxis or truck drivers because vehicles will drive themselves. There will be no need for warehouse workers because warehouses will be fully automated. The list goes on and on and on and on and on, touching every industry.

Sure, these changes will create a few new jobs, but it’s on the order of one new job for every ten lost (or worse).

The thing is, unless we have some sort of solution akin to basic income at that point, we’re going to be in real trouble as a society. As the saying goes, the devil finds work for idle hands to do, and there’s going to be a lot of idle hands.

I don’t know what the solution is for that situation, but I know two things. One, it is coming, and two, we can’t simply throw out the idea of basic income from the solution to that problem. You can talk about people being “lazy” and “entitled” all you want, but those issues are irrelevant if you reach 50% or 60% unemployment.

Q7: Cosigning loan with adult child

Our 52 year old daughter has asked us if we could cosign a loan to buy a 154,000 house. She makes 74,000 dollars a year and has no credit. The problem she has is her divorced husband has ruined her credit (by not paying on loans he is responsible for) and will probably be turned down to get a loan on her own. She is a wonderful daughter who lives about 7 miles from us and has to get out of her house soon as it has been turned over to Fanny Mae, thanks to her husband’s default on paying the mortgage. We just need another opinion. Thanks
– Andy

No matter how you slice it, the decision to sign on that loan with her is a financial risk for you. No matter how great and perfect your daughter is, there are risks involved.

What exactly happens if, say, she dies next year? You’re stuck with that mortgage and unless you can get that house sold quickly for what you paid for it – which is a big “if” – you’re going to be stuck with a mortgage payment.

What if she marries someone of similar character to her previous husband? What if she ends up with a prescription drug addiction and is unable to functionally keep her bills paid? The list goes on and on.

You can shrug off those risks as being incredibly unlikely, but they are things that happen to people all the time, and those risks do add up to something notable. Quite simply, you’re taking on real risk by signing on that line.

Now, should you still do it? I can’t make that call for you. However, I would look at what your life would be like if you were suddenly saddled with those mortgage payments. Could you survive if that were suddenly dropped on your lap? If you couldn’t make ends meet, I would be very careful about this.

Q8: Debt reconstruction question

I’m trying to decide if debt reconstruction (working with a company to reduce my payment and pay off debt quicker) is a good choice for me. I’m a little worried about how it might impact my short term (within 3 years) goal of home ownership. Do you have any insight to share on the pro and cons? My immediate goals are to reduce credit card debt, free up cash flow and ultimately increase credit score and creditworthiness. My current struggle is a high debt use, I have good income and good payment history. Thoughts?
– Mindy

The number one thing you need to do isn’t to go into debt reconstruction. The number one thing you need to do is get a strong grip on your credit use. If you are continually adding to an already-high credit load, reconstructing your debt will only serve to make that problem worse in the long run.

The only thing debt reconstruction will do in your current situation is give you a bit more breathing room and space with which to add to your debt load. It’s the equivalent of pushing down the trash in your garbage can, then realizing you have more space in the trash can so you toss in even more trash.

Do not even consider doing this until you have a firm grip on your monthly spending and aren’t contributing any more to your debt. If you do not have that personal control, then debt reconstruction isn’t going to work and your goal of home ownership is incredibly shaky at best.

Q9: Paying down townhouse mortgage?

Is it better to pay down my current Townhome mortgage (which will become an investment when we move) or save MORE for our dream-house. Like many fools we want the bigger, newer house. So in a year or less we plan to turn our current townhome into a rental property (loan is 200k@3.25%; worth 250k). And we will probably look for a brand new house in a great school district for 600k. I assume it will be worth more when we are ready. Right now we have 50k down payment. Not counting that, I have about a year’s worth of expenses saved in stocks, ROTH and checking accounts. So, I expect to be able to save another 50k in a year to make a 100k down payment. My question is it better to maximize the down payment (100k) or try to pay down the future investment property as much as possible. Rght now we are saving everything and will then decide later what to do with the savings.
– Derek

The more you put into the down payment savings, the faster you’ll be able to move. On the other hand, the more money you pour into your townhouse, the better off you’ll be financially over the long haul unless your real estate market is incredibly weird.

Why? The $600,000 house is going to cost you a LOT each year. The property taxes are going to be immense. It’s probably going to involve homeowners association fees. You’re going to rack up home maintenance costs like there’s no tomorrow. The insurance is going to be very high, too. All of that money vanishes when you own such a home; you merely hope that the value of the house goes up fast enough to recoup it, and there are very few housing markets that are growing like that right now.

Over the long haul, you’re better off waiting as long as possible to make that move, even if the value of the house goes up during that time. Paying off that town house mortgage is likely to give you a better return on your dollar than jumping into that big house. However, that might not be in line with your other life goals.

So, my suggestion is to sit down and figure out what’s more important to you. If it’s purely dollars and cents, you should wait, live as cheap as you can, pay off the townhouse, then save for a down payment, then move. If there are other factors involved, then you have to weigh them in comparison to the best move financially.

Q10: Storing emergency fund?

I have a question for you: in re: emergency funds, what is your take on the strategy proposed in this article? http://www.businessinsider.com/where-to-store-emergency-fund-2016-3 I’m very curious to know your opinion. I never thought that bonds could be very liquid…and maybe I was right? Thank you for any insight you might have.
– Neville

The whole problem of this article is summed up in one sentence: “Short-term bond funds will, however, be a slightly riskier option than a traditional checking or savings account, or a money market fund.”

Your emergency fund is the one place in your finances (besides your primary checking) where you want zero risk – or as close as you can get to zero risk. Short term bond funds add a little risk for a little more return, which isn’t something that makes sense here.

If you want to invest and want to lower your risk in your overall investment portfolio, then invest in short term bonds with some of your money. However, that’s a very different thing than your emergency fund.

Q11: Insurance questions

As I get closer to financial independence, I am wondering if having an umbrella insurance policy to protect my assets is necessary. What is your opinion? I am also starting an online freelance writing business, and I will be conducting business via my website and email. Should I have business insurance, and if so, what type? Thanks for your help! I appreciate your common sense advice.
– Nadine

You should consider umbrella insurance when you reach a point where your assets exceed the amount covered by your other types of insurance. For example, if you have $500,000 in assets and your auto insurance only covers $250,000 in liability, you’re going to want to either increase that liability or start looking at umbrella insurance.

The easy way to do this is to calculate your net worth – add up your assets and subtract your debts. Then, look up three numbers – the bodily damage per person per accident on your auto insurance, your property damage per accident on your auto insurance, and your personal liability per occurrence on your homeowners insurance. Take the lowest of those three numbers and subtract it from your net worth. That’s how much of your net worth is essentially uninsured, and that’s the amount you should consider protecting with umbrella insurance.

Many people don’t have a net worth high enough to even need umbrella insurance. Most of the people who do are perfectly covered by a $1 million policy, which costs somewhere around $1 a day.

Q12: Whole life after thirty years

Hi Trent! I love your website and value your advice, was hoping you could help me and my family. My husband’s father bought him a whole life policy when he was born. The policy is now worth about $4000, and has a death pay out now of $20K. Everything I read about whole life compares buying now versus buying term life now, and I can’t find anything which incorporates the benefits of already having 30 years of investment returns. The policy costs about $90 a year at this point given dividends paying off the price. I am pregnant with our first child and wondering, (1) do we need more life insurance and should I supplement with a term policy?, (2) should we just sell this policy now and stop paying for it, replacing it with a term policy?, (3) keep things as they are? Thanks so much!
– Lila

In general, once you’re past the first several years with a whole life insurance policy, it ends up being a pretty good policy. The problem is that the initial years with such a policy tend to be very bad – bad enough for it to make sense to go with a term policy if you’re buying from scratch.

Given what you’ve said here, I’d consider more insurance, but I would get a term policy for each of you. If one of you dies, the other one will need some money to make it through with that child, and if you both die, you’ll leave behind plenty for the child.

Sit down and figure out what your financial picture looks like if each of you passes away. What money would you each individually need to take care of that child (and yourself) beyond what you would likely earn? That should give you a good guideline as to how much term life insurance to buy. Remember, with your husband, this would be on top of his whole life policy.

Got any questions? The best way to ask is to follow me on Facebook and ask questions directly there. 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 many, many questions per week, so I may not necessarily be able to answer yours.

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