Monday, August 31, 2009
On Mondays in this space we answer a financial question from a reader. Post your questions in the comments and we'll answer them here next Monday.
QUESTION: My fiancé and I are getting married in October. However, we don’t agree on one point: checking accounts. I say we should have one. He says we need separate accounts so we can each have some freedom. What do you think works best?
ANSWER FROM DAN DANFORD: Every couple is different. In my house, we keep separate checkbooks on the same checking account. It's harder to reconcile each month, but it allows a certain freedom that suits us both. Most families have a designated finance person (gender doesn't seem to matter), and that person divvies up the money and pays the monthly bills. Obviously, someone's got to do it and it's not a high-glamour job.
My only concern with this question is that it seems to indicate a bit of financial friction already. Finances are at the root of many troubled marriages, so I'd try to resolve as much as possible before the nuptials. I doubt there is a specific right or wrong on the issue of checkbooks, but it's important to find a solution that fits your relationship. Money equals power, and no one wants to lack power in a relationship. You need to negotiate a solution that meets everyone's needs. For the sake of your marriage, do it before the wedding.
Friday, August 28, 2009
By Robyn Davis Sekula
I’ve recently experienced something that is thrilling: I’ve had a large surge in my income, mostly due to a new client I signed just a month ago. I got the first check today, in fact.
It has changed the way I work. I don’t have to chase down hourly work anymore, and I reserve two days per week for this new client, who buys hours in advance through a monthly retainer. I love the client, love the work and feel incredibly blessed in a “pinch me this can’t be real” sort of way.
However, I’m quickly seeing something I didn’t expect to experience: a rampant desire to spend, and spend heavy.
I’ve spent most of the year paying down debt, and in fact, we now have two paid-for cars, no credit card debt and we’re saving for my three daughters’ college funds and for our own retirement. I had told myself, rather severely, that I would be banking this extra money, hoping to pile up a significant emergency fund by the end of the year. Perhaps I’d splurge on one item, such as a new television to replace ours, which is 15 years old.
But then, I had other ideas. My mother-in-law is pushing for us to replace our 2002 Camry, which has 126,000 miles. I’ve sufficiently beat back that idea, but it still pops up every now and then. My friend Carmen, who runs a cleaning service, said I should hire a maid. Hey, you’ve got the income now, she says, and your time is valuable – why not?
Then the Coldwater Creek catalog arrived, and I wondered what it would be like to actually order clothes from it instead of paging through it and tossing it, as I usually do so that I can’t give in to temptation. I also want a new gas grill, to replace the rusted out hulk in our back yard, and a carpet shampooer for the downstairs carpet. Oh, and did I mention I’d like to turn the half-bath upstairs into a full bath, and replace a brick sidewalk outside with a new concrete patio?
Then I had this reckless thought: hey, I work hard. What if I spent the whole first check? I could make a major dent in my list. And after all, I’m thrifty – I don’t spend that much. I’ve gone after this work and brought it in. I deserve it. Why not?
That little voice, my friends, is the one that plagues us and keeps us from achieving true wealth. I define wealth in this way: you have enough money that when something breaks, you are able to fix it without panicking. You feel prepared for life’s near-certainties (retirement, children’s college). You do not spend everything you make. It’s not necessarily that you make great money, but that you’ve done well with what you’ve got. Wealth is about how you prepare for life’s events, and how you feel when you think about the money you have. Having significant savings would make me feel secure. And if I do in fact ramp up my spending to the level that it sucks up all of my extra income, yes, I’ll enjoy a few things, but when the contract ends six months from now, I won’t feel secure.
The problem with making a good income is we tend to spend it, all of it. And in the end, that grill rusts, just like the old one. The new TV isn’t watched, and isn’t enjoyed nearly as much as we thought we would. The clothes stain. The car transports us, just like the other car. In other words, NONE of these things that we thought would be transforming truly change our lives.
What changes lives? Paying down debt, saving money and investing wisely with thehelp of a good advisor who studies options and can make solid recommendations. Security, and the ability to sleep at night, changes your life, and that’s what you’re buying with savings.
Think of it this way. Let’s say you have a problem. Money will fix the problem. Therefore, you have no problem anymore. That’s appealing, isn’t it?
Wednesday, August 26, 2009
Tuesday, August 25, 2009
Finding a car that will go the distance is important. In fact, one of the most wasteful things many people do is trade in perfectly good cars for a newer model, for no solid reason other than simply wanting a newer car.
Pay attention to many factors when you purchase. Do look at the sticker price, but also look at the car's long-term prospects. Review gas mileage, too, as fuel prices are climbing. Get away from status brands and avoid expensive trim packages. Pay attention to everything you're charged - and be sure to check multiple places for the best financing deal. Don't just accept dealer financing.
For more, here's an article that Yahoo! Finance posted as part of their Financially Fit series. Surprisingly, the Hyundai Accent tops the list as cheapest per mile to drive.
Monday, August 24, 2009
On Mondays, Dan Danford answers a question in this space from a reader. If you have a question, please ask - we're happy to help!
QUESTION: My 19-year-old daughter is in college, away from home for the first time. I’m sure she’s going to get opportunities to get credit cards. Should I discourage that? Or set some rules about how it should be used? I know she’s an adult, but I am paying for college, so I feel that I should exert some control over her spending habits. What do you advise?
ANSWER: Good news for you. Under the new law governing credit cards, children under 21 can't get one without a co-signer. So some of those now-famous college credit card horror stories won't happen in the future! Or, if they do, you'll be part of the story.
Seriously, it's good for a child to learn credit card protocol with a responsible adult. And they are an unmatched convenience in today's world. My suggestion is to apply for a single card in your joint name. Have statements sent to both of you and monitor spending and monthly payments. Best to pay it off each month, but you can decide if a circumstances calls for a different approach.
Think of this as a teaching opportunity. These are life lessons with important consequences. Good luck.
Tuesday, August 18, 2009
Dan Danford regularly does podcasts for Dad's Divorce, a web site that advises fathers on all aspects of single parenthood and divorce. It's a great site and we're happy to be a partner with them. Here's a recent installment in which Dan discusses setting some financial rules for families.
Monday, August 17, 2009
Each Monday, Dan Danford answers a question from a reader in this space. If you have a question you'd like to see addressed, please post it in the comments section or e-mail the blog administrator Robyn Davis Sekula at firstname.lastname@example.org.
QUESTION: My two sisters, two brothers and I will inherit a house in Minnesota from our uncle, who has no other heirs and is in a nursing home. My desire would be to sell it and for us to split the money.
However, my sisters want to keep it. None of us is wealthy. All of us are in our 50s and 60s, and three of us have children in college. No one lives near this property. None of us can afford to buy the others out. I think this property needs some repairs and will need upkeep, plus there will be taxes to pay and insurance every year. There is no debt on the property.
How do we rectify this situation? I do not want to dump money into a property I don’t want, but I don’t want to force the sale either. I was thinking of starting with an appraisal and thorough inspection report so we can see what we’re dealing with. Also, what kind of inheritance tax will we have to pay if we get the property?
ANSWER: First of all, there's no inheritance tax to any of you. If your uncle's estate is large enough, it may pay some taxes, but this inheritance is not taxable income to you or your siblings.
Now, for the other issue(s). If it helps, this scenario plays out daily within families. One reason to do estate planning is to avoid these situations with potential to cause strong discord between family members.
The challenge is that five brothers and sisters will rarely agree on an action plan. Nor should they, because they all have different situations at home. For those needing money, the house represents a financial windfall. For others, it represents an added and welcome luxury - one-fifth of a vacation home in a desirable location. How each sibling looks at this is determined by their own family and circumstance.
Unfortunately, there isn't a good solution that's likely to satisfy everyone. (That's why a well-intentioned gift often goes bad.) The fairest solution is to sell the property and distribute one-fifth of the proceeds to each sibling. For ones wanting it, they can use the proceeds to buy something similar for their family. If one or two siblings want to keep this house, they should buy out the others (again, at fair market value). If the house has good value, this could be done easily though a mortgage loan and payments. Those one-fifth shares could serve as their down payment. If they can't afford that, then keeping the house is not really an option, is it? As a last resort (no pun intended), someone could file a lawsuit and let a judge decide. In all likelihood, however, the judge is going to dictate a sale of the property and distribution of the proceeds.
No matter what, the notion of an appraisal and inspection is solid. You may also want to research what insurance costs, taxes and other services will cost you on the property each year, and find out if there is a market to rent the property. Semi-concrete numbers are necessary for decision-making. You can't really discuss the challenge without knowing the amounts of money involved. I'd encourage you to seek an amiable solution. Your uncle is trying to do a nice thing and it would be a shame to let it come between you.
Friday, August 14, 2009
Dan Danford regularly provides commentary for Dad's Divorce, a high-quality web site for men going through the divorce process or those who are now single parents. It's a terrific resource, and the information not only applies to divorced men but to anyone who is interested in increasing their financial knowledge. You can watch the video below, or on www.dadsdivorce.com
By Dan Danford
We all know that we should save money, and most of us don't save enough. We should all have an emergency fund, and we should also have savings outside of that. For the past week or so on Twitter, we've been giving out tips on two things relating to that: first, what qualifies as an emergency, and second, tips for savings. We've compiled the tips below.
- Emergency funds are for true emergencies. What’s that? Something that threatens life, health or safety.
- What’s an emergency? You need to escape path of deadly hurricane and pay for hotel rooms.
- What’s an emergency? Your car dies, and you need to repair it so you can get to work.
- What’s an emergency? You break your leg, and need to pay hospital bills. (Although they will often negotiate payment plans.)
- What’s not an emergency? You need a new iPod or TV, couch, chair, carpet.
- Savings works best when it is earmarked for a certain purposes and a goal for a specific amount is set.
- Savings works best when you save a little at a time. Don’t let the size of the goal daunt you. Start small.
- Savings works best when it comes straight out of your paycheck. Have some direct deposited into your savings account.
- Savings works best when it comes straight out of your paycheck. Take advantage of work-sponsored retirement plans.
- Savings works best when you stay away from temptation. Stay out of consumer stores that sell expensive stuff you want but don’t need.
- Savings works best when you work from a budget. Don’t sabotage your good income by frittering away money.
Thursday, August 13, 2009
By Dan Danford
Politicians SAY they love small business. But often, they DO something different. Through what looks like to me a fluke in the law, self-employed people pay taxes on the money they spend on health insurance premiums. Anyone employed by any other type of business does not. Why should self-employed folks (I'm not self-employed) be the only people to pay tax on insurance premiums? It's been this way for years, and it make no sense at all. In a lot of ways, smaller businesses already carry a massive burden in our bad health care system. It's time to fix the system, and this is one necessary fix. Our economic system should encourage small businesses in every way possible. Our flawed health care system is a major impediment to rebuilding a small business culture in America.
Tuesday, August 11, 2009
Investor's Alley recently published an article I penned on why investing isn't a game. The first part of the article is posted below plus a link to the rest. Tell me what you think in the comments section.
By Dan Danford
I can understand the allure of chess. It’s pure intellectual challenge; just you and an opponent, focused on making the right moves and winning the ultimate battle. Every move by your opponent creates a new challenge. You adjust or you lose.
Investing offers similar challenges. Important variables change every minute of every day whether it’s the economy, world tensions, the management team at companies you own, competition or technology. Everything changes.
So it’s not surprising that so many people enjoy the challenge of investing. Like chess, it’s a game. It’s a game that tests your intellect, your instincts, your ability to think and act quickly.
But it’s not really a game. Results matter. Will your children or grandchildren go to college? Will you retire in comfort? Will you outlive your savings? Will there be anything left to pass along to chosen family members or charities? Truthfully, the world of investing is a very serious business.
And you need to treat it that way to succeed. Although it’s nearly impossible to beat the market on a consistent basis, there are time-proven ways to invest for success. Follow these eight rules of investing and it’s likely that you’ll achieve your financial objectives. Ignore them at your peril.
Read on: http://bit.ly/SQ4ky
Monday, August 10, 2009
On Mondays, we post a question from a reader and answer from Dan Danford. Today's question centers on annuities. If you have a question you'd like to see answered, post it in the comments section here or send it to us on Twitter @family_finances.
QUESTION: I am 62, and looking at investing in a fixed annuity. They seem like a good deal, but I’m confused by the different types of annuities offered. What type do you think is the best? I have a 401 (k) with about $500,000 in it, and I will be receiving some social security and a small pension. I’d like to preserve some of my funds for my children.
ANSWER FROM DAN DANFORD: Annuities are investment contracts sold by insurance companies. They come in many shapes and sizes, but we'll focus on the fixed annuity today. In its usual form, a fixed annuity trades your stack of money for a stream of monthly payments. That stream could start today or some date in the future. It's called a "fixed rate" annuity because the interest rates (and payments) are set by the contract, and don't change in the future.
So the interest that you earn, and the payment schedule and amount, are all part of that initial contract. In a way, the buyer is trading an uncertain future for a certain stream of payments. For most of us. that's an appealing idea because we hate uncertainty! That's why these types of contracts are popular with the public.
But, like many things, popularity isn't always a good measure of character. A downside of buying "certainty" is that you give up flexibility. Once you've locked in those rate and terms, you're stuck with them for the rest of your life. What if you need emergency cash? What if interest rates rise dramatically, or inflation rages at 8 to 10 percent a year? What if you die suddenly after only collecting eight payments? Though unlikely, these things have happened in the past, and they left fixed annuity holders in a (genuine) fix.
Based on the statistics, you have many years of "life expectancy" left. Don't be quick to jump into an annuity (even if the seller seems sincere and charming). If you eventually decide an annuity makes sense for you, keep a sizable nest egg out to meet future emergencies. With the contract you do buy, seeks a couple of important provisions: annual inflation adjustments for your monthly payments, and five- or ten-year certain (a guarantee that your beneficiaries collect payments after you are gone).
It also makes sense to check the insurance company's rating because your ultimate guarantee is their success in business. They can't honor contracts unless they are still operating. Last, and this is a big issue, get quotes from several different companies. Each company sets their own terms and makes their own predictions about future investment returns and lifespan. You'll be surprised at how much difference that makes in your guaranteed monthly payment.
Wednesday, August 5, 2009
By Dan Danford
The government has announced it will likely continue its CARS program (known by most as Cash for Clunkers), in which individuals are given a bonus for purchasing a new car. (Read a news story about it here. See the details of the plan here.) Rebates are $3,500 or $4,500, depending on the circumstances of the car trade-in and purchase. The old vehicle is scrapped, with the concept being that gas-guzzlers are traded in for newer, more efficient vehicles, including hybrids, which get more miles to the gallon of gas.
The basic tenants of the plan are as follows:
- Your vehicle must be less than 25 years old on the trade-in date
- Only purchase or lease of new vehicles qualify
- Generally, trade-in vehicles must get 18 or less MPG (some very large pick-up trucks and cargo vans have different requirements)
- Trade-in vehicles must be registered and insured continuously for the full year preceding the trade-in
- You don't need a voucher, dealers will apply a credit at purchase
- Program runs through Nov 1, 2009 or when the funds are exhausted, whichever comes first.
- The program requires the scrapping of your eligible trade-in vehicle, and that the dealer disclose to you an estimate of the scrap value of your trade-in. The scrap value, however minimal, will be in addition to the rebate, and not in place of the rebate.
The idea of getting a discount on a vehicle may tempt some to consider purchasing a vehicle when perhaps it's not in the consumer's best interest. Avoid that common fallacy that you "saved" a lot of money by buying on sale. Unless you needed something in the first place, you didn't really save anything. If you are actively in the market for a new coat, and you find one at 50 percent off, then you saved that money. But, as is more commonly the case, you find it on sale, and you don't really need it, but you like it, so your buy it, then you actually spent money, not saved it!
The same holds true with cars. With car company rebates and the government's clunker program, it's a great time to be buying a car. But only if you need one anyway. If your family schedule called upon you to buy a replacement car anytime in the next year, this could be a big saving opportunity. If not, you're just rationalizing so you can get a new one. Those are the kinds of mistakes that led us into the mess in the first place.
Tuesday, August 4, 2009
By Dan Danford
Even in the face of continuing bad news, the American consumer is starting to feel better. The severity of this recession was due - in part - to a crisis of perception. People were terrified and their behavior showed it. Now they are starting to perk up and it shows in their spending. It's a good sign, similar to a sickly patient who starts complaining about noises in the hallway. It's a little thing, but you know they are starting to heal.
Monday, August 3, 2009
Most Mondays, we post a question from a reader and an answer from Dan Danford. We've skipped a few Mondays due to vacations, but we're back on our regular schedule as of today. Please let us know if you have a question of your own. Post it in the comments section.
QUESTION: I am in the process of setting up a family budget. We are a two-income family with three kids all 5 and under. Our expenses include day care, a mortgage, a second mortgage, and then routine bills (electricity, cable, gas, water, trash, insurance). Can you describe a basic process for how to start doing this and what needs to be in it? How detailed should it be? What should I do with savings?
ANSWER FROM DAN DANFORD: I prefer the term "spending plan" instead of budget. Budget has a lot of negative connotations, and most of us rebel at constraints. A monthly spending plan sounds and works better for most of us.
The process can be very simple. Create a list of recurring expenses. If certain things only come up once or twice a year (insurance or taxes, maybe), divide them out into a monthly amount. Or, better yet, set them up to pay monthly - it might cost a bit more, but the convenience may be worth it. Now, armed with this list, compare to your monthly income. The difference - either a shortfall or surplus - requires more attention.
Monthly deficits require a second look at your expenses. Where can you make adjustments to eliminate the shortfall? Usually, there are some discretionary expenses that can be shifted downward. Entertainment, maybe, or clothing. Lower car payments or rent. As I said earlier, this is a spending plan, so adjust your future spending to fall within your income.
If you have the luxury of surplus (and that is a luxury today!), stash the extra into a bank, credit union, or money market account. Dave Ramsey suggests a $1,000 emergency fund (as a start) and I'd shoot for three to six months of expenses. There will always be emergencies, and it's a genuine blessing to have cash on hand when they come. In fact, that's one measure of financial success in my book! After you've accumulated three to six months of savings, you can start looking at other investments. Like Ramsey, I suggest no-load mutual funds with a bent towards growth. But, until you have an emergency reserve, that's putting the cart before the horse.
In The Millionaire Next Door (Tom Stanley), he notes that few millionaires use budgets. That seems counterintuitive, right? What he found, though, is that they know the important stuff anyway, even without a formal budget. The most important data from a spending plan is how much you spend on things on an ongoing basis. That's the key. If you know what you spend and make good choices, family results are good. The reason why many advisors suggest a plan is because most folks don't keep track of what they spend. That's why they have financial problems.