Dear Liz: I really enjoy the columns you’ve written about living frugally and especially appreciate when you discuss healthcare expenses. I find it extraordinarily frustrating when people who promote a frugal lifestyle answer that they keep healthcare expenses down by “eating healthy.” I recently experienced a serious medical situation even though I maintain a healthy weight and otherwise take care of myself. It is in this area, I believe, the frugal community lacks understanding. Some believe that you get sick only because you don’t take care of yourself, or assume that their emergency fund will get them through a rough patch of health issues. Those that believe this are setting themselves up for disappointment should they have the unfortunate experience of a healthcare problem. Thank you for drawing attention to the importance of healthcare and making sure your family is covered.
Answer: Eating healthful food, exercising, maintaining an appropriate body weight and investing in preventive healthcare can lower healthcare costs on average. But no individual, no matter how vigilant, is immune from an accident or illness that can result in catastrophic medical bills.
So you’re right that people who voluntarily go without health insurance are deluding themselves. They’re pretending they have the sole power to determine their future health, when that’s clearly not the case.
Dear Liz: I invested in an annuity, and now I’m sorry. How do I cancel an annuity? And what are the ramifications of doing so?
Answer: Annuities are a lot easier to enter than they are to exit. Many annuities have substantial surrender charges if you try to cash out in the first few years. You also may owe taxes and penalties on any earnings.
You may be able to get the insurer to “unwind” the annuity (essentially, refund your money without surrender charges) if the salesperson used deceptive tactics. If that’s the case, consider enlisting the aid of your state insurance commissioner.
Otherwise, you may want to consider waiting until the surrender charges no longer apply, and then cashing out or exchanging it for a lower-cost annuity. A visit with a fee-only financial planner could help you decide on the right move.
If you owe more on your mortgage than your home is worth, you have several options. Debt expert Gerri Detweiler walks you through them in this 6-part series for Credit.com.
If you’re hyperventilating over the latest market gyrations, read Ron Lieber’s latest post at the New York Times’ Bucks Blog: “People who should sell stocks now.”
Finally, check out “Never dumpster dive for plastic containers” at Donna Freedman’s Surviving and Thriving blog. Donna and I have both lost family members to colon cancer, so I hope you’ll take to heart the serious message wrapped inside Donna’s usual loopy humor.
Dear Liz: I am working on paying my bad debt from the past to rebuild my scores. I have one credit card that I pay in full every month, but no installment loan. I recently was given the opportunity to take a car loan with monthly payments I could easily afford. Here is my confusion: Taking on more debt while trying to eliminate past debt is usually not advisable. But I also know creditors like to see both revolving and installment credit. Am I OK to take the car loan to improve my mix of credit, or should I just use that extra money to pay off my past debt?
Answer: Adding an installment loan such as an auto loan, mortgage or student loan to your credit mix can indeed help rehabilitate troubled scores. But it’s advisable only if you’re well on your way to having the rest of your debt paid off. Otherwise, you risk stalling on your debt repayment or — worst-case scenario — adding another bad debt to the pile.
If your scores are still troubled, the car loan probably has sky-high interest rates. If you go this route, put down at least 20% of the purchase price so that you can refinance to more favorable terms in a year or two when your scores improve.
A better option may be to skip the car loan and try to get a three-year personal loan from your credit union. This fixed-rate loan would allow you to pay off some of your other debt while improving your scores.
Once your debt is paid off, you can save up to either buy your next car with cash or at least make a substantial down payment so you have to finance only a portion of the purchase.
Finally, you should know that although using and paying off your credit card is definitely helping your scores, paying off old debts may not be so helpful to your numbers. If the bills are already in collections, you may not see dramatic improvements in your scores as you retire those debts. That’s why you would be smart to look for other means to improve your scores.
Dear Liz: I’m 55 and single with no dependents. I have about $250,000 invested. I rent an apartment in Los Angeles. I work in sales, which I can do anywhere. Would I be better off buying a house for about $150,000 now (somewhere in the middle of the country), thus reducing my living expenses (property tax and insurance will cost much less than rent) and leaving me with about $100,000 left for retirement, or just continuing to invest the entire $250,000 for retirement?
Answer: Moving to a less costly part of the country is a time-honored way to make your money stretch further in retirement. It also can help you save more for retirement if you dramatically lower your living expenses.
What you don’t want to do, though, is incur all the expenses of moving and buying a new home only to discover you hate where you’re living. Do substantial research and visit your targeted communities at different times of year before you commit.
Also, tying up 60% of your portfolio in a single, illiquid asset such as a home is risky. You may well be better off moving to a cheaper area and continuing to rent until you’ve built up a bigger nest egg.
Dear Liz: My bank unexpectedly charged me a $25 annual fee for overdraft protection, which ironically caused two checks to bounce because I no longer had sufficient funds to cover them. I was then charged overdraft fees of $27.50 for each check, as I was already maxed out on my overdraft protection. I don’t remember the bank charging this fee before and it didn’t mail anything to me warning that this charge was coming. It was so disheartening as I knew I had enough money in the account to cover the checks I had out. Had I known I would have found a way to deposit more money to cover the transactions. I actually feel my banker watches my account looking for ways to rob me.
Answer: Your bank isn’t the real problem here. Yes, banks can charge sneaky fees, and sometimes their disclosure leaves a lot to be desired. But you’re severely mismanaging your money if a $25 fee can cause this big a problem.
You should keep at least a $100 pad in your checking and keep an eagle eye on your balance to try to prevent overdrafts in the first place. If overdrafts occur despite your best efforts, then your priority should be repaying those — not writing more checks.
If you can’t manage that, then you should turn off your ability to overdraft. If you have true overdraft protection — your checking account is linked to a line of credit or credit card — ask your bank to discontinue that. You also should decline the bank’s “bounce protection,” which allows overdrafts on ATM and debit card transactions in exchange for a fee. Recurring transactions and checks can continue to trigger overdraft charges, however, so your best bet is to switch to your debit card and cash until you have a better handle on your cash flow.
We in the media need to make that clear. We’ve been excoriating Congressional bungling and inaction so loudly that many ordinary people are getting the impression the world is about to end.
It’s not. A default would have some seriously bad affects—including raising the interest rates on the national debt that everyone professes to care so much about. One of the basics of money management is that if you’re in debt, you want to keep your interest rates as low as possible to get out of debt faster. Doing something that makes your interest rates rise is just stupid. But right now, “stupid” is Congress’ middle name.
So what can you do with your own money to prepare in case we do default? My thoughts:
Move your cash from money markets to FDIC-insured bank accounts. The average interest rate on money market mutual funds is .25%, and they aren’t federally insured. The risk that money funds would “break the buck” and lose principle is probably minimal, but you’re not being compensated for taking any risk, so you’d be better off in an online bank account paying 1% or so.
Don’t invest in gold. Gold is a hugely speculative investment. The gold bubble has been growing for years, and the last time this happened the crash was pretty awful. In fact, the price of gold still hasn’t climbed back to its previous 1980 peak in inflation-adjusted terms. Buying gold or gold mining shares right now is gambling, not investing.
Make sure you’re diversified. Bailing out of the stock market isn’t a good choice. Congress will get its act together eventually. If it doesn’t do so before the default, it will do so quickly afterward, once the stock market plunges. Either way, if you’re out of the market you’ll miss the relief rally. In any case, trying to time the market is all but impossible. If you’re invested in a broadly-diversified mix of stock and bond mutual funds, you should be able to hang on for the bumpy ride. (One way to get quickly diversified is to put your money into a “lifestyle” or “target date” fund, that does all the diversification and rebalancing for you. Most workplace retirement plans and brokerages offer these.) But remember that money you’ll need within five years should be in a safe, easily accessible bank account, not invested in the stock market. That’s true under any market conditions, but if you’ve been taking chances you shouldn’t, now is the time to correct that.
Dear Liz: I had to nod my head when reading your recent column concerning the financial advisor who kept trying to get her client to buy a variable annuity. My wife and I for many years dealt with a like-minded lady who was personable and intelligent. We did purchase several annuities before research alerted us that maybe this wasn’t the best way to go. Every time we met with her she wanted to transfer us to a new “fantastic” annuity, which started up new surrender charges, some as high as 20%. Finally, our accountant suggested a financial planner. We paid the gentleman $1,000 for a full-bore assessment, turning over all our records and meeting three times with him. His advice? Buy a variable annuity. I have a hard time trusting anyone in the financial world.
Answer: It’s possible, but rather unlikely, that you were dealing with a fee-only financial planner. Some planners charge fees, but they also take commissions — and annuities tend to pay fat commissions.
If you want advice that’s free of such conflicts, you’ll need to look for a true fee-only (not fee-based) financial planner. You can get referrals from the National Assn. of Personal Financial Advisors at http://www.napfa.org or the Garrett Planning Network at http://www.garrettplanningnetwork.com.