Ask Liz Weston

Get smart with your money

Liz Weston

Q&A: Help your son by helping yourself

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Dear Liz: I’m a new mom and want to start saving for my son’s college/car/other life expenses while also planning a secure future for him. If I only had, for example, $300 a month to put toward this goal, what would you recommend I spend it on? Life insurance? Savings accounts for him? Savings accounts for my household? A 401(k)? Stashing away money under the mattress? Something else I haven’t thought of yet? I just want to make sure I’m doing the very best for my son and our future.

Answer: Congratulations and welcome to the wonderful adventure that is parenthood.

This adventure won’t be cheap. The U.S. Department of Agriculture estimates the cost of raising a child to age 18 is now $233,610 for a middle-income married couple with two kids. Your mileage will vary, of course, but there’s no denying that your income will have to stretch to cover a lot more now that you’re providing for a child.

Your impulse will be to put your son first. To best care for him, though, your own financial house needs to be in order.

Begin by creating a “starter” emergency fund of $500 or so. Many people live paycheck to paycheck, which means any small expense can send them into a tailspin. Eventually you’ll want a bigger rainy-day fund, but it could take several years to build up the recommended three months’ worth of expenses, and you don’t want to put other crucial goals on hold for that long.

Once your starter fund is in place, you should contribute enough to your 401(k) to at least get the full company match. Matches are free money that you shouldn’t pass up.

You probably need life insurance as well, but don’t get talked into an expensive policy that doesn’t give you enough coverage. Young parents typically need up to 10 times their incomes, and term policies are the most affordable way to get that much coverage.

After life insurance is in place, you can boost both your retirement and emergency savings until those accounts are on track. If you still have money left over to devote to your son’s future, then consider contributing to a 529 college savings account. These accounts allow you to invest money that can be used tax free to pay for qualifying education expenses anywhere in the country (and many colleges abroad, as well).

Keep in mind that post-secondary education really isn’t optional anymore, particularly if you want your kid to remain (or get into) the middle class. Some kind of vocational or college degree is all but essential, and the money spent can have a huge payoff in terms of his future earnings.

Q&A: Adding daughter to home could create a tax burden

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Dear Liz: My wife and I are both 80 and we are contemplating adding our 56-year-old daughter as a co-owner and borrower to our home. The house is now valued at $600,000 and our mortgage balance is $196,000.

If it is advisable, and I am able to do this, will it prevent the house going into probate when my wife and I have passed on? Because my daughter will be the sole beneficiary of our assets, is a will or living trust required?

Answer: Please don’t do this without consulting an estate planning attorney — who will most likely tell you not to do this.

You can’t add your daughter to the mortgage without refinancing the loan. Adding your daughter to the deed means she would lose the valuable “step up” in tax basis that would otherwise happen after your deaths.

If she’s made a co-owner, she could be subject to capital gains taxes on all the appreciation that happened on her share. That tax burden essentially would disappear if she were to inherit the home instead.

How you should bequeath the home to her depends on where you live. In most states, probate — the court process that typically follows a death — isn’t that bad.

However, in some states, such as California or Florida, probate can be lengthy, expensive and worth avoiding. It can be worth investing in an attorney to draw up a living trust.

Another option in many states, including California, is a “transfer-on-death” or beneficiary deed, which allows you to sign and record a deed now that doesn’t transfer until your death. You can revoke the deed or sell the property at any time.

Florida doesn’t have transfer-on-death deeds, according to self-help site Nolo.com, but the state offers something similar called an “enhanced life estate” or “Lady Bird” deed.

But again, discuss this with a qualified estate planning attorney before proceeding.

Today’s must-read: Run–don’t walk–out of this store

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Everybody knows that renting-to-own furniture, televisions and electronics is an expensive way to buy. What you may not know are all the other ways these transactions can hurt you. It’s not just ruined credit and aggressive collection tactics. In some states, you can even go to jail.

NerdWallet’s investigative reporting team exposes the horror stories behind the largest rent-to-own chain, which has expanded into stores serving middle-income customers. The stories include “Kicking in Doors and Crushing Credit,” “Rent-to-Own Slip-Up Can Land You in Jail,” “Rent-to-Own: Be Informed Before You Sign” and “Why Would Anyone Rent-to-Own?”

Read the full coverage here.

 

 

Q&A: Saving for retirement can’t wait

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Dear Liz: I have a family member who at 57 has no savings, a house whose value is 58% mortgaged and debt from a family member of $180,000.

This person is just starting a new job that will cover expenses with about $1,000 left over each month. The job offers a 401(k) but doesn’t allow contributions until employees have been with the company for eight months.

This person has paid into Social Security so that will be there (hopefully!) at retirement. What would be the best way for this person to start saving toward retirement?

Answer: Your relative shouldn’t wait to be eligible for the 401(k). People 50 and older can contribute up to $6,500 annually to a traditional IRA or a Roth IRA, which is $1,000 more than the usual limit.

If your relative didn’t have a previous job that offered a workplace plan in 2017, then this year’s contributions to a traditional IRA should be deductible.

Next year, when your relative is eligible for the 401(k), the deductibility of contributions will depend on that person’s income. In 2018, deductibility begins to phase out when modified adjusted gross income reaches $63,000 for singles. If IRA contributions aren’t deductible, after-tax Roth contributions typically are a better deal, but the ability to contribute to a Roth begins to phase out for singles at $120,000 in 2018.

Encourage your relative to save and to delay starting Social Security for as long as possible. When Social Security makes up the majority of one’s income in retirement — as it will for your relative — it’s important to maximize that check.

It’s not clear why your relative has been saddled with a family member’s debt, but any retirement plan needs to include options for paying off, settling or even erasing (through bankruptcy) such a substantial amount. Your relative should talk to a credit counselor and a bankruptcy attorney to better understand the options.

Q&A: Free credit monitoring won’t prevent identity theft

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Dear Liz: I thought I would share some information in light of the Equifax disaster.

Two of my credit card issuers provide free credit monitoring. Capital One scans my TransUnion file and Discover uses Experian. Both send email and text alerts about new activity and a monthly “reassurance” email when no such activity turns up in the previous 30 days.

Along with the credit freeze I placed at Equifax, I feel pretty secure at the moment. I’m sure that other credit card issuers have similar programs in place, and perhaps people should ask their financial institutions if such monitoring is available to them as account holders.

Answer: Free credit monitoring can certainly be helpful, but understand that it can’t prevent identity theft. At best, credit monitoring alerts you after the fact if someone has opened a new account in your name. Only credit freezes at all three bureaus can prevent those accounts from being opened in the first place.

Unfortunately, credit monitoring and freezes can’t help you with the most common type of identity theft, which is account takeover. That’s when someone makes bogus charges to your credit cards or steals money from your bank accounts.

Financial institutions use different types of software to detect fraud, but nothing replaces vigilance on the customer’s part. We should be reviewing transactions on our accounts at least monthly if not weekly. Online access to accounts can help you better monitor what’s going on.

You also can set up alerts that will email or text you if large or unusual transactions happen. (Just beware of a common scam where you’re texted an “alert” that your account has been frozen, along with a link that encourages you to divulge your login information.)

Even if you do everything in your power to avoid identity theft, you still can’t prevent scammers from using your information to file bogus tax returns, get medical care or commit criminal identity theft (by giving your name to the police when they’re arrested, for example). As long as Social Security numbers are used as an all-purpose identifier by businesses and government agencies alike, you can’t make yourself completely secure.

Friday’s need-to-know money news

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Today’s top story: Rent-to-Own: Be informed before you sign. Also in the news: How Rent-A-Center torments customers, the pros and cons of subscription meal boxes, and how to “credit surf” to score huge reward bonuses.

Rent-to-Own: Be Informed Before You Sign
Reading the fine print.

Kicking in Doors and Crushing Credit: How Rent-A-Center Torments Customers
Renter beware.

Are Those Subscription Meal Boxes Right for You?
The pros and cons.

How to “Credit Surf” to Score Huge Rewards Bonuses
Racking up points.