Ask Liz Weston

Get smart with your money

Liz Weston

Old check may still have value

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Dear Liz: You recently answered a question from a reader who found an old refund check that couldn’t be cashed. You pointed out that checks typically must be cashed within six months or they’re worthless. But your reader should check the unclaimed-property department of his state. Each state has laws that all companies must follow that typically require them to turn over or “escheat” amounts from uncashed checks, dormant checking accounts, unclaimed utility deposits and other accounts. The consumer should write a letter to the company that issued the check (sent certified mail) with a copy of the front and back of the check to find out whether they escheated the funds. The consumer should also check Unclaimed.org and talk to the state that the company is based in along with his current state. Please encourage him to keep the check and not give up. Unclaimed-property laws are not well known, and they are there to protect the consumer.

Answer: Thanks for your suggestion. Not all companies follow the laws regarding unclaimed property. If this company had, it presumably would have referred this customer to the appropriate unclaimed-property department when he called asking for a replacement check. Still, checking the state treasury departments on Unclaimed.org is relatively easy and certainly worth a try.

Emergency funds: How much is enough?

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Dear Liz: A lot of financial advice sites say you should have an emergency fund equal to three to six months of living expenses. What would be considered living expenses? Should you use three to six months of your net take-home pay or a smaller number? Is three to six months really enough?

Answer: Let’s tackle your last question first. The answer: No one knows.

It’s impossible to predict what financial setbacks you may face. You may not lose your job — or you may get laid off and be unemployed for many months. You may stay healthy — or you may get sick and your only hope might be experimental treatments your insurance doesn’t cover. Nothing may go wrong in your life, or many things could go wrong all at once, depleting even a fat emergency fund.

Having a prudent reserve of cash can help you survive the more likely (and less catastrophic) setbacks. Financial planners suggest that your first goal be three months’ worth of living expenses, typically defined as the bills that can’t be put off without serious consequences. That would include shelter, utilities, food, transportation, insurance, minimum loan payments and child care. Any expense that you easily could cut or postpone wouldn’t be included.

If you work in a risky industry or simply want a little more security, you can build your fund to equal six months of essential living expenses, or more. (The median duration of unemployment after the recent recession peaked at around five months, although many people were out of work for far longer.)

It can take many months, if not years, to build up even a three-month reserve. In the meantime, it can be prudent to have access to various sources of credit, including space on your credit cards or a home equity line of credit.

No matter how eager you are to have a fat emergency fund, you shouldn’t sacrifice retirement savings. For most people, saving for retirement needs to be the financial priority, with saving for other purposes fit in as you can.

About to retire? Get some help

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Dear Liz: I am approaching being able to retire in three years at 56, but I’m really concerned with the current market conditions. I have around $320,000 in 401(k) and 457 accounts now, all of it invested in stocks. Should I scale this back to more moderate allocations? My pension will pay me around $5,200 a month, so I do not anticipate needing to withdraw from my investments before age 59.

Answer: Even if you’ve been a die-hard do-it-yourself investor until now, it’s time to get help. Retirement decisions can be incredibly complicated, and you may not have time to recover from mistakes.

A fee-only financial planner would ask, among other things, what your current living costs are and what additional expenses you expect, such as buying another car, taking trips and so on. Those details can help determine whether your savings are adequate. The planner also would ask you how you plan to pay for healthcare in retirement, since Medicare doesn’t kick in until age 65, and an individual policy at your age could eat into that pension check. Even with Medicare, Fidelity Investments estimates, a 65-year-old couple retiring this year would need $240,000 to cover medical expenses throughout retirement — not counting any money they might need to pay for nursing home or other custodial care.

What a planner probably wouldn’t do is approve having 100% of your investments in stock at any age, even with a nice pension. You may have time to ride out another market downturn, but watching half of your life savings disappear might increase the chances you’d sell out in a panic. Having a more moderate allocation that includes bonds and cash could help cushion those market swings and keep you invested.

You can get referrals to fee-only planners who charge by the hour at the Garrett Planning Network, http://www.garrettplanningnetwork.com. If you’re looking for fee-only planners who charge a retainer or a percentage of assets, you’ll find those at the National Assn. of Personal Financial Advisors, http://www.napfa.org. NAPFA has tools for consumers at http://www.napfa.org/consumer/Resources.asp and the Financial Planning Assn. has tips on choosing a financial planner at http://www.fpanet.org/FindaPlanner/ChoosingaPlanner/.

Avoid tax refund ripoffs, and think twice about getting married

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Tax refundMy recent MSN Money columns, in case you missed them:

How to avoid tax-return rip-offs Beware of promises to get your refund faster. Refund anticipation loans are gone, and what’s replaced them isn’t worth the cost.

Gay marriage can muddle finances Gay and in love? You might want to wait to marry.

‘Boomerang’ kids: Moving out again Household formation is on the rise and the kids who moved into their parents’ basements are finally able to move out on their own. Here’s what they, and their parents, need to know to avoid future boomerangs.

Simple retirement can be satisfying If you haven’t saved much for retirement, all is not lost as long as you’re willing to pursue a much simpler lifestyle than what you’re probably living now. One man who lives just such a life is happy he does.

 

Graduating without student loans is tough

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Education savingsA few months ago I gave a verbal spanking to a woman who equated college loans with handouts. She wondered why people didn’t just delay college for a year and earn enough money to pay for their entire education, as she did back in the day.

I pointed out that there weren’t many jobs available to newly-minted high school graduates that paid $60,000, which is about the minimum you’d need to pay for a four-year degree today.

Apparently my reader isn’t the only one having trouble keeping up with the times. A recent New York Times story quoted Virginia Foxx, a Congresswoman from North Carolina who heads a House subcommittee on higher education and work force training, saying she was bewildered why people went into debt instead of working their way through school the way she did.

Here’s what Times writer Ron Lieber pointed out:

But students nowadays who try to work their way through college without parental support or loans face a financial challenge of a different order than the one that Ms. Foxx, 69, confronted as a University of North Carolina undergraduate more than 40 years ago. Today, a bachelor’s degree from Appalachian State, the largest university in her district, can easily cost $80,000 for a state resident, including tuition, room, board and other costs. Back in her day, the total was about $550 a year. Even with inflation, that would translate to just over $4,000 for each year it takes to earn a degree.

A plucky, lucky few manage to get through college with no loans or parental support. But many of those who try wind up dropping out, unable to balance the work hours required with the demands of school.

If you’re one of those who may be stuck trying to pay your own way, Zac Bissonnette’s book “Debt Free U” can provide helpful guidance. If you’re a parent or a policymaker, however, you should check your views about the viability of kids’ working their way through college with today’s realities.

Protect those who look after your kids

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NannyA woman who works as a nanny and housekeeper wrote into the Wall Street Journal recently. Her employers had paid her under the table for years. As a result, at she’s facing retirement with only a miniscule Social Security benefit.

This drives me nuts. If you can afford to hire a nanny or a housekeeper, you can afford to pay her taxes.

Yes, you can.

The employer half of payroll taxes for Social Security and Medicare is 7.65%. The cost of hiring someone to do the paperwork is around $500 a year. (I use the Nanny Tax Company, which charges a $100 one-time set up fee and a $475 annual preparation fee. Each additional employee after the first one is $125.) Those aren’t exorbitant sums. If you can afford to hire help, you can afford to pay the taxes that are legally required as a household employer.

(I’m assuming that your household help can legally work in the U.S. If that’s not the case, well—that’s a matter for a whole different column.)

There’s a line between frugal and cheap. You cross that line when you force other people to pay the price while you save money. The people you entrust with your children and your home deserve better.