Ask Liz Weston

Get smart with your money

Q&A

Q&A: Spouse balks at wife’s franchise-financing scheme

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Dear Liz: My wife has an MBA and essentially has been a homemaker due to having a disabled child. She would like to go back to work and has asked me to cosign a $1.5-million loan to buy a franchise. In addition, she would like to use all the savings we have —$140,000 — for a down payment. I am afraid to do this as it took over 20 years to get the emergency fund collected. She earlier suggested using my 401(k) retirement fund for this business. My fear is that she will not be able to manage this business well and I will have to add this onto my own job. The business may fail and all the money would be lost. She is so mad at me and will not talk to me. Please help me with this.

Answer: Your wife understands that her long absence from the workplace makes it unlikely that she will ever see the kind of salary that an MBA normally earns. So she’s decided to bypass regular employment in favor of entrepreneurship.

If there were a decent chance of her succeeding, this enterprise might be considered a gamble. Given the circumstances, however, it’s almost certain to fail. If you commit every spare dollar to the down payment, where will you turn when the business needs additional infusions of cash, as most businesses do in their early years?

There are other businesses she could start and other franchises she could buy that wouldn’t require committing such a huge chunk of your resources. The fact that she’s clinging to this one idea doesn’t speak well of her ability to make good business decisions. Even worse is that when you expressed perfectly rational fears about her scheme, she responded by refusing to speak to you. It’s definitely time to make an investment, but it should be in couple’s therapy rather than in a business.

Q&A: What to consider before paying off a vehicle loan

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Dear Liz: In January, I used financing to buy a used car, and now I have about $8,000 left to pay off. I recently received a windfall and can pay off that debt in full. Is there any reason to not go ahead and do that? This car loan is my only current debt. However, I do anticipate buying a home and thus getting a mortgage in the near future. Additionally, would paying off the car loan help lower my auto insurance payment?

Answer: Having an open installment loan showing on your credit reports can help your scores, according to credit expert Barry Paperno, who used to work for leading credit scoring firm FICO. But paying it off shouldn’t hurt you much if at all. By contrast, paying off revolving debts such as credit card balances can give a real boost to your scores.

Paying off the loan should save you some interest and eliminating the payment could help you qualify for a bigger mortgage. Those are real advantages. Still, there may be better uses for your windfall. Are you taking full advantage of your 401(k) match, if your company offers one? If you don’t have a workplace retirement plan, are you contributing to an IRA? Do you have an emergency fund?

A paid-off car doesn’t automatically qualify for lower insurance rates. You can consider dropping collision and comprehensive coverage on older cars, since you’re no longer required to carry that coverage, but make sure that you’re comfortable with the risk of not getting anything from your own insurer to repair or replace your car if, for example, you cause an accident and your car is damaged.

Q&A: Social Security benefits for children

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Dear Liz: My husband was 51 when our last child was born, meaning that our son was only 15 when my husband turned 66. Because I was working full time and we had sufficient income, we adhered to the traditional advice of delaying my husband’s Social Security payment. However, when he filed this past year at age 69, we learned that our son is eligible to receive a considerable monthly amount. Fortunately, the Social Security office was able to backdate my husband’s application for six months, but nevertheless we lost out on several thousand dollars by not filing when my husband was 66. Although his monthly payout would have been lower, the accumulated difference would have been considerable with our son’s payment. Therefore, although most retiring people do not have minor children, I believe that all financial advisors should be aware of this option and that those parents should plan carefully to maximize their payout.

Answer: More than 4 million children receive Social Security benefits because their parents are disabled or deceased or have reached retirement age. A child can receive up to half the parent’s disability or retirement check. If the parent dies, a child’s survivor benefit can be up to 75% of the parent’s basic benefit. (There’s a limit to how much a family can receive, though, which ranges from 150% to 180% of the parent’s check.) Benefits typically stop at age 18, although they can continue until two months past the child’s 19th birthday if the child is still in high school. Benefits can continue indefinitely if the child is disabled.

Children’s benefits can be subject to the same earnings test that reduces Social Security retirement checks if the parent claims early and continues working. So it often makes sense to wait to start benefits until the parent is full retirement age, currently 66, when the earnings test no longer applies. You’re right that delaying beyond that age may not make sense when the child is young enough to receive benefits, since they can considerably boost a family’s total benefit.

Having minor children at retirement age definitely complicates the calculation of when to take benefits. Many free Social Security claiming calculators don’t let you include minor children in your calculation, so if you’re in this situation it can be worth paying $40 to get a customized claiming strategy from calculators such as MaximizeMySocialSecurity.com.

Q&A: Changing the executor of a will

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Dear Liz: You recently wrote about a stepmom who dismissed her deceased husband’s son as an executor. Sometimes a will provides that someone such as the surviving spouse can alter the executor pattern. This is done to keep the children in line.

Answer: That’s certainly a possibility. But if that’s the case, the stepmother could simply show at least that portion of the will to the other children to allay their fears. The fact that she hasn’t shared the will, which should be a public record at some point, is reason for concern.

Q&A: Why surviving spouses aren’t always entitled to Social Security benefits

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Dear Liz: I am confused. I thought all wives were entitled to Social Security if the husband’s earnings qualified. My husband is deceased and he received a larger Social Security benefit than I because he worked longer in a qualified system. We were married almost 49 years. Most of my earnings are from a job that didn’t pay into Social Security. I was told because I had a high retirement income, I could not qualify for a percentage of my husband’s benefit. I didn’t know there was an income basis for Social Security. My income was severely reduced when he died. I appreciate any resource in understanding Social Security you could provide.

Answer: It sounds like your survivor’s benefits were eliminated by something known as the “government pension offset,” or GPO. While this sounds draconian, the GPO is actually meant to ensure that people in your situation don’t wind up getting a bigger benefit than people who paid into the Social Security system.

If you had paid into Social Security, you would get the larger of either your own benefit or your husband’s after his death. You wouldn’t be able to continue receiving both checks. Since you’re receiving a government pension from outside the Social Security system, you would be receiving much more than a typical survivor if you could keep that pension AND get your husband’s check. The GPO reduces your survivor benefit by two-thirds of your government pension to compensate. If your pension is big enough to completely eliminate your survivor’s benefit, that means you’re still better off than you would have been just receiving your husband’s check.

Q&A: Effects of closing credit card accounts

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Dear Liz: I would like to know how to close credit card accounts and not get a bad credit rating for doing so. We are trying to improve our credit after filing for bankruptcy seven years ago.

Answer: If you’re trying to improve your credit, then avoid closing credit accounts. Doing so can’t help your scores and may hurt them. Credit-scoring formulas are sensitive to how much of your available credit you’re using. The formulas like to see a wide gap between your credit limits and the amount you charge, both on individual cards and in the aggregate. When you close an account, you reduce your available credit, which narrows that gap and can ding your scores.

If you want to speed up your recovery from the bankruptcy, continue using the cards lightly but regularly and paying the balances in full every month. Make sure to pay all your bills on time so that a skipped payment doesn’t undo all the progress you’ve made. Review your credit reports and dispute any errors, including accounts that were included in the bankruptcy but are still showing up as active debts.

That doesn’t mean you can never close unwanted credit accounts. You just don’t want to do so now, or when you’re in the market for a major loan. You can close an account or two once your scores are in the high 700s on the 300-to-850 FICO scale and you don’t plan to apply for credit in the near future.