Ask Liz Weston

Get smart with your money

Q&A

Investing in stocks: what you need to know

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Dear Liz: I currently have a 401(k) and an IRA, but want something more. A longtime CPA, who is very close to our family, recommended that I buy some stocks, but I’m unsure how to go about this.

Answer: When you’re investing, it’s important to be diversified. That means you should spread your money among different types of investments so you don’t have all your eggs in one basket, so to speak.

You’d need hundreds of thousands of dollars to be properly diversified with individual stocks. When you’re just starting out, it’s a lot smarter to buy mutual funds or exchange-traded funds that invest in a wide variety of stocks. Vanguard Total Stock Market ETF, for example, invests in more than 3,600 companies and has an ultra-low expense ratio of just 0.05%.

The fees you pay for your investments are important, since high expenses can dramatically reduce your total returns. Funds that try to beat the market, rather than match it, often engage in a lot of trading that drives up costs. Funds sold through full-service brokerages can carry high expenses as well.

So look for a discount brokerage that allows you to invest with minimal fees and commissions. Or consider one of the new breed of online advisors, such as Betterment or Wealthfront, that offers a low-cost basket of investments that are selected, monitored and rebalanced using sophisticated technology.

Beware debt reduction offers

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Dear Liz: What is your opinion of debt reduction programs? I am constantly receiving mail from various companies, and I was wondering if they are legit. They claim they can reduce my debt, which sounds promising, but I am hesitant to get involved with them.

Answer: You’ve got good instincts.

Many of the companies sending out these solicitations say they can settle your debt for pennies on the dollar. What they often fail to mention is that the debt settlement process can result in your being sued by your creditors and having your credit trashed. That’s assuming they try to settle your debt at all, rather than just disappearing with any money you pay them in advance.

If you’re struggling with too much debt, you should make two appointments: one with a legitimate credit counselor (visit the National Foundation for Credit Counseling at http://www.nfcc.org for referrals) to see whether you qualify for a debt management program to repay your credit card debt, and another with a bankruptcy attorney (check the National Assn. of Consumer Bankruptcy Attorneys at http://www.nacba.org for referrals) to see whether a bankruptcy filing might be appropriate for your situation.

It’s okay to close credit accounts sometimes

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Dear Liz: I have heard that you should never close credit card accounts of your own volition because that can hurt your credit scores. Are there any exceptions? I received a credit card several years ago, when my credit scores were in the toilet because of a number of collection accounts and delinquencies. I had no other open credit cards, so when they offered me unsecured credit, I accepted it willingly. The interest rate was (and is) 23.99%, and I was charged a $72 annual fee. Now, six years later, my credit scores are greatly increased. But you would never know it by this issuer. They have refused my request to lower the interest rate, and the annual fee has now gone up to $99 a year. My credit limit is $2,100 and a credit line increase of $150 would cost me a $14.95 fee. Under these circumstances, would you still counsel not to close this account?

Answer: Closing credit accounts won’t help your credit scores and may hurt them. But that doesn’t mean you should never close an account.

If you have several other credit cards, your credit scores probably won’t suffer much of a hit from a single account closure and will recover quickly from any damage done. You don’t want to close accounts if you’re still trying to improve your scores or if you’re in the market for a major loan, such as a mortgage or auto loan. Otherwise, though, there’s no reason to continuing paying for a card you no longer need.

If this is still your only credit card, you should use your good scores to open one or two cards with better deals. Then you can say good riddance to this one.

You may be held responsible for a parent who fails to save

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Dear Liz: My mother is 65 and refuses to plan for retirement. She has worked for the same organization for almost 20 years and, despite my begging her over the last decade, has not contributed a dime to her 403(b).

I am an only child in my late 30s and received no financial help from her from the age of 18. In addition, my father died when I was very young, leaving us fairly destitute with no life insurance. I feel that both of these legacies have contributed to my less-than-optimal financial situation.

I have had to work very hard on my own for everything, with very little support from anyone. I am now trying to catch up financially but am afraid that all of my efforts will be futile as I will be required to take care of my mother.

She says she expects to be able to live on Social Security and the $70,000 her company contributed to her 403(b) over the years. I’ve been advised by friends that I have no legal obligations to provide for her. I certainly have social ones though. What are her options once she becomes too old to work and doesn’t have enough money to cover her expenses?

Answer: Your friends may be wrong about your legal obligations, because 29 states — including California — have what are called “filial responsibility” laws. These laws create a legal duty for adult children to support indigent parents.

Most states don’t enforce these laws currently, but that doesn’t mean they won’t in the future, said elder-law attorney Michael Amoruso, a past president of the New York chapter of the National Academy of Elder Law Attorneys. States struggling with money issues may be tempted to step up enforcement, he said.

According to Katherine Pearson of Penn State‘s Dickinson School of Law, who has studied such statutes, the states with filial-responsibility laws are Alaska, Arkansas, California, Connecticut, Delaware, Georgia, Indiana, Iowa, Kentucky, Louisiana, Maryland, Massachusetts, Mississippi, Montana, Nevada, New Hampshire, New Jersey, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Virginia and West Virginia.

Your mother isn’t indigent yet, but she may be soon if she thinks Social Security and a five-figure retirement account will sustain her.

The good news is that you may still have time to influence her decision-making, because she hasn’t quit work yet. You should tell her, gently, that you can’t afford to support her if she runs out of money, and suggest that together you consult a fee-only financial planner about her future.

The planner can review your mother’s financial situation and offer suggestions — which are likely to include delaying retirement and considering part-time work in retirement. The planner also can explain that her $70,000 nest egg will provide only about $200 a month if she withdraws 4% initially. Four percent is considered a sustainable withdrawal rate by many financial planners.

You can tell her that consulting a planner is a good idea for anyone considering retirement — since that’s quite true. If you like the planner, you can book a session for yourself and learn some concrete strategies for getting your own finances on track. This may require an attitude adjustment.

You’re still blaming your parents for your financial situation, but your father’s been dead for decades and you’ve been on your own since age 18. In other words, the statute of limitations on blaming your folks has long since expired.

Your finances are the result of the choices you’ve made, just as your mother’s situation reflects the choices she’s made. Let’s hope you both make better choices in the future.

Don’t let 0% offers result in maxed-out cards

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Dear Liz: I’m trying to transfer some credit card balances to existing accounts that are now offering 0% for 12 to 18 months. If I come close to maxing out the credit limit using one of those offers, will that affect my credit score adversely? Or, should I open up a new card, since I’ve gotten several 0% offers recently?

Answer: Using all or even most of your credit line on any revolving account can hurt your credit scores.

Although opening a new card may ding your scores a few points, it’s usually preferable to spread your debt over several accounts rather than pile it all on one card. This advice assumes you plan to use these offers to pay off your debt as rapidly as possible, rather than as an excuse to continue carrying balances.

If you can’t pay off your balances before the teaser rates expire, consider getting a three-year personal loan from your local credit union and using that to get free of debt. The interest rate you pay may be somewhat higher initially but you’ll likely save money in the long run.

At death, wills matter–promises don’t

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Dear Liz: If your in-laws promised you and their son their house, and have for over 20 years, and the whole family is aware that was the plan — your mother-in-law even had a will and a deed made up — do you think the executor of the estate has the right to do away with the will and take matters into her own hands? Do you think the daughter-in-law and the son have a right to stick up for what the parents wanted?

Answer: There’s a big difference between drafting documents and executing them.

Presumably the deed wasn’t executed, or used to legally transfer the house into your names. Otherwise this dispute wouldn’t be happening. Is the same true of the will? In other words, did your mother-in-law sign it in the presence of disinterested witnesses (people who don’t inherit)?

If the will was properly executed, then in most states it must be filed with the probate court. The executor is supposed to follow the will’s dictates to the extent possible. (If your mother-in-law left more debts than assets, for example, there might not be enough left over to distribute according to a will.)

What seems likely is that your husband’s mother failed to follow through on her promise. If that’s the case, and there is no will, then the executor is obliged to follow state law to determine who gets what.

The results may not be what you hope. The home may need to be sold to pay creditors or to allow an equitable distribution of assets among all the legal heirs.

This assumes the executor is living up to her fiduciary duty. If she truly is taking matters into her own hands, however — deciding how the estate will be distributed without reference to a will or state law — then you and your husband should hire an attorney to file a lawsuit in probate court to get her removed and replaced with someone more responsible.