Ask Liz Weston

Get smart with your money

The Basics

Paper statements may not be necessary

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Dear Liz: I’m wondering how long we really need to keep bank statements, since banks now offer paperless options. My son doesn’t even open the statements anymore; he just views his account information online.

Answer: There’s nothing magical about paper bank statements. If your son doesn’t open them, he probably shouldn’t even get them. He can ask his bank to switch him to its paperless option and save some trees.

The IRS accepts electronic documents, and banks keep account records at least six years. Your highest risk for an audit is the three years after a tax return is filed, so you should be able to download statements if you need them in an audit. There might be fees involved to get these statements, however, so you’ll have to weigh the potential cost against the hassle of storing all that paper. Some people get the paper statements, scan them and shred the originals; others download the statements as they go and store them electronically.

If you don’t need bank records for tax purposes, there’s even less reason for getting paper statements. Eschewing them can reduce bank fees and will certainly save a few trees.

Use windfall to boost retirement savings

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Dear Liz: What would you suggest that someone do with $20,000 if the someone is closer to 40 than 30, single, with $100,000 of student loan debt and a $250,000 mortgage? My salary is around $100,000 a year. I have an emergency fund equal to six months of expenses and I make an annual IRA contribution since my employer doesn’t offer a 401(k) plan. Should I accelerate my student loan payments, since the interest isn’t tax deductible for me because my income is too high? Or should I invest instead? If I invest, should I put it all in a total market stock index fund or is that too risky?

Answer: Even if you’re making the maximum annual IRA contribution of $5,500 (people 50 and older can contribute an additional $1,000), you’re probably not saving enough for retirement. You can check the numbers using a retirement calculator (AARP offers a good one at its website, http://www.aarp.org). If indeed you’re coming up short, then consider opening a taxable brokerage account and earmarking it for retirement. You can use a chunk of your $20,000 windfall to get started, but also set up regular ongoing contributions.

The bulk of your retirement money should be invested in stocks, since that’s the only asset class that consistently outperforms inflation over time. If you try to play it too safe and avoid stocks, your purchasing power is likely to decline over the years instead of growing. A total market index fund with low expenses is a good bet for delivering diversification at low cost. But leaven your portfolio with bonds and cash as well, since these assets can cushion market downturns. All the returns that stocks give you in good markets won’t be much help if you panic and sell in a bad market. People who try to time the market that way often miss the subsequent rally, so they wind up selling low and buying high — not a winning way to invest.

If you don’t want to try to figure out an asset allocation, look for a low-cost target date fund. If you plan to retire in about 25 years, you’d want to look for a “Retirement 2040” fund.

Once you get your retirement savings on track, then you can start paying down that student loan debt. Target private loans first, if you have any, since they’re less flexible and have fewer consumer protections than federal student loan debt.

Downsizing: Be realistic about the value of your stuff

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Dear Liz: We are in our 60s and looking to downsize. We’re living in an apartment now and don’t like it, so we want to buy a small house. Also, our finances took some serious hits in the recent economy and we’re trying to rebuild. But in trying to sell our possessions, we’re learning that people want us to discount the item beyond belief or even expect to get it for free. People talk about using Craigslist and EBay to generate cash but it looks like a waste of time. Do you know of other options?

Answer: Your two goals are somewhat in conflict with each other, so you need to clarify which is more important. Is your primary aim to shed your excess stuff so you can get on with your life? If that’s the case, then your focus should be on getting rid of what you don’t need rather than squeezing top dollar from it. If it’s more important to harvest the maximum value from these unwanted items, you’ll need to invest more time and effort in marketing your goods.

It may help your decision-making to get a reality check on the value of your stuff. If you believe that you have some quality items — antique furniture, rare collectibles or expensive artwork — you could hire an appraiser to give you an idea of their market value as well as some ideas where these items could be sold.

Consignment stores and auctions can sell your stuff, although you typically have to split the proceeds. Another possibility if you have quality items is to hire a company that specializes in estate sales to sell your things. These companies also typically take a hefty percentage of the sale proceeds — often 30% or more.

If what you own is mostly mass-produced, though, you’re unlikely to recoup much of what you spent. Many people erroneously cling to the idea that their possessions are worth what they paid for them, or at least something close to that. In fact, that purchase price is what economists call a “sunk cost,” which can’t be recouped. The best you can do is get fair market value for your items. “Fair market value” doesn’t mean the price you think is fair; it means what a willing buyer would pay a willing seller when neither is under any duress to buy or sell.

Craigslist and EBay are two marketplaces that can give you a pretty good idea of what those values might be.

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.

Should you remodel before you sell?

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Dear Liz: It has been almost one year since my domestic partner passed away, and our home of 43 years is fully paid for. I am ready to sell. The house is structurally in good shape but needs upgrades and a backyard redo. I have heard that painting both inside and out is a plus, but I’m concerned that any other improvements, such as flooring, would be my taste and not the buyer’s. Is it a wise idea to indicate that any major improvements be deducted from escrow funds?

Answer: You’re smart not to take on any major remodeling just before you sell, since few home improvements come anywhere close to paying for themselves. The fix-ups that typically do return more than they cost include painting, deep cleaning, trimming and freshening your landscaping, and de-cluttering. Consider storing half or more of your possessions. You’ll have to pack them up anyway to move, and getting them out of the way now will make your house look bigger.

Talk to your real estate agent about the advisability of replacing your floors. If yours are quite worn, the investment may pay for itself. Otherwise, a cleaning may be enough. You don’t have to offer to pay for the next owner’s improvements. Just price the home appropriately to reflect the fact that it needs updates.