Money & Investing

I have five credit cards. Should I cancel some of them?

2008-01-28T16:56:00Z

That may seem like a lot of cards, but you’re actually on the low end of the average for Americans, who usually have between 5 and 10 cards, counting store cards. The key question isn't how many cards you have -- it's how much you spend in relation to how much you pay. If you pay off your bill on time each month and don’t ever get more than halfway to the balance limit, then you’re doing your credit score a favor in most cases.

But if you have a problem with your credit and five cards entices you to overspend, you might want to think about trimming back. But don’t pick up the phone to cancel right away. First, find out your credit score and see how bad things really are. Once a year, you can get your score for free. Then evaluate which cards have the lowest rates and put those in the keep pile. Definitely think about paying off and canceling any store cards you have because they cause the most problems with your credit score (your score will need to be in great shape when you try to buy a new pad).

For any cards in the discard pile, cancel them slowly; your credit score is based on your debt-to-credit ratio, which isn't supposed to tip over 50 percent. That means that if you have five cards with a limit of $2,000 on each card and you cancel three of them, your combined credit limit drops from $10,000 to $4,000. So, if you owe under $2,000, you’re fine, but if you owe more, you could raise some red flags.

What’s the difference between a mutual fund and a hedge fund?

2008-01-28T16:49:00Z

They’re both investment opportunities but one is only for the superwealthy. A mutual fund is managed by an investment company that uses the money from selling shares to the public to invest in a range of stocks and bonds. Shareholders get dividends and their share prices can increase in value. A hedge fund is also managed by a company and invests with money from people who buy in, but those people are limited and loaded. Individuals are courted by the hedge funds to invest millions of dollars each. Why do they do it? Hedge funds operate under less stringent laws and regulations and therefore shareholders have an opportunity to make a lot more money, but at greater risk because they short stocks (predict they will decrease in value) something not allowed in mutual funds. So unless you work for a hedge fund, or your second cousin in Connecticut does, you’re not going to have anything to do with one.

What is an Exchange Traded Fund (ETF)?

2008-01-14T17:29:00Z

There are so many acronyms in investing it can start to look like alphabet soup. But E, T, and F are three letters you should know. It’s a hybrid of a mutual fund and stock because it’s set up like a fund that tracks the performance of an index, but it’s also traded daily like a stock. So how is that helpful to you? First off, you’re not locked in for a certain time period as you are with a mutual fund -- you can buy and sell anytime but you will pay a commission as if you were working with an individual stock. But unlike buying shares of a solo stock, it’s a less risky option because you’re automatically diversified thanks to all of the stocks that make up the fund.

My spouses' spending is out of control! Help!

2008-01-14T16:55:00Z

How serious is the situation? Is she a compulsive spender, or does she just overshop occasionally? If it's the former, she needs professional help. But if she simply spends frivolously, you can make changes together. Offer to be her shopping buddy and help her figure out ways to avoid unnecessary splurges -- whether she's drawn to the latest tech gadgets or new clothes. And do it nicely, not in a nagging tone but with a "Look, honey, we're spending time together, and I'm not spying on you. I'm just working with you to make smart choices."

Next, encourage your mate to get off any email lists that may tempt him into shopping online. And help him find a new weekend activity that doesn't include strolling the mall or window-shopping (which often leads to actual purchases). Another option is to track both of your spending, big and small, for a few weeks (also a sign of solidarity). Your spouse may not realize how hard he's hitting the family bank account until the numbers start adding up. Finally, if none of those things work (or work well enough to satisfy you) it may be time to divide and conquer. Open one bank account for your spouse, another for you, and a third that's joint. Put enough in the joint account to satisfy all of your household expenses and joint savings needs, then divvy up the rest. The idea is to give your wife or husband only as much discretionary cash as she or he can blow through without dragging your family finances into the gutter.

- Jean Chatzky

My employer provides life insurance, but it’s limited, should I get my own?

2007-11-12T21:53:00Z

It depends on your situation, if you have a need for life insurance (see question above), then you should obtain your own coverage for a couple of reasons:

1. Coverage through an employer can be limited.

2. For individuals who can qualify for preferred rates (in good health), the rates for individual policies over a longer period than a couple of years will almost always be lower. Group policies generally have more liberal underwriting which translates into higher rates as they cover a greater range of individuals.

3. Most people don’t stay with the same employer for the duration of their work life, so having coverage tied into employment is not advisable as group coverage will usually terminate or cost a lot more if employment is terminated.

Tony Steuer, CLU is a specially licensed life insurance analyst and author of Questions and Answers on Life Insurance

Buy Tony's book on Amazon.com

What is disbaility insurance? Do we need it?

2007-10-22T09:35:00Z

Disability Income Insurance can replace income in the event of a partial or total disability. If you have income to replace then you have a need for this type of coverage. Individual Disability Income insurance provides a monthly benefit for a specified amount of time with after-tax premiums based on after tax premium payments. It can either provide a full benefit or a partial or residual benefit for a partial or residual benefit.

Individual coverage can be relatively expensive and difficult to qualify for, especially in certain states such as California. Premiums will depend on your health, occupation and other factors. The amount of coverage available will be based on your income whether you are an employee or self-employed.

Even if you have group Long Term Disability coverage, this benefit may be significantly less than your current income, so a supplemental individual disability income insurance policy may be a consideration.

Social Security does provide disability income however it is based on a total, permanent disability and is difficult to qualify for. The benefit is also low compared to the average annual income.

Tony Steuer, CLU is a specially licensed life insurance analyst and author of Questions and Answers on Life Insurance

Buy Tony's book on Amazon.com

We recently incurred some unexpected bills and thus have significantly increased our credit card debt, is it a good idea to withdraw from my 401(k) to pay them off?

2007-10-22T11:21:00Z

Do you remember that commercial about the roach motel . . . roaches check in but they don’t check out? I want you to think of your 401(k) as a retirement hotel. Money checks in but it doesn’t check out (until you’re retired)!

Do not withdraw money from your 401(k) or any other retirement account to pay off credit card debt. Not only will you increase your taxes but you will pay a 10% penalty. Don’t do it. Step away from the 401(k).

Can you plan for “unexpected” bills? Yes and no. While you can’t look into the future to see what the unexpected bills will be, you can set aside some money in a savings account for these unexpected bills. This way you won’t have to charge them even if they come out of nowhere.

Again, the best way to pay off credit card debt is to (1) cut up all of your credit cards right now, (2) call the credit card companies and ask them to reduce your interest rate or you will transfer your balance to another firm and cancel your card, (3) reduce your living expenses, (4) develop an automatic payment plan for each of your cards, and (5) use bonuses or other big money events to chip away at the debt.

Buy Robert's Book on Amazon.com

Check out his website SixDayFinancialMakeover.com

Itemizing charitable deductions?

2007-10-08T21:19:00Z

Chartable donations are not subject to the AGI (adjusted gross income) floor. Unlike medical expenses, which you can only deduct if those bills are more than a certain percentage of your gross income – you can deduct your philanthropic donations regardless of their total. And yes, you can and should deduct every single good deed whether it amounts to $5 or $5 million. But you absolutely must must must have the receipt. The IRS requires one.