Money in kids' names equals 'loaded gun'

Dear Reader: What I have said repeatedly is that I don’t believe in putting money, which children gain access to when they reach adulthood, in children’s names. Children may develop some very bad habits by the time they turn 18. To put a whole ton of money in their hands, no matter how well-intentioned, is like giving them a loaded gun.

While I salute the idea of saving for your children, I only recommend it if you have complete care, custody and control of the money.

Renting may improve monthly payment picture

Dear Bruce: I own a home and have considerable unsecured debt. I’m paying down balances slowly, because I have an interest-only mortgage. I pay more than minimum with all payments. I own a business poised to create significant additional income, but it hasn’t materialized yet. I realize that additional income (and less expense) would assist in bringing down debt. I was toying with the idea of selling my home, paying off my debts and renting a house for a while. The home has significantly increased in value. I would have enough to pay off all the other obligations if I were to sell. However, the amount it would cost to rent a house in the area would keep me in about the same financial position I’m in now. Moving from the area is out of the question, as is renting something smaller. In your opinion, would we be better off selling the home and renting or keeping it? – I.S., via e-mail

Dear I.S.: I don’t read the situation quite the same way you do. You say you’ll be in the same financial situation, meaning your monthly payments would be the same. Selling the house and getting rid of all your debts would reduce your overall monthly payout. Further, since you’re paying only a little more than the minimum on your credit cards, I suspect the interest rates are substantial. Even if the cost is exactly the same to rent another house, it would still materially lower your monthly payout because you’ve paid off your other obligations. When your income increases significantly, there will always be lots of houses for sale. Good luck.

Start reading for financial literacy

Dear Bruce: I am currently in my mid-30s, a single male with no outstanding debts. I have a zero balance on two of my credit cards. I have paid off all of my student and vehicle loans with a median income of $42,000. I have two older vehicles that are serviceable and well-maintained. My friends tell me to buy a new car; however, I don’t want to invest in depreciated belongings. I contribute the maximum amount to my traditional individual retirement account for tax deductions and deferred savings. I invest heavily in mutual funds and, in the past decade, I have maintained a 12 percent return. I subscribe to the theory of dollar-cost averaging. Can you recommend a good publication or book to invest in stocks? Without a background in financial planning, I have a modest foundation for retirement with $40,000 in assets. Thanks for the input. – Greg in Michigan

Dear Greg: You are doing very well. I would bet your friends who are telling you to buy a new car have not achieved the financial independence and exhibited the responsibility you have. That said, I don’t have a problem with “depreciated” belongings. An automobile is certainly transportation, but it also gives people pleasure. Years ago, I knew a gentleman who said his cars never depreciated because he drove expensive antique automobiles that were appreciating, rather than depreciating.

As to the investing, start with your local newspaper. Read the finance section on a daily basis. Check the Wall Street Journal from time to time, and magazines such as Forbes, Fortune, Money and many others should be on your reading list. It’s not going to happen overnight, but you’ll be surprised if you follow this regimen. Six months to a year from now, your knowledge will have increased exponentially.

Return of 10 percent isn’t unrealistic

Dear Bruce: I am 52 and currently saving 20 percent of my earnings through mutual funds and a 401(k). I am diversified at a rate of 80 percent stocks and 20 percent bonds. My overall return has been in the 7 percent to 8 percent range, but I have noticed the bonds are only returning 2 percent to 3 percent.

With CDs returning a guaranteed 5 percent, would I be better off investing that 20 percent in CDs and leaving the rest in stocks? – T.B., via e-mail

Dear T.B.: You didn’t indicate how long a period of time you used to determine the return of 7 percent and 8 percent. Are you talking about the past 12 months? And without knowing more about what type of bonds you are describing, it’s difficult to make an accurate assessment.

Aside from the 401(k), in which you may not have a whole lot of choice, I would consider a bit more aggressive investing in today’s strong market. And at your relatively young age and your substantial percentage of savings, I would consider talking to a good broker.

As these words are written, an overall return of 10 percent or 11 percent, which includes dividends and growth, is not an unrealistic expectation. Options such as CDs come with a price, and that price is a very modest return on your savings.

Keep CDs in owner’s name

Dear Bruce: Is it better to title certificates of deposit in my daughter’s name, my name or in trust for her? What are the pros and cons when it comes time for her to redeem them? She is 56, and I am 86, so naturally, I assume I will go first. We do not agree, and each bank has a different answer. – R.K., via e-mail

Dear R.K.: There are a number of ways to approach this, but if you want to make it quick and easy, assuming your daughter is your only heir, it would likely be better to keep the CDs in your name and give her a durable power of attorney.

In the event that you are unable to handle your own affairs, she can step in, redeem them, invest them, etc. This way, there would be no question with regard to federal estate taxes unless the amounts are huge. Your current exemption is $2 million.

There are lots of times when things are put in a parent’s name and an offspring’s name. Governments realize it’s done to facilitate the handling of funds. That said, if you run into a stickler, there could be gift-tax implications. That could be unpleasant.

All things equal, a properly drawn will, accompanied by a durable power of attorney in the event of incapacitation, will work.

Pay off the credit card

Dear Bruce: I would like to have your input on whether it would be right for me to pay off a credit card with a balance of $8,000 with interest rates at 9.9 percent? I ran up this balance as a retired senior citizen to help one of my kids with a crisis. I have about $70,000 in a savings account paying 4.5 percent. My new car is completely paid for. –Reader, Las Vegas, Nev.

Dear Reader: Don’t walk to your nearest post office – run and pay off the $8,000 debt on your credit card. You have got to be kidding? You are paying 10 percent and receiving 4.5 percent on your money. What’s wrong with that equation? As long as you have cash sitting around, there’s no advantage whatsoever in keeping the credit-card balance. I would retire it immediately.

Paying extra won’t lower interest rate

Dear Bruce: I have two mortgages. I would like to find out how much I have to pay off the principal in advance, in order to reduce the rate to 6 percent. I don’t want to refinance, but I want to lower the interest, even if the payment will increase. – P.B., via e-mail

Dear P.B.: I think you misunderstand what refinancing is all about. No matter how much you reduce the principal, if the interest rate is 10 percent, the outstanding balance will be charged 10 percent. The only way to reduce the interest rate is to refinance. Obviously, the quicker that you retire the mortgage, the less interest you will pay. But, as stated, the only way to reduce the interest rate is to refinance your obligations.

Don’t let rebate lead to foolish spending

Dear Bruce: I have a charge card that gives you a rebate for monies spent. I pay on time each month so I pay no interest, but I know they receive a fee from the stores where I use the card. However, it seems to me, that they are paying me to spend my money. Am I missing something? – A.B. in Arizona

Dear A.B.: I don’t know if you’re really missing anything. The point is that you should not spend any money that you wouldn’t ordinarily spend. If your card gives you a bonus in the form of a refund, that’s fine. But, obviously, it doesn’t pay to go out and spend money that you cannot afford to spend.

On the other hand, if you’re going to pay $100 cash for something, and you pay your bill on time, why not use the card to build up those credits so that your refund is a little bit larger? The caveat? You must have that discipline to pay off that card every single month before the interest comes due.

Bruce Williams is a national radio talk show host and syndicated columnist. He can be reached at bruce@brucewilliams.com.