Marketplace

Dividend funds

Question: Hey Chris, I'm just finishing up my second year at Wake Forest University, and I recently started investing in the stock market with the belief that it will rebound eventually. One of my friends recommended that I invest in dividend funds. From the research I've done and they seem like a very profitable with relatively low risk option compared to individual stocks. But, I feel like they are too good to be true. Can a dividend fund collapse or go bankrupt? Besides looking at there individual holdings what are other indicators that might indicate if a dividend fund is safe? Patrick, Cranston, RI

Answer: It's great that you're investing so early. Terrific. Here's a grief look at dividend funds, also known as equity income funds.

The income from dividend payments typically moderates the volatility of mutual funds that focus on owning dividend paying stocks. That's why these funds are often recommended to retirees that want to stay exposed to the stock market and earn an income. Dividends are a big part of the long-term return of stocks. However, the importance of dividends shrank during the Go-Go '90s when the investing game became a matter of chasing high flying growth stocks that didn't pay dividends. Think dot.com. Companies started hiking their dividends around 2003, and investors have been eager buyers with the tax rate on dividends reduced to a low 15%. That favorable rate is scheduled to disappear in 2011. Dividends will be taxed as ordinary income, although who knows what Congress will do between now and then.

I don't see a dividend fund collapsing or going bankrupt. (It is far more common for a poorly performing mutual fund to be quietly closed or merged with a better performing peer.)

That said, there are risks. The bear market has mauled these funds this year. For instance, the T. Rowe Price Equity Income Fund is down 3.97% year-to-date and it has fallen 35.41% over the past year. The Vanguard Equity Income fund is down 9.11% year-to-date and -34.16 for the past year. What's more, companies usually raise their dividend to keep shareholders happy in good times and bad. But the Great Contraction is forcing a swelling number of companies, especially financial services firms, to slash or eliminate their dividend. According to the Wall Street Journal, there have been 45 dividend reductions and six dividend suspensions among the Standard & Poor's 500 companies.

When it comes to picking an equity income fund the single most common mistake is putting money into the highest yielding funds. The yield is nice, but it also means there is a lot of risk built into that portfolio. I would stick to well-diversified equity income mutual funds with a track record. Better yet, there are equity index funds that focus dividend paying stocks and exchange traded funds (ETFs) that do the same. You research your choices at Morningstar.com. Good luck.

05/01/09 by Chris Farrell

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Cut down on 401(K) contributions

Question: My husband and I are currently putting 9% of our income into our Roth 401K with a 4% match from his employer. We got a late start in contributing to that due to a late change of career which entailed years of schooling, so we currently only have about $40,000 in our 401K.

However, we have almost no savings outside of that. We have $5000 in the bank, some of which we need to use over the summer. I am wondering if we should decrease our 401K contribution and sock that money into savings instead until we have a few months' worth of cushion. Kathleen, Rexburg, ID

Answer: I think your financial instincts are right. It's important to have a decent cash cushion in normal times, let alone during the extraordinary period we're living through today. You'll still be saving money, just not as much in the retirement account (where you would pay a steep penalty if you tapped into that money.)

There are three keys to this strategy: First, continue to take full advantage of your employers match. The real investment kick in a retirement savings plan comes from the match. Second, shift the money into a very safe place backed by a government guarantee, such as an FDIC insured savings account. Third, remember to increase the sums going into the retirement plan when you've built up a large enough cash cushion.

05/04/09 by Chris Farrell

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I-bonds at 0%

Question: Every May and November I download the redemption values for my I Bonds. I use the program called "Savings Bond Wizard" that goes to the government website and automatically downloads the values of the bonds for the next period of time (in this case it would be May 2009 thru Nov 2009). Every time I have done this in the past, I can see how my bonds increase every month. This time, I did not see any increase at all in any of the months May June July Aug Sept Oct or Nov 2009. Do you know why this is? Could it be that my bonds will not grow any interest at all for all those months? Thanks for your help! Maxine, Danvers, MA

Answer: You read it right: The yield on I-bonds, the government's inflation protected savings bond, is almost zero. That's right, 0%. The I-bond joins a long list of very safe government backed securities that pay savers from nil to fractional yields.

Here's the deal: Treasury recently announced that inflation-linked bonds bought between May and October will earn 0% interest for the first 6 months. The same holds for current I-bond owners when their rates reset. Remember, I bonds come in two parts: a fixed rate and a rate that adjusts with changes in the Consumer Price Index. The fixed rate is at 0.10% for new issues. That fractional rate of interest will last for the 30 year life span of the bond. The 0% yield component comes from the link to the Consumer Price Index. Reflecting the worst financial crisis since the Great Depression, the CPI came in at a more than 5% annual rate during the prior 6 month period. However, the yield on I-bonds can't fall below zero % so that's what holders will get.

By the way, I still like I-bonds. It's an insurance policy, a good hedge against the risk of rising inflation once the recovery does set in. Plus, these 30-year bonds allow your money to compound tax-deferred until they're cashed in. (I-bonds redeemed before the 5 year mark forfeit the 3 most recent months' interest, but after 5 years that there is no penalty at redemption.) There are no commission costs when buying or selling them.

05/05/09 by Chris Farrell

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Home equity and credit cards

Question: I have a $16,000.00 credit card balance with Chase at 3.99 % until balance is paid off. I also have a home equity credit line that would support paying this balance off. The home equity interest rate is currently at 4.12%.

My question is would I be better off paying off my credit card and putting it into my home equity line of credit where I could deduct the interest on my taxes even though the interest is slightly higher or stay the course and continue to make monthly payments on my credit card. Some one told me it is not a good idea to put your credit card balance against your mortgage. What do you think? Roger, Minneapolis, MN

Answer: I am against using home equity to pay down credit card debt. Yes, you get to deduct the interest. But you're hardly paying much of an interest rate anyway.

Far more important, once all your debt is home-based you risk losing the house if you suffer a setback. If you look at the credit problems of recent years a common mistake was homeowners tapping into their home equity to consolidate debts for the tax break. Then they got into financial trouble--lost their job, suffered a major medical illness, got divorced--and suddenly they couldn't make their mortgage and home equity payments. Results: Foreclosure, a short sale or extreme stress holding on to the property.

Yet there are a number of ways to get financial relief on auto loans, credit cards and similar consumer debts. For instance, you can make minimum payments for a while, go into debt counseling, and even declare bankruptcy. And you get to keep the home. The bottom line: I don't like the risk-to-reward ratio.

I would just focus on paying off the credit card and leave your home equity al

05/07/09 by Chris Farrell

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Take on graduate student loans

Question: My son graduated in December in one of the worst economic times. He was fortunate to land and entry level job in his field with an international company. One day shy of three months (the probation period) the company has laid him off. His goal was always to go onto graduate school after paying off his student loans (they would have been paid off in June if his job had lasted). Coincidentally a graduate school he had applied to has an unexpected opening in August. The bottom line: $91,000 for a 4 year doctorate program with little chance for a scholarship. When do you decide to take on this much debt? With his degree, when he graduates, he will start making $80,000/year.

Does he go on to graduate school or does he stay in the job market and try for another job? Thank you so much. Leslee, Boulder, CO

Answer: Traditionally, it has been a smart move to get additional education when the economy is down and jobs scarce. Then in several years you reenter a hopefully improved job market with a new degree.

However, the numbers you give tell me that your son needs to make a series of green eyeshade calculations, and then carefully think through the potential upside and the potential downside. For instance, with the numbers you sent in (and assuming a 6.8% interest rate) your son would end up putting over 15% of his gross monthly income toward student loan debt repayment. That's a very high percentage. It sets off warning bells. Most students carrying that much debt end up feeling oppressed by their debt burden, especially if they take out additional loans, say, to buy a car. To get that debt repayment figure down to a still steep but more reasonable 10% of monthly income he'd need a starting salary of about $126,000. We're living in an economy that is punishing for borrowers.

I just made a very simple calculation. He'll need to make a much more detailed budget to paint a more accurate picture. But once he has done that I would look into what steps might he take to lower the amount he borrows and cut down on living expenses. For instance, can he live at home while going to school or after he graduates? Are you in a position to help him out? Is there a cheaper school with a comparable graduate program that still opens up good career prospects? What if he got another job, lived frugally and saved money for a couple of years--would that make sense?

Then there is the long-term return on investment. Even when the job market recovers wage increases will be scarce in many professions. What is the experience of other graduates from the program he's thinking about attending? Are there reasons to believe he'll enjoy good jumps in pay? Or is the starting salary of $80,000 about what he should expect with 1% to 3% pay increases a year at most? Will this degree open the door to a career he really wants to do and is getting the degree now the best and fastest way to get in?

I don't know the answers to these questions, of course. My main recommendation is to really try and understand the financial and career risks and rewards of taking this step now, and make his decision from there.

05/08/09 by Chris Farrell

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A bond ladder

Question: I am 42 and have never ventured beyond CD's so obviously my tolerance for risk is very low; I don't like anything I don't understand - compound interest is something I do understand! I have a 90K CD that just matured at one of the national big banks on "shaky ground" and I plan on transferring it to a local bank for my own peace of mind. I will put 5K in the "rainy day" fund, and then have 85K left. The only way I can get a rate of 3% or higher is to go for a CD of 50 months or longer. Our circumstances right now are such that I need to use this money as a "monthly income generator;" I have the monthly interest transferred into a checking account and use it for expenses (so I don't ever get the full APY, just the interest rate). Our son has autism and I need to be home with him in order to take him to a special preschool and get him the therapies that he needs. If I was working, I would let the interest accrue. Are there any safe alternatives to CD's where I could get a monthly payment at 3 to 4% or higher on my 85K without committing to 4 or 5 years???.... Thanks in advance for your reply and I'm grateful for your advice! Cheryl, Akron, OH

Answer: First of all, you're right to steer clear of anything you don't understand. Secondly, you are risk averse and you have good reason to be cautious with the money. It's an axiom of finance that you can't get a higher yield without taking on more risk, and right now safe securities pay a paltry rate of interest. Third, I am worried about tying up money in a CD for four or more years. What if rates jump higher next year if the economy recovers, inflation rears its head--or both?

How about creating a laddered portfolio out of FDIC-insured CDs or U.S. Treasuries? It's both a savvy and safe way to invest. The basic idea behind a ladder is that you buy some 3-month, 6-month, 1-year, 2-year, 3-year and 5 year securities. If rates go up you reinvest your short-term securities when they mature at the higher rate. If rates stay where they are you still get the higher yield from the 4 to 5 year securities. You'll get the average yield of all securities you buy, and as long as you hold it until the CD or Treasuries mature, you can't use lose money.

By the way, it's the after-tax yield that matters. So, I would compare the after-tax yield on CDs to the after-tax yield on Treasuries (you don't pay state and local taxes on the latter). You can buy Treasuries without commission--in other words, for free--from the U.S. government at www.treasurydirect.gov. The website www.analyzenow.com has a web-based program for monitoring bond ladders. Just go to the free programs section and click on the "investment Manager" program. Smart Money has a nice article on bond ladders here.

05/11/09 by Chris Farrell

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The Administration's home refinance program

Question: WE OWE 3 mortgages at 5.3755% 6.25% 6.98% for three different homes. Would we be qualified to refi under the HOME AFFORDABLE REFINANCE program with the current rate under 5%? Thank you so much. Mai, Los Angeles, CA

Answer: It's always worth a phone call to try and negotiate a deal, but I doubt that you'll qualify under the Administration's program. The reason is the way the Administration's homeowner rescue plan is designed, it explicitly won't help out anyone with homes purchased as an investment. The home must be owner-occupied. The federal government says it doesn't want to be bailing out speculators (unless they call Wall Street home and gambled with billions of dollars).

The Administration's home rescue plan is complicated with a number of twists and turns. For instance, the federal government isn't reaching out to borrowers who misrepresented their income on no-doc loans. The plan loosened the rules so that homeowners current on their mortgage can refinance even if their mortgage represents as much as 105% of their home's current value. But the sharp decline in prices in many parts of the country means many troubled homeowners still don't qualify for relief.

I would call your lender and see if you qualify for a refinancing under their normal guidelines.

05/12/09 by Chris Farrell

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Public or private graduate school

Question: I am trying to decide between two different graduate schools: a state school and a private college. Both have good, well respected programs, although I'm fairly certain that the private school has a slightly better reputation and would probably improve my chances of getting a good job after I'm done at least a bit. The real difference between the two schools is the cost, and it's the reason I'm concerned about accepting admission at the private school. I would probably have to take on between $30,000 to $40,000 in student loans to attend the private college, in addition to spending my entire life savings of about $30,000. This concerns me especially because the program - A masters in English literature--isn't going to greatly increase my earning potential. I plan to become a teacher, hopefully at a community college, although there's a chance I may want to go on to do a PhD. Also, I'm 31, and hope to buy a home and have children sometime in the not too distant future. And I have no retirement to speak of.

I'm really torn, because while I think I may get a better education at the private school, it seems like a bad idea financially, especially since the state school MAY be just as good (if not as cushy and warm and fuzzy). Should I take the risk and take on the debt required to go to the private college? Thank you! Anna, San Francisco, CA

Answer: Anna, I think you already answered your question as you wrote it out. You believe it doesn't make sense for you to take on that much debt and drain your savings for a degree that won't increase your earnings potential (much). If you go to the private college you'll spend years after getting your degree struggling to pay down debt, living on a financial high-wire. I take seriously the importance of enjoying your graduate school experience. But I worry that you'd end up financially strapped, limiting your freedom of choice once you have earned your degree.

I hope you've really explored that the state college graduate degree will pay off in terms of job and career. I'm not an expert, but I do know that the competition for teaching jobs at community colleges and junior colleges is soaring. When it comes to graduate school, it's less about getting an education (which is vital with an undergraduate education) and more a cold, rational calculus on the return on investment.

You might want to check out my answer to a related question that I posted on May 8th, Take on graduate student loans? Better yet, read the comment section. There are some very sharp observations on money and the risks of getting a graduate degree.

Anyone else want to weigh in with some insight for Anna?

05/13/09 by Chris Farrell

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Life insurance

Question: We are both 54 years old, professionals, still working. We own our home and have no debt beyond $30,000 in a home equity loan from building our home. We have about $200,000 in savings and plan to work at least part time for several years. He has a government pension, we will both have SS income (if its till solvent!) We each have term life insurance but they are getting expensive (his for $400,000, mine $75,000). Is it really important to have insurance at this time? We have no other dependents. Pam, Jeffersonville, VT

Answer: You are at a good age to evaluate your need for life insurance. You have little debt, lots of savings, and good pensions. You plan on working even during retirement, which means your savings can compound longer. (And Social Security will be there when you decide to tap into it.) You have no children or parents to worry about.

Now, you're still young. I don't have a magic number to suggest how much you should cut back. I would consider if it makes sense to look into whether you should enjoy equal financial protection from the death of the other instead of the wide disparity in coverage you have now. There are a number of life insurance calculators on the web. They're simple but they give you some guidance, and you can find one here and another here.

Here is a thought for your calculations that makes sense to me: You should each have enough life insurance so that if one of you dies the other doesn't have to worry about money for a period of time. The survivor can take a year or more--you decide--to deal with their grief, without worrying about earning an income, paying down debts or draining the savings account.

Again, your savings may be enough. But I'd also think about factoring in a bit of mad money into the calculation, a sum to try something new, to pursue a dream. When a loved one dies it painfully reminds us of our own mortality. Like Woody Allen said, "Life isn't a dress rehearsal--it's reality."

05/14/09 by Chris Farrell

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$250 is in the mail

Question: Hello Chris. I got a letter stating that the 250.00 checks would be mail by the end of May. I notice that some people have already gotten theirs. My question: is there a website you can see when these checks go out and how they might be sending them on certain days? Or where the names of people and when they might be sending them. Thank you very much Donna, Spring, TX

Answer: According to the Social Security Administration, the federal government sent out the first of its more than 50 million payments on May 7th. The $250 payment to those on Social Security and Supplemental Security Income (SSI) are being mailed out on a staggered schedule throughout May. The agency requests that you don't contact them about your payment unless you haven't gotten it by June 4th. You can read the entire statement here.

05/18/09 by Chris Farrell

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Estate taxes

Question: My elderly parents (82 & 88 years old) own a large (2000 sq ft) completely renovated 1805 farm house and 100 acres in SC - all paid for. My brother and I will inherit this property upon the death of our parents. It is vital to my parents that they leave this property as a gift to their children; they are proud that they have it to give to us. However my parents think that there won't be many estate taxes on this property since it is no longer an active farm and the local property taxes list the value at $200,000. My brother and I are concerned that the estates taxes will take away most of this inheritance. As a solution to this problem, my understanding is that if our parents sell us this property now, with a codicil that they will stay in the house until their deaths, there won't be any inheritance taxes to us. We would be responsible for the yearly property taxes. Also, who decides, upon my parents' deaths, the value of the property in order to calculate the amount of inheritance tax? Any input is gratefully accepted. Thank you. Ellen, Willow Spring, NC

Answer: I doubt if you need to worry about the estate tax. Most people don't need to be concerned about it because the amount exempted from the tax is so large.

To be sure, estate tax law is extremely bizarre at the moment, and that's putting it kindly. Here's the rub: Congress and the White House cut a deal in the negotiations for the 2001 income tax cut that increased the amount that individuals can leave to heir's tax free. It also lowered the estate tax rate on any money owed to Uncle Sam. In 2009, an individual could leave her heirs $3.5 million free of taxes. That's $7 million for couples. For sums above that the estate tax rate starts at 13% and tops out at 45%. Yet in 2001 to make the budget projections work and to satisfy opponents of the "death tax" the estate tax was slated to disappear completely in 2010 and then return in 2011. Go figure. I can't.

But it looks like the estate tax disappearance and reappearance act won't happen. The Administration's current budget blueprint makes the 2009 rules permanent. In other words, individuals with estates of $3.5 million or less would be exempt from the top 45 percent estate tax rate, and married couples could end up sheltering a combined $7 million for their heirs from tax (depending on how marital assets are titled).

I'd see what the law becomes first. Then, if you want you can get some additional peace of mind by having an independent appraiser value the home and property for you. And I'm sure your parents have other assets as well that should be considered. I'd also with a reputable estate attorney. But I wouldn't do anything without good evidence that you and your brother are among the estimated 0.2% of all estates this year that might be subject to the tax. Most people who worry about the estate tax aren't subject to it.

05/20/09 by Chris Farrell

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Mortgage vs. CDs

Question: We have several CD's that are coming due. Interest rates are so low we are wondering if we should pay off our 6.875% home loan with the CD's and then pay our house payment to ourselves to resave. We only owe about $72K. The CD's are for our retirement; we are self employed. Gail, Arlington, WA

Answer: First of all, I don't see how you can go wrong by paying off the mortgage or reinvesting the money into CDs.

On the one hand, the advantage of eliminating your mortgage is that you'll earn a 6.875% return on investment--not bad in this market. I also believe that most homeowners should enter their retirement years without a mortgage.

On the other hand, if you keep the money in savings you have a personal financial safety net in case business slows down for one or both of you during the economic downturn. I also believe it's smart to own a well-diversified portfolio and not put too much of your savings into a single asset like a home.

So, my answer really comes down to evaluating how much risk you face. The more secure your income and the better diversified your overall household portfolio the more I would lean toward getting rid of the mortgage, and vice versa.

05/21/09 by Chris Farrell

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New or used?

Question: I wasn't sure whether to ask you or the Car Talk Car Guys about this - Maybe a joint consult? I just got half a book advance, and have $15,000 to do something with. My finances are secure - no credit card or other debt, own my home with an easy mortgage payment as well as a paid-off condo. I live off secure rental incomes and have $10,000 in regular savings account.

I've always invested in real estate and have no experience in, or much desire to get into stocks, even if they weren't so crazy these days. I'll get another $15,000 in September, but even $30,000 isn't much to work with in real estate these days. Meanwhile, I have a 1994 Honda Accord with 105,000 miles. It runs fine, but I'm thinking since I have the money and no real interest-earning investment ideas, perhaps I should buy a newer, lower-mileage, but still used Honda Accord.

Then a friend said for that price I could just buy a brand new Toyota or something. But I've always understood that the moment you drive a new car off the lot you loose 1/4 of its value. Is this still true? I'm not a new car person, just looking for another 15 year run of trouble-free driving and the best "investment" of my money. What should I do?
Thanks, Victoria, Washington, DC

Answer: When it comes to cars I'll defer to the Car Talk guys. But since you asked I'll throw in my two cents. Right now, there are good deals for both new and used cars.

It's disconcerting to think that when you buy a new car and drive it off the lot for the first time its value falls by some 20%. And that is after you've done comparison shopping, online research and final negotiations to get the best price possible. Still, it's an irrelevant fact if you buy new and own the car for a long time, driving it into the ground. How fast and how much it depreciates doesn't really matter.

Used car prices are cheap, and the used car business has become far more respectable over the past decade. Still, the one thing to remember when buying used is that you're inheriting someone else's problem with the car. I know nothing about cars. Engines are a mystery and repair shops are an alien. That's why I've always been a charter member of the buy new and then own for a long time school of car ownership. Some of my more car savvy friends would never purchase a new car, however. But they know what they are doing. I don't.

Here's my real question: Why spend the money? Why not just save it for now? Sure, you'll make a fractional rate of interest on the savings. But so what? Your car is fine. There's no need or rush to replace it. I would just put the money into your savings account, let it lie there safely and, when a good investment opportunity or a smart purchase comes along in the next couple of years, you'll have the money to tap.

By the way, what is the book on?

05/22/09 by Chris Farrell

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Buy a home soon?

Question: My girlfriend and I want to buy a house soon. My credit is great, I have no debts, but I have been unemployed living on my savings since 2006, continuing my good credit history with the use of a credit card. Together, we have about $20,000 in savings and $7,000 in a Roth IRA. She also has great credit that she built with Macy's and personal loans. She has secured full time employment in the LA County, making about $37000 a year. She just earned her MPH with potential for a better position that pays $52800 a year. She has $13,000 in student loans. Should she pay her loans off before we apply for a home loan? Should she get a credit card to continue her good credit history? Should we wait for her to get a higher position? Gerardo, Los Angeles, CA

Answer: A house is expensive to buy and to own. My concern is that your finances are too fragile for homeownership, and you'll end up buying financial trouble. The lesson of the recent real estate boom and bust is that stretching to own is truly risky.

Now, it's wonderful that your partner has landed a good job with the prospect of a promotion. I would wait until the promotion came through. I wouldn't buy anticipating that she'll get the higher paying job, especially with all the state and local government financial problems in California. She doesn't need a credit card, either.

Instead, I'd focus on paying off loans and building up savings. I'd let your partner get established in her job and, hopefully, you'll find one soon. This will put you in a much stronger financial situation whether you end up buying or not.

To be sure, you might miss being able to take advantage of this year's first-time homebuyer tax credit of $8,000. That's a lot of money. But I don't believe home prices will skyrocket anytime soon, either. The latest figures show home prices continuing to decline both nationally and in Los Angeles. And I don't want to see your finances stretched too far.

05/26/09 by Chris Farrell

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A college savings plan?

Question: We are in our 30's with three kids ages 7 and under. We live simply and have been able to get by on our income around $24,000 per year, plus our tax return which is usually several thousand. Though this seems like pennies compared to what others mention saving and investing, we have over the last 7 or so years managed to save over $10,000. We now find ourselves in a situation where we don't need to buy a house (which is what we originally thought we were saving for) but feel like that $10,000 should be put to use for us somehow. We like the idea of starting 529 plans for the kids' college funds. But we have nothing in the form of potential retirement. Should we invest it in some other way? Or, should we just keep it in our savings account, which is what we have done in the past. Often we have had to dip into several thousand a year between car trouble, and slim employment income. Kari, Eau Claire, WI

Answer: You're terrific savers. Congratulations. I understand your desire to set money aside for your children's college education. But I wouldn't if I were you. Several years ago I interviewed the head of admissions at the University of California, Berkeley. He made several points that have stuck with me. When you have a slim employment income and have to worry about keeping the car running you shouldn't set money aside for college. Instead, focus on making sure that your kids get a good education, one that prepares them for college. But with your income and three kids there will be plenty of money available from the federal government, state government and colleges to help defray the cost of college.

I'd rather you continued to save for a rainy day and for your retirement. You can accomplish both with a Roth IRA. I've written a lot about the Roth on this blog. In essence, a Roth is a retirement savings plan funded with after-tax dollars. When you withdraw the money during retirement it's free of taxes. That's right, Uncle Sam doesn't tax Roth savings. Here's the thing: You can take out your contributions at any time without paying a penalty or taxes. You just can't withdraw any gains (you would pay a penalty and income tax on the gain if you take it out early).

So, a Roth is both a pot of emergency savings and a retirement savings plan. This is a nice article from Kiplinger's that goes into more detail about a Roth.

05/27/09 by Chris Farrell

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Health Savings Accounts

Question: I'm in the market for an HSA. Any suggestions on how to shop around and find the best provider? There are so many, it gets confusing. Jeremy, Santa Cruz, CA

Answer: Health Savings Accounts (HSA) are confusing. The insurance component is actually a high deductible catastrophic policy with an attached tax-sheltered account. The HSA contributions are made with pretax dollars. Withdrawals are tax-free so long as the money goes toward qualified medical expenses, which include everything from acupuncture to organ transplants to quit-smoking programs. The money is usually parked in a banklike account and beneficiaries of the plan receive a checkbook or debit card for paying bills. It's like a Flexible Spending Account--except that with an FSA, you forfeit what's not spent in a calendar year while unused HSA money rolls over.

As you can imagine the terms of the policy can vary a lot. Two places I know for comparison shopping are eHealthInsurance.com and HSA Insider.

Any other suggestions?

05/28/09 by Chris Farrell

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Buying a home

Question: My wife and I are considering buying a house but don't really know where to begin. We've spent the past few years rebuilding our credit after having both filed bankruptcy. We have a good income to debt ratio. We will be first time home buyers.

Can you recommend some resources that will help us get started? There is so much information out there, we are willing to pay someone to help sort through it all. We know we should get prequalified for a loan, but don't know the best resource for that. How do we determine what we can really afford (accounting for property taxes, HOA dues, etc.)? Thanks, Paul, Aliso Viejo, CA

Answer: A good starting point is Home Buying for Dummies. It's by Eric Tyson and Ray Brown. I've interviewed Eric over the years and he's always thoughtful. He's out to help you, not line the pocket of real estate agents or mortgage brokers. It's a bit dated since it was published in 2006, but the basic informaiton is solid. Another useful book is Elizabeth Razzi's The Fearless Home Buyer: Razzi's Rules for Staying in Control of the Deal.

There are a number of home affordability calculators on the web, such as Dinkytown.net and hsh.com. A home is the biggest financial purchase most of us ever make, so be sure it's a wiser course for you financially than continuing to rent.

If you do decide to buy keep the finances conservative. The experience of the past couple of years tells all of us the risks of stretching our finances to own. It's not just the mortgage, taxes and insurance costs that matter. A home is expensive to run and maintain. When you move in, you'll see that the furniture you've accumulated over the years looks wrong. You'll probably need more furniture if you're moving from an apartment into a house. You may love tending to your garden, but that pleasure will costs money. Financial conservatism means leaving behind the notion of buying as much house as you can afford.

Once you've gone through some basic books you can start talking to professionals, such as a banker. Take your time. There is no rush.

Good luck.

05/29/09 by Chris Farrell

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