My Two Cents

Star Tribune Q & A

Chris Farrell Nov 5, 2007

Another Star Tribune Q & A column.

Q: I will be coming into about 50,000 from the sale of a home. I do not have a will but want to be certain that if something happens it will go to my dependents. I would like to try a ‘do it yourself will’ sort of will using some software. How do you recommend I rate the various software programs that will make a will? Kevin

A: First of all, congratulations on pulling together a will. Everyone needs one, and I consider a will the foundation of all financial planning.

Now, there are a number of good “do-it-yourself” products on the market. I have used in a pinch the one of the products created by Nolo Press, a long-time publisher of consumer-oriented self-help legal guides (www.nolo.com). Nolo offers several will writing products ranging in price from $39.99 to $73.73. When I used Nolo I found the directions comprehensive and easy to follow. I haven’t personally used them (although I’ve played around with them), but other well-known products include legalzoom.com (at www.legalzoom.com, with prices ranging from $69 to $119) and buildawill.com (www.buildawill.com, with a basic price of $19.95). All of these products work best for simple estates.

That said, I remain a fan of hiring a lawyer for doing a will, especially when children are involved and some basic assets are owned, like a home. The reason, as I wrote above, is that a will is a critical foundation for a personal financial plan. You want to make sure you get it right, that you address all contingencies, and that you get any questions answered. So, while I have nothing against the do-it yourself wills, in many cases I still believe prudence dictates hiring a competent attorney.

Q: Is there any downside to increasing one’s line of credit besides the inherent psychological boost of the upper spending limit? Will increasing my credit limit hurt, help, or have no effect on my credit rating? I recently called in to my card service provider… and was given the option of increasing my credit line. The offered increase was much larger than I would have expected, so I guess I’m just wondering: what’s the catch? Zachery

A: In one sense you are fine. The credit limit does come into play in calculating your credit score with credit cards and other revolving debts. The credit score formula looks at the gap between your credit limit and the amount of credit you’re actually using. “The bigger the gap between your balance and your limit, the better,” writes Liz Pulliam Weston in her book, Your Credit Score.

Here’s what’s really going on. I attend the American Economics Association annual meeting every other year. Several years ago it was in New Orleans, and I sat in a session on some research by economists into credit limits. What they found is that consumers that carry a balance tend to have a psychological tendency to spend a set percent of their credit limit. Let’s say you had a credit limit of $10,000 and you routinely carried a balance of $1,000. You were comfortable spending 10% of your credit limit. The credit card company knows this. If it increases your credit limit to $20,000, the odds are you’ll still carry a 10% balance of your credit limit–but now that adds up to $2,000, an increase that makes your credit card company happy–very happy.

Bottom line: Only raise your credit limit with good reason. Otherwise, leave it alone.

Q: Hi Chris. I’m 50, my wife is 52 and has Multiple Sclerosis, daughter 16 and daughter 14 has type 1 diabetes. We have a home with a value of $400,000. 1st mortgage at 5% with a balance of 53,000. Home Equity loan $18,000. In January 2007 we sold a townhome with a net profit of $50,000. My income is $50,000. and my wife’s is $10,000. We have a 401k with a value of $158,000. Our home is in Hennepin County and it includes seven acres, so for us that could be potential retirement income.
We have plenty to think about for the future. Two chronic illnesses, college for two, and retirement. First priority is what to do with the $50,000 townhome profit. We have some folks saying to buy an annuity. I have invested in real estate before and would consider it again. Thanks, Greg.

A: You do face a lot of financial issues. In thinking over your email question, I’ve realized I can’t really advise you on whether an annuity is a good move or investing in real estate. Both offer different trade-offs between financial risk and financial security. For instance, I do think over the next several years people with cash and real estate savvy are going to have opportunities to do well by taking advantage of financially stressed households and lower home vales. Nevertheless, there are risks associated with that kind of investment. On the annuity side, you’d get some financial security but you’d also give up financial flexibility with the $50,000 profit.

Here’s what I would recommend. Spend the next couple of months (and it might take that long) researching and finding a fee-only certified financial planner (CFP) that has worked with people with multiple illnesses. The reason is that you need a comprehensive blueprint to guide future savings and investing decisions, guidance that includes both thinking through and understanding the financial and emotional trade-offs you face.

There are two online places to start your search. The first is the National Association of Personal Financial Advisors at www.napfa.com. The other is the website of the financial planning association at www.fpanet.org. I like the CFP designation since it implies a level of comprehensive education into the whole financial planning process–and that’s what you need rather than a broker or life insurance agent. You can also ask people you respect who they consult with when it comes to their finances.

Q: A good friend of mine from college recently passed away after being diagnosed with pancreatic cancer. She leaves behind a husband and 5 children under the age of 13. My question is how to best help fund the children’s college education without causing tax issues and is the 529 fund the best way? Ed

A: I think you are on the right track. I would encourage the husband to set up a 529 plans for the children if they don’t have them yet. And it costs very little money to set up a plan. The big advantage of a 529 plan is that anyone can contribute. The money will grow sheltered from taxes and its tax-free money if it’s withdrawn for qualified educational expenses. It’s a good, thoughtful idea.

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