I came back from vacation recently to a big stack of mail, most of it commenting or inquiring about ever-popular topics. I suspect I’ve addressed all of them at some point, but a refresher never hurts.
Q–My wife and I have credit card debt of $3,700 with an interest rate of 18.65 percent. The minimum payment is 2 percent and we have been paying $100 a month. We have four savings accounts earning 4 percent and we deposit a total of $55 into them every week. We are also buying U.S. savings bonds with $10 a week. My question is, should we pay off the credit card as fast as possible by adding those $55 we are putting into savings?
A–Yes, yes, yes and yes, for each of your savings accounts. And while you’re at it, drop the savings bonds and use the $10 to also pay off your credit card debt. If you keep making 4 percent while you are getting charged 18.65 percent you are losing 14.65 percent on your “savings.”
Now I have a question for you: Why do you keep four separate savings accounts? If you put everything into one with a higher balance you might even earn a higher interest rate.
Q–You said that unlike money in most other tax-sheltered investments, life insurance cash values can be withdrawn without tax penalties at any age.
Your advice is pure bull-oney. I cashed in two life insurance policies I owned for a number of years. Each insurance company sent me a form that showed a taxable income amount. One of them was darned steep.
A–More than a dozen of you wrote to say the same thing, although not as colorfully. But all of you are confusing tax penalties with the simple tax you must pay when you make a profit.
With cash-value life insurance, you owe income tax if the amount you withdraw is more than the total premiums you paid. With other tax-deferred plans, such as individual retirement accounts and 401(k)’s, you also owe the regular tax plus usually a 10 percent penalty if you take the money out before age 59 1/2.
Q–Your investment advice is very interesting, sir, but it seems to make sense only for the people in a position to take advantage of it.
A–A week doesn’t go by that I don’t get a letter clinging to the myth that it takes a lot of money to invest. It actually takes far less than what a lot of Americans waste in credit card interest each month.
Either mutual funds or stock dividend reinvestment plans require only modest amounts. For small investors who are just getting started, mutual funds offer more diversification than individual stocks.
The good news: Many mutual fund companies waive their usual minimums if you commit to investing just a few dollars each month by having the money electronically transferred to the fund from your bank account.
“With only $50 a month, you can own some of the nation’s best mutual funds,” said Mari Adam, president of the South Florida Society of Certified Financial Planners.
Signing up is easy, certainly as easy as opening a bank account. You fill out the application provided by the fund company, select a fund and decide how much you want to invest every month.
As the size of your account grows, Adam suggests, you can stick with your original fund, switch to a second fund or divide your money among several funds (always check with each fund family for particular requirements). And, of course, you are always free to sell or exchange your shares.
Here are some mutual fund companies suggested by Adam that allow you to open an account with as little as $50 a month. They are all no-load funds, meaning they don’t charge any upfront fees to invest or “surrender charges” when you take your money out.
The companies and their toll-free numbers are:
Berger, 800-333-1001; Founders, 800-525-2440; T. Rowe Price, 800-638-5660; Strong, 800-368-1030; and Twentieth Century, 800-345-2021.
All these fund companies, I should add, also provide excellent investment literature for novice investors at no charge.
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If you’d like to learn more about Humberto Cruz’s savings tips, the new newsletter, “Winning at the Savings Game with Humberto Cruz,” is now available. Mail $19.95 to Tribune Media Services, P.O. Box 4410, Chicago, Ill. 60680-4410 or call 800-788-1225.
