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By LIZ PULLIAM WESTON
Reader Questions: Savings Account vs. 1-Year CD?
Dear Liz: I am 27 and make a great salary and commission for my age. I recently set a personal goal of having $30,000 saved by the time I turn 30 as a down payment to buy my first home. But I am at a loss about the best way to make the most of this money.I am contributing to a savings account that started out with a 4% interest rate but has declined to 1.8%. I can't seem to find an account with a better rate. Am I letting money go to waste? Is there a better option to help me reach my goal?
Answer: When it comes to cash you'll need in a few years, you need to forget about "making the most" of your money in favor of making sure you still have it when you need it.
That means keeping the money relatively safe in a savings account, money market mutual fund or certificates of deposit.
You may be tempted by investments promising higher rates of return, but more return means taking more risk of losing your money and possibly delaying the time when you can buy your house.
You can get a slightly better rate -- 2% or so -- by investing your cash in one-year CDs offered by some banks (check Bankrate.com for a list). But beware of locking your money up for much longer. As the economy recovers, interest rates are likely to rise, and you'll want to benefit as much as possible from that trend.
Dear Liz: My parents have named me as the executor of their estate. They are elderly, and I will be called upon to perform this duty in the next few years. My sister and her husband are not good money managers. My parents' wills have been set up to put my sister's share into a trust administered by me. Is there any way for me to protect this inheritance from a future bankruptcy?
Answer: "Spendthrift trusts" are designed to keep profligate heirs from wasting an inheritance and keep creditors from seizing the trust money. These are fairly common trusts, but the wills have to be properly worded; if you're not sure, have an experienced estate-planning attorney review them.
While you're asking your parents for copies of their wills, see if you can talk them into naming someone else to be the trustee. Putting one sibling in charge of another's money is a recipe for disaster and continuing disharmony. Even if your sister understands she's hopeless with money, she is almost certain to resent you for standing between her and her inheritance. In many cases, the family would be far better off paying a fee to a bank or a professional fiduciary to be the "bad guy" controlling the cash.
Dear Liz: I am 57 and was just terminated from my job of 37 years. I have a pension and a 401(k). I went to see a financial advisor the other day and he suggested I buy an annuity. I know it is not FDIC-insured, but is it a really safe bet?
Answer: Annuities are complicated, often expensive investments that typically offer handsome commissions to the people that sell them. Before you buy one, you should thoroughly research what you're getting into. A good place to start is AnnuityTruth.org. This site, run by the nonprofit education and counseling center Healthcare and Elder Law Programs Corp., offers a tutorial to understand the basics of annuities, warnings about inappropriate sales techniques and shopping tips for those who want to buy them.
Even after doing your homework, you still may have questions about whether an annuity is right for you. Rather than accept advice from a salesperson, which is what your "financial advisor" probably is, consider consulting a fee-only financial planner. These planners are compensated only by the fees you pay and do not accept commissions for selling financial products.
You can find fee-only planners who cater to middle-class investors at GarrettPlanningNetwork.com. Another resource is the National Assn. of Personal Financial Advisors at NAPFA.org or (888) FEE-ONLY.
Liz Pulliam Weston is the author of the book "Your Credit Score: Your Money and What's at Stake." Questions for possible inclusion in her column may be sent to 3940 Laurel Canyon Blvd., No. 238, Studio City, CA 91604, or via the "Contact Liz" form at www.asklizweston.com. Distributed by No More Red Inc.
