Mutual Funds vs Corporate Bonds vs Bank CDs

DEAR DAVE: My wife and I are in our early 70's, and we’re retired. We have about $136,000 in corporate bonds and $200,000 in mutual funds. Considering our age, should we move the investments into a CD? — Kurt


DEAR KURT: There’s always a chance you’ll lose money if you leave it in mutual funds and bonds. That’s the nature of the market. But there’s another kind of risk based on what you’re proposing, and that’ risk of value due to inflation.

Assuming you two are in good health, you could expect to live another 10 to 20 years. Most current CD rates are less than 1 percent. Even if they rise to 2 or 3 percent in the future, do you really want to see that kind of return when inflation is likely to rise 4 percent annually? That’s in itself a type of risk, so I would urge you to keep that in mind.

No, I wouldn’t advise moving all of your money to CD's. If I were in your shoes, I’d live off the income generated by my mutual fund investments. As for the corporate bonds, I'’m not a big fan of those. They entail almost as much risk as mutual funds without the good returns (on average) over a long period of time.

If you’re concerned about stability, I’m okay with you taking a little money from your bonds and putting it into a CD right now. But I wouldn’t touch the mutual funds.

Why insurance on a cell phone does not make sense

The purpose of insurance is to transfer a risk that you can’t afford to take.

When it comes to things like cars or houses, I absolutely recommend that people have insurance. Most folks couldn’t just write a check for another car if the one they drive were totaled.

It’s the same with a house. If your home is destroyed, the insurance takes care of things instead of putting you in the position of having to pull tens or hundreds of thousands of dollars out of your own pocket for a new home, which is also something most people can’t do.

I don’t insure inexpensive things like smartphones. And if a smartphone is an expensive item to you, then you probably shouldn’t have that phone.

I mean, there’s nothing wrong with having a cell phone if you can afford it. But if you tear up a phone or it breaks down and you can’t afford to replace it out of your own pocket, then you’ve got too much phone!

Selling your Home vs Boat

Dear Dave: My husband was laid off a month ago from a job making $80,000 a year. We have no debt except our house payment. We owe about $82,000 on it, but it’s valued at approximately $300,000. We’ve also got an emergency fund of $30,000, and I work part-time making about $2,000 a month while he collects unemployment and looks for another job. Do you think we should sell our home? We’ve also got a boat that’s worth about $18,000 we could sell. — Sheila

Dear Sheila: The first thing I want you to do is take a step back and breathe. Yes, you guys just hit a big bump in the road. But the good news is you’re in pretty good shape financially to handle things for a while.

At this point, I’d strongly recommend selling the boat over selling the house. Boats are a lot easier to replace than nice homes, and the process isn’t nearly as traumatic on the family. You can also dip into your emergency fund a little bit, but for the next little while you need to make sure you’re living on a really tight, bare bones budget. I’d love to see you not have to touch the emergency fund, because he’s gone out and found at least a part-time position while he’s searching for something in his field. I know that’s tough to do once you’ve gotten used to making $80,000, but there are jobs out there that will help you guys get through this.

As long as he’s being diligent in seeking a new job, and you’re budgeting and watching what you spend together, I think for now you should keep the house. God bless you both!

Teach children that work earns them money

Dear Dave: 
Our son just turned 8 years old. Is it time to start giving him an allowance? 
-Dan


Dear Dan: There’s never a time for an allowance, no matter the child’s age. In my mind, that kind of thinking is the best way to plant the seeds of entitlement. You don’t want your son growing up with the idea that he’s owed money simply because he’s alive.

Instead, work out a plan to pay him commissions. Assign him weekly chores that are age-appropriate. Then, when the work gets done, he gets paid. And guess what? If the work doesn’t get done, he doesn’t get paid! Not only do we want to teach a healthy work ethic, but we also want him to learn that work creates money.

Of course, there are some things a child should be expected to do without financial reward. Everyone needs to pitch in and do certain things to help out when they’re part of a family. But once you’ve taught him about work, make sure to also teach him about the three uses for money — saving, spending and giving.

Lessons on the basic handling of money are some of the best teachable moments you can have with your child. Not only does it make them more knowledgeable about finances, it helps them learn about life!

Types of life insurance to avoid

In the life insurance world, you should buy only term life insurance. 

Avoid any kind of insurance that has a savings program built into it — things like whole life, universal life and variable life. 

Another thing to avoid is return of premium. This is where an insurance company charges you extra, but gives all your premium money back if you don’t use the policy. It sounds good, but if you’d just invest the extra you pay for that stuff, you’d get all your premiums back, and more, whether you used the insurance or not.

I also don’t recommend gimmick insurances, like double indemnity for accidental death. Think about it. You’re not double dead if you die by accident; you’re just dead.