Solutions to Real-Life Money Challenges

published 5 February 2010

You’d like to get back into stocks, but how? Or you want to earn more on your savings. Or maybe you just want to get away somewhere warm and cheap. We hear you, and we can help.

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First, invest through a merger fund, a low-risk way of owning stocks. Our favorites, Merger Fund (MERFX) and Arbitrage Fund (ARBFX), buy stocks involved in takeovers that have been announced but haven't yet closed. They make money by capturing the gap between the price they pay for shares after a deal is disclosed and the final price upon consummation (see How to Make Money on Mergers). Annual expenses are 1.47% for Merger and 1.69% for Arbitrage.

Ernest Roebuck, a graduate student at Columbia University, in New York City, is fed up with being nickel-and-dimed, and he's ready to ditch his Chase checking account. The clincher came when Roebuck used another bank's ATM to check his balance. He didn't get a receipt, so he checked the balance again -- and was socked with two $2 fees from Chase. When he called to complain, he was told that it was bank policy to charge for the service. "I said, 'Well, it's utterly unacceptable.'" Roebuck is considering using more of his credit union's services and opening an account with ING Direct, an online bank.

Think twice. With the new credit-card law, people under the age of 21 will have to provide proof of income to get a card or have a parent or other adult cosign the application. Cosigning for a card -- or making your child an authorized user on one of yours -- may be convenient, but as long as you're paying the bill it won't do much to teach your kids how to manage credit wisely. And if they screw up, your good record is on the line.

You'll need to submit Schedule C to report your business income and Schedule SE to figure your self-employment tax if your net earnings for the year are more than $400. But you can deduct the cost of equipment you buy for your office, such as a computer and phone system, plus what you pay for advertising, accounting services, travel and fees for professional conferences, as well as 55 cents a mile for business travel in 2009 (or 50 cents per mile for 2010). You can also write off the cost of renting an office or, if you use space in your home exclusively for your business, take a home-office deduction and write off part of your mortgage interest or rent, utilities, and home insurance.

The demise of the estate tax comes with a catch. Previously, assets were inherited on a stepped-up basis. For example, if you bought a stock for $10 a share and it was worth $100 a share when you died, the $100 became the basis for your heirs, effectively wiping out taxes on any appreciation that occurred during your lifetime. Now, heirs of large estates inherit the $10 basis and owe capital-gains taxes on the $90-per-share appreciation when they sell. But even this rule is unlikely to be enforced because Congress is expected to reinstate the estate tax -- and the stepped-up basis rule -- retroactive to January 1, 2010.

Walking away should be a last resort. First try a mortgage modification (call your lender's loss-mitigation department or see www.makinghomeaffordable.gov) or a short sale (selling your home with the lender's okay for less than you owe on your mortgage). You may have to stop making your mortgage payments to pressure your lender to sign off on a short sale. If you can't sell the home, you may be forced into foreclosure.

But whether you pursue a short sale or end up in foreclosure, your lender will report your mortgage account as "settled," meaning you agreed to settle the debt for less than you owed. Your credit history will be blemished for seven years, and your credit score will take a major hit. If you want to buy a new home with a mortgage backed by Fannie Mae or Freddie Mac or insured by the Federal Housing Administration -- probably your only options -- you'll have to wait three to five years after a foreclosure and two to four years after a short sale related to a delinquent mortgage.

It's a good time to buy, especially if you qualify for the tax credit of up to $8,000 available to home buyers who sign a contract by April 30. But you'll need more savings than in the boom years to get a mortgage. If you're buying a single-family home that you'll live in, you'll generally have to put down at least 5% of the purchase price for a conforming mortgage (up to $417,000) backed by Freddie Mac or Fannie Mae. For jumbo loans, expect to pony up 10%. To avoid private mortgage insurance, you must put down at least 20%. Or consider a Federal Housing Administration (FHA) loan, which requires only 3.5% down.

Chances are good. For starters, fill out the Free Application for Federal Student Aid (FAFSA), which puts you in line for federal and state grants as well as federal student loans. The federal financial-aid formula uses your income from the previous tax year in calculating your eligibility for need-based aid. In light of your job loss, ask the school's financial-aid office to consider your estimated income for the upcoming academic year in determining your award (see studentaid.ed.gov).

For starters, raise your collision deductibles to $1,000, which lowers your rates and prevents you from filing small claims that could jeopardize a claims-free discount. Christine and Bob Throckmorton of Seattle were able to lower their annual auto premiums from $5,749 to $3,957 about a year after their son Joseph turned 16 and joined his two brothers as family drivers. The Throckmortons dropped collision-and-comprehensive coverage entirely because their old cars were worth little more than the deductible (find car values at Kelley Blue Book). The boys all earn B averages in school, which entitles each of them to a good-student discount. And when older sons Matthew and Timothy moved more than 100 miles away to go to college, they got another discount.

Premiums vary a lot, so work with an independent agent (see the Independent Insurance Agents & Brokers of America) to compare quotes, or compare rates at www.insurancerates.com. You usually get a discount for buying your homeowners and auto insurance from the same company, and a longtime insurer will often keep a lid on rate increases if your kids have a claim, says Trisha Mujadin, an independent agent in Seattle.

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