Your Money Dilemmas, Solved
Should I Invest a Lump Sum Once a Year or in Monthly Installments?
If you always knew the best time to put your money in the market, you would be well on your way to joining Bill Gates and Warren Buffett on a list of the world’s richest people. Of course, no one—nope, not even Mr. Buffett—can predict the market’s future with total accuracy, says Christine Benz, a Chicago-based director of personal finance for the investment research firm Morningstar. That’s why most financial pros are proponents of stashing money in the stock market on a regular basis—a practice that is called dollar-cost averaging.
Here’s how it works: You invest a set sum—say, $100—each month for 12 months rather than plunking down $1,200 all at once. In the process, you spread your risk out across the entire year. As long as you invest the same amount every time, you should be fine. You’ll usually end up buying more shares when the market slumps and fewer shares when prices are high. So you will be protected from huge ups and downs in the market.
What’s more, investing on a schedule makes it easier to be disciplined about setting money aside, says Dawn Brown, a senior financial adviser with Altfest Personal Wealth Management, in New York City. Keep making regular deposits and you’ll find your financial goals are closer than you think.
Should I Use a Car-Buying Service?
When it comes to buying a car, haggling is (ahem) nonnegotiable. “There’s about a $3,000 difference on average between the invoice price of the car and what the dealer is likely to agree to sell it for,” says Philip Reed, a senior consumer-advice editor for the auto-buying site Edmunds.com. If you hate playing hardball, you might consider outsourcing the task. That’s easy to do if you’re a member of AAA or a warehouse club, like Costco, or if you subscribe to ConsumerReports.org—all of which offer an auto-buying service for no extra charge. (Most AAA clubs offer this program; check with yours for specifics.) Tell the service the make, the model, and the extras (like a sunroof) you desire. The service will match your specs with vehicles from at least one local dealership (and often more) with which it has partnered. Within a day, you’ll receive details on any deals that meet your criteria, all at prearranged discounts.
Pluses: These programs claim to knock anywhere from $1,000 to $4,000 off the sticker price. And they do indeed save you from haggling.
Minuses: Most services work with a limited number of dealers, so it’s possible you could score a better deal elsewhere. (Go to Edmunds.com to verify the true market value of the car.) Also, if you have custom requests, you’re better off going solo.
The bottom line? Worth it if you don’t want to go back and forth with a dealer about costs. And if nothing else, it can help you get a better sense of how your car is priced, which can ultimately help you drive a hard bargain yourself.
Where Can I Get a Better Deal—at an Outlet or an Off-Price Retailer?
It depends on what you’re looking for. At both types of shops, you can get significant discounts on clothing and accessories—anywhere from 10 to 80 percent off retail prices. However, the quality and the selection of the merchandise differ greatly.
When you make a trip to the outlets, you’ll find your favorite brands in a wide array of styles, colors, and sizes. But there’s a catch: “In their factory stores, some companies focus on selling cost-effective versions of what is sold at the full-priced retailers, not on leftover inventory,” says Linda Humphers, the editor in chief of Value Retail News, a trade publication. That means you might see an embellished top using fewer sequins than the original or a jacket made out of cheaper fabric.
To determine whether an item was made exclusively for the factory store, examine its price tag. Outlet exclusives will read, “Compare at.” Also be wary as you shop. If something doesn’t seem like a bargain, it probably isn’t. “Not every item is marked down,” says Marshal Cohen, the chief industry analyst for NPD, a market research firm. Some outlets mix in regular store inventory at the regular retail prices. If there isn’t a tag or a sign indicating there’s a price reduction, chances are those items are not discounted in any way.
In contrast, off-price merchants such as Ross and Loehmann’s sell inventory that is identical to what you would find in department stores. According to Laura McDowell, a spokesperson for T.J. Maxx and Marshalls, more than 85 percent of T.J. Maxx and Marshalls stock is current-season merchandise, not last year’s cast-offs. That said, “shopping these retailers is a crapshoot,” says Cohen. “You don’t know what designers they’ll carry, and you won’t always find your size or preferred color.” But for some, the thrill of the hunt is part of the fun.
Should I Buy Life Insurance or Skip It?
If you financially support only yourself, there’s usually no need to purchase a policy. “However, if someone else relies on your income—a spouse, a child, or even an elderly parent—you should definitely have coverage,” says James Hunt, a life-insurance actuary affiliated with the Consumer Federation of America, a nonprofit association of advocacy groups. If you die, the insurance money goes directly to your beneficiary tax-free, thereby helping to protect your loved ones from financial misfortune.
Consider buying a policy with a payout that’s large enough to cover your mortgage principal. If you have young children, make sure it also covers the cost of college tuition. Opt for term life insurance, which charges a fixed annual premium over a predetermined time frame, rather than a whole life policy, which includes an investment component (a portion of the policy is held in an investment portfolio) and whose premium can be about 10 times the price of comparable coverage. (Go to term4sale.com to compare policies.) Typically, you should sign up for the longest term possible (30 years is usually the maximum), because you’ll get the cheapest rate. And look for a guaranteed renewable level premium, which means the cost of your premium won’t increase from year to year within the term. If you’re under the age of 35, don’t wait to buy a policy, says Bonnie Hughes, a certified financial planner in Reston, Virginia. You lock in a lower price the younger you are.
Should I Keep My Money in a Big National Bank or Go With a Local Bank or Credit Union?
If convenience is your number one priority, big banks offer it: Your mortgage, credit cards, and checking, savings, and retirement accounts can all live under one roof, thus simplifying your paperwork, says Greg McBride, a senior analyst at Bankrate.com, a financial website. Furthermore, if you’re the type of person who does all (or most) of her banking online or if you frequently travel and want compatible ATMs wherever you go, stick with a large institution.
But if you’re more keen on earning the most interest, signing a car loan with the best terms, or paying the lowest fees, look to a local bank or a credit union (a cooperatively run financial nonprofit). “Smaller institutions must compete for customers, so their rates are usually more favorable—and they focus more on customer service,” says McBride. Also, credit unions don’t pay out profits to investors, says McBride, so they can keep fees as low as possible. (Your money is safe in either type of institution. The Federal Deposit Insurance Corporation, or FDIC, insures up to $250,000 per bank depositor. The Credit Union National Organization does the same per credit-union account.) To find a local bank, go to icba.org, the website of the Independent Community Bankers of America, and search by ZIP code. If you want to join a credit union, it’s easier than you think. Often you only need to be a member of a specific church or community. Go to find a creditunion.com.
Should I Check My Bags or Ship Them?
You probably assume that checking your luggage is the cheaper option, even though you’re stuck paying the airline about $25 for the first bag (each way) and $35 for the second, not to mention additional fees for heavy or large items. And sometimes it is. But not always, says Susan Foster, author of Smart Packing for Today’s Traveler (Smart Travel Press, $20, amazon.com). So before you jet off, it’s worth doing the math. If your baggage is unusually heavy or bulky, shipping may be a better deal—provided that you don’t send your Samsonite overnight or by two-day mail, says Jami Counter, a senior director of Seatguru.com, a travel-resource site. Case in point: UPS can ship a 75-pound box from New York City to Orlando, Florida, for $57. Checking an item that heavy would probably cost between $100 and $175—one way. Get quotes from the two options that you have for shipping: a standard delivery or courier service, such as FedEx or DHL, or a specialty luggage handler—particularly useful for bulky items, like skis—such as Sports Express (sportsexpress.com).
You should also consider shipping your baggage if you want to hit the ground running at your destination (which means skipping the luggage carousel), or if you want to be assured that those bags will be waiting for you when you arrive, says Peter Greenberg, a travel editor for CBS News. “Shipping is an especially good idea if you have a connecting flight, which increases the risk that your bags will be misplaced,” says Greenberg. And delivery services offer far more bells and whistles than air carriers, says Counter, such as superior insurance, better tracking, and, best of all, picking up your luggage at your home. No schlepping!
Should I Use Airline Miles for Airline Tickets? Or for Some Other Item?
If you're close to scoring a free ticket to Rome, we have one word for you: Arrivederci. “The smartest way to spend your miles is on high-cost travel, like an international flight,” says George Hobica, founder of Airfarewatchdog.com, a consumer-travel website. In fact, you should always avoid trading in your miles for goodies like an espresso maker and a DVD player. Why? In comparison with a free plane ticket, the retail items eat up a disproportionate number of miles, says Galia Gichon, founder of Downtoearthfinance.com, an independent financial-education website. Case in point: A recent $516 Delta flight from New York City to London would require 60,000 Delta SkyMiles, whereas a 120-gigabyte Sony PlayStation that retails for less ($390) would cost 79,400 miles. Of course, if you have miles that are about to expire or you plan to travel on popular travel dates, such as the winter holidays, the equation changes. In those cases, go ahead and order that juicer or video-game console, guilt-free.
Should I Buy Travel Insurance or Skip It?
If your general opinion of vacation insurance is that it’s a rip-off, consider this: Getaways don’t always go as planned, as anyone waylaid by the Icelandic volcanic-ash cloud last April could tell you. And travel coverage can soften the (financial) blow. A comprehensive package, which typically costs 4 to 8 percent of the cost of the trip, reimburses you for unexpected hotel stays, medical emergencies, charges for interrupted or canceled trips, and lost or damaged luggage. Although it may not make economic sense to get a policy for routine or short-distance domestic travel, consider buying one any time you’re required to make a big deposit ($1,000 or more) or prepay for travel services that come with a hefty cancellation penalty.
To obtain the most thorough coverage, buy the insurance within 7 to 21 days of your first trip payment and go through an independent insurance provider. If you ultimately decide to skip the insurance or you’re taking a last-minute trip and it’s too late to buy a policy, remember that you may have a minimum level of protection through your home owner’s or renter’s insurance or the credit card you used. Contact your provider for details.