Gather Little by Little

Over the past few weeks I’ve received a number of Ask the M-Network questions. Normally I’d post up one of the questions and associated responses, but given the number of questions I’ve received, this edition will contain multiple questions along with their responses from the M-Network:

What happens to my pension if GM goes bankrupt?
What to do with my tax return?
Continue with Company Stock?
Money for college student?

What happens to my pension if GM goes bankrupt?

An anonymous reader asked:

I am GM retiree. What happens to my pension if GM goes bankrupt?

Plonkee responded with:

In the UK, I think it’s insured, and there is some separation between the finances of a company and of the pension scheme. There should be a trustee or something that they would be able to ask these sorts of questions and get actual real answers.

Patrick responded:

There is a national pension insurance program. I would recommend he talk to an authority on the pensions and start preparing by eliminating any debt, looking for part time work if it won’t affect his pension (and he is physically able), etc.

What to do with my tax return?

Craig wrote in and asked:

I was just told that I will be receiving $1400 from my tax return. I am 23, have no debt, and no financial responsibilities for other than myself. I have been living a more paycheck to paycheck lifestyle with my salary and costs but have no pressure right now with paying bills, and have a savings set up already from money save last year when living at home while working. The only money I currently save each month goes into a vacation fund for myself because I am planning a trip for later in the year. I do not currently have an IRA account set up for retirement. I am unsure of what to do with this money and was thinking about opening up an IRA account and putting the full refund into it. What do you think?

Patrick said:

Being debt free is a wonderful thing, but living paycheck to paycheck is not. The first thing I would consider is starting an emergency fund, which is a cash savings you keep aside for unexpected expenses. Depending on your situation, people recommend keeping 3-6 months worth of living expenses in your emergency fund.

The next thing I recommend is setting up a solid financial plan to follow. One finacial plan that is often recommended is Dave Ramsey’s Baby Steps. This is plan for getting out of debt and starting on the path to financial freedom. You are already ahead of the curve because you don’t have any debt. The next step is the step I recommended, starting an emergency fund, and the step after that is saving in an IRA or 401k. I highly recommend investing, but only after you have an emergency fund in place first.

Pinyo replied with:

You’re definitely doing well by not being in debt, although you could do better by start saving for retirement and starting an emergency fund. Overall, you’re not in a bad shape for someone your age.

First, let’s address the sizable refund that you just received. I hope you do realize that when the government gives you a refund, they are returning money that you lent them for 0% interest over the course of the year. In generally, it doesn’t make financial sense and you should adjust your W4 so that you can keep more money from each paycheck. To make sure that you continue to set money aside, you may want to start contributing to your 401(k) (if your employer offers one). Your target could be simply contributing $1,400 to 401(k) this year using the money that you would otherwise give to the government.

Secondly, let me just say that it’s good you’re saving money to go on vacation, as opposed to putting it on a credit card. But once you have this vacation out of the way, you should really looking into saving money for other purposes — i.e., emergency fund, retirement, down payment for a home, etc. Like Patrick, I recommend that you look into Dave Ramsey’s Baby Steps financial plan.

23 is not too late to start, but it’s not too early either. Anyway, enjoy your vacation and good luck.

Continue with Company Stock?

Kim wrote in and asked:

DH (Dear Husband) I are now 100% vested with a previous employers stock retirement plan. That’s $11,600 in one stock, one company. We have gotten conflicting advice on what to do with this account. should we leave it alone, roll it into our existing 401k, or roll it into a diversified retirement account. Some back ground for you…We are in our late 20’s, we contribute monthly to our 401k but not the vested retirement account. The company’s stock has dropped more then 50%, so should we get out now too buy up good low stock or wait for a better time, since we have time to wait for investments to grow?

Pinyo said:

You’ll have to check with your employer because transferring money out of your employers stock retirement plan may not be an option. That’s the case for me and all I can do is hold on to the company’s stocks. However, if you do have the option, I would certainly move that over to wherever you are allowed to — e.g., your 401(k) or other retirement account.

Personally, I don’t recommend having more than 5% of your investment in your own company’s stock. When you do this, you’re taking additional risk that other investors do not have to take, specifically, the risk of losing your job and the value of your company’s stock at the same time. There are many recent examples of this — e.g., Lehman, Enron, etc. To take it a step further, I think it’s generally not a good idea for long-term investors to invest in individual stocks, period.

Anyway, I think you’re heading in the right direction. The only thing to find out is whether or not the move is allowed.

Patrick said:

It’s generally not a good idea to own too much company stock, but as Pinyo mentioned, you should determine what your options are with the stock options you hold. My company gives us a match in our pension plan and our only option is company stock; it cannot be transferred or exchanged for anything else. Many companies have similar programs with 401k plans or other pension plans.

If you have the option to roll the stocks into a 401(k) or IRA plan, I would consider doing that. You will have many more investment options and have more control over your investment. Just keep in mind there may be fees or taxes that result from selling the stocks.

Best of luck in your decision!

Money for college student?

Dee asked the following:

I am struggling with how to provide money easily to my college student. The first year, we did the college account with Wells Fargo. He tended to play it too close and wound up with ridiculous over draft fees for being over $10. I looked into prepaid debit cards, but they have a boat load of fees as well. I need to be able to transfer money in electronically ( I prefer weekly). I was also looking at an ING account for him. I am pretty disgusted with regular banks as they seem committed to overdraft fees as a funding mechanism. We even tried having it tied to his credit account and they still charged huge fees to use that as well.

I want to teach responsible use, but in the end for the first two years, I don’t expect him to work. He is on a scholarship for engineering and it is worth it to keep the scholarship money and have good grades. He is not a minor, so I can’t have a custodial account. But I could force a joint account.I am struggling with how to provide money easily to my college student. The first year, we did the college account with Wells Fargo. He tended to play it too close and wound up with ridiculous over draft fees for being over $10. I looked into prepaid debit cards, but they have a boat load of fees as well. I need to be able to transfer money in electronically ( I prefer weekly). I was also looking at an ING account for him. I am pretty disgusted with regular banks as they seem committed to overdraft fees as a funding mechanism. We even tried having it tied to his credit account and they still charged huge fees to use that as well.

I want to teach responsible use, but in the end for the first two years, I don’t expect him to work. He is on a scholarship for engineering and it is worth it to keep the scholarship money and have good grades. He is not a minor, so I can’t have a custodial account. But I could force a joint account.

From Mrs. Micah:

Like you, my parents wanted my first year at school (and part of my senior year, during my honors project) to be a time when I didn’t have to hold down a job but could focus on my studies and scholarships. I think it’s a wise choice if the family can afford it. We ended up breaking it down into a two-part system.

1) I got a monthly allowance deposited into my account. The allowance was based on a set of needs that we’d determined beforehand and reasonable estimates of how much it would take to cover them. Since he’s already done a year of college, you should be able to get a good idea of what spending needs he has and approximately how much it’ll take to cover them.

2) I received an additional amount periodically that was intended to cover my recreational spending – clothes I didn’t need, the occasional book, eating out with friends. This was given in lump sums of $150 and I was expected to report back when it was spent and include a short log of the sorts of things it was spent on. I didn’t have to do specifics, just clothes, eating out, extra groceries, misc, etc.

Beyond all that, I (of my own initiative, though I think my father would have had me do something like it if I hadn’t) kept $250 in my account that was essentially untouchable. This was intended to avoid any risk of overdraft fees. Once my account came anywhere near the $250 and it wasn’t the end of the month, I contacted my dad for another lump sum of the second type of allowance.

I think that having a buffer is extremely helpful in avoiding fees. The only issue is that one of the two of you is going to have to keep an eye on that buffer. Optimally, your son will learn to contact you any time he comes close to the buffer. It’s an important real-world skill for him to learn. At the same time, if he continues to have problems then I think a joint account might be wise, so you can keep an eye on it yourself.

Best of luck!

From Patrick:

I think it’s great that you are able to help your son with college expenses – many students don’t have that opportunity. That said, paying over draft fees because if irresponsible money management shouldn’t be part of the bargain. If teaching responsibility is your goal, then you must put an end to the chronic problem with over draft fees, otherwise his problem of overspending may turn into a huge credit card problem he maintains throughout his adult life.

There are several ways to do avoid overdraft fees, such as putting your son on a strict budget, or reducing the amount of the next money transfer by the amount of the fees he caused. It will only take one or two times before it gets his attention. Another way to avoid overdraft fees is to find a bank that offers free overdraft protection between a savings a checking account, and be sure to leave a little extra in the savings account at all times. Just be sure he sticks to that strict budget, otherwise he may start drafting more than you keep in savings, which will cause more problems.

It is extremely important that your son learn strong money management skills now because he will take those skills with him for the rest of his life. Here are some college money tips and some high school money tips that may help him get a handle on his personal finances. Best of luck.

Pinyo says:

Stop right there! You’re being too generous. Like your son, my parents paid for my college education and gave me money so I don’t have to work while I was in school. That’s already more than a son could ask for.

Since you gave him the money, let it be his money. This means let him deal with the overdraft fees and other fees by himself. He’s not paying any attention right now because mommy and daddy is taking care of it. Let him deal with the consequences of irresponsibility. Once he realizes how much these fees are costing him, he’ll improve. Trust me on this because that’s how I learned my lessons too.

I’d encourage you to sit down with him and put together a reasonable budget. This way he gets an idea what the money is meant for. When you’re settled on the budget, give him a little extra because he will invariably make a mistake — it’s normal. But here’s the catch, it’s up to him to manage this money. This means identifying the best savings and checking accounts for his situation, spending it wisely, and yes, dealing with all the fees and consequences.

If you don’t let him fall, how could he learn? It’s better to let him make small mistakes now than bigger ones tomorrow. Remember that you can’t help him forever. Good luck.

Readers, what do you think? What would you recommend? Disagree with any of the replies?