After more than six years I have paid off all my credit card debt. I have no debt other than my mortgage.
Are these high-yield savings accounts safe? With compound interest, I would even transfer my kids' small savings into these accounts. It seems too good to be true.—J.H., by e-mail
A: These accounts, which are becoming more numerous, are competitive but safe. Rather than go to heroic effort to find the highest possible yield, however, I suggest you place some value on ease and convenience of use. With $5,000 in savings, a 1% point gain in yield is a bit more than $4 a month. It doesn't pay to go to much effort to capture that increase. A slight modification may work better for you.
First, build your taxable savings account to an amount that makes you reasonably comfortable. If your income is $60,000, say, that might be a $12,000 reserve—about three months of spending money after taxes and savings.
Second, apply additional savings to your mortgage. By paying on the mortgage, you'll get an effective interest rate equal to the interest rate on your mortgage. As a backup against an unforeseen future need for cash, you might also consider taking out—but not borrowing against—a home equity line of credit. It would cost you over 8% to use in the current market, but you would only use it in an emergency or as an alternative to a large credit card purchase.
By the way, if you've become debt-free other than your mortgage by age 41, you're not late in the game. You're doing well.
Q: Some time ago, you wrote a column about how to tell when you are rich. I should have cut it out and saved it, but I didn't. Can you supply me with that definition?
I am 80; my wife is 72. We have more money than we will likely spend. We own our home and have excellent health insurance. We inherited our cemetery plot. There is nothing that we want that we cannot buy and pay for in cash. Now that we have reached this point in life, the only thing we could ask for is good health, and no earthly being could grant that.
On top of that, we have three adult children living close by. There is seldom a day that we do not talk to each one on the phone. They always express their love to us in their own way. They may be different, but they are reasonably close to each other. We see no reason for them to fall apart when they divide our assets.
I think we are rich. Incidentally, our net worth is probably between $1 and $2 million. —L.C., by e-mail.
A: You are definitely rich—and not because of your incidental $1 or $2 million in net worth. My favorite story about knowing when you are rich is told about Joseph Heller, the novelist who wrote "Catch-22." At a fashionable party in Nantucket, someone pointed to another person at the party.
"He runs a hedge fund. He's worth $100 million or $200 million."
"He'll never have what I have," Heller responded.
"Oh? What could that be?" Heller's friend asked.
"Enough."
That story is a good thing to remember when you check where you are on my Wealth Scoreboard. You can find it on my Web site, www.scottburns.com. A search engine there can help you find columns you meant to save.
(Questions about personal finance and investments may be sent by email to scott@scottburns.com or by fax to 505-424-0938. Check the Web site: www.scottburns.com. Questions of general interest will be answered in future columns.)
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