Advanced Personal Finance

Increasing identity theft. Government agencies losing personal data-rich laptops. Hackers breach retailers and data merchants. Is it time for a credit freeze?

What a credit freeze is

A credit freeze is used by someone to prevent their credit files from being shared with others. It places a certain level of security on your credit report by preventing most new accounts from being opened in your name. I say most because it’s possible for a company to extend credit without a credit check.

The prohibition against new credit is even for new accounts you authorize. That is, for you to open new credit lines, you must unfreeze your file.

A credit freeze involves informing the credit bureaus of your intent and, most likely, paying a small fee (typically $5 to $15). You also pay a fee to ‘unfreeze’ your file when you really do want a new account opened in your name.

As of August 2007, 32 states allow consumers to freeze their credit. Eight more make freezes available in 2008.

How to put a credit freeze on your information

The actual logistics of putting a freeze on your account varies by state. Consumers Union maintains this list of each state’s laws and instructions for freezing and unfreezing your file. By the way, I think it’s a freakin’ crime that the federal government hasn’t stepped up with uniform rules that apply across the nation, but whatever.

Why freeze

The benefits of a credit freeze are self-evident. Since no one can get new credit in your name, your identity cannot be stolen for that purpose. This doesn’t preclude the abuse of your stolen credit card account number, but it does stop credit unknown to you from being extended.

Obviously, it’s a pain in the butt to unfreeze and freeze your account when you really do want new credit. I say that’s a small price to pay. When 2008 rolls around (I live in a state where a law hasn’t yet taken effect), I’ll be freezing my file.

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Well, I finally did what about a million personal finance/get things done books and blogs tell us we should all do. I did a household inventory. Sort of.

I took the cheater’s way out and went around the house with the digital camera taking pictures of everything. It’s a heck of a lot faster than going around writing stuff down. Probably not as accurate, I suppose. It took all of ten minutes to get all the pictures, download them, and back them up.

Why would anyone in their right mind run around their house taking pictures of their stuff? In the case of some catastrophic loss (like a fire or tornado), you have to submit a claim to the insurance company. It sure would be a lot easier to remember what stuff you had if you had a list or picture of it in front of you. That’s why you people are advised to take a home inventory.

If you haven’t done one, a home inventory is really quick and easy with a camera. If you wanted to, you could even edit the pictures with text of what’s in the room. That way, if you ever need to, you can show the insurance man a record of what you owned.

Our closet (I have too many clothes)

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I was getting some concert tickets out of our safe when I saw all of the stuff we keep there. It got me thinking about whether that’s the right place for some of that stuff.

How we do it

We keep ‘valuable’ documents in a small fireproof safe in our office closet. What’s ‘valuable’ you ask? It’s kind of like pornography to Justice Potter Stewart of the U.S. Supreme Court - I know it when I see it. Briefly, we keep the following there:

• Vital records - birth certificates, passports, social security cards
• Insurance records - primarily life insurance
• Deeds & titles
• Temporary, but expensive stuff I don’t want to lose track of (like concert tickets)
• Home inventory from 1995 saved on floppy disk (memo to me, memo to me - update home inventory when new digital camera arrives)

Jim at Blueprint for Financial Prosperity published a nice comprehensive list of resources for how to replace lost or destroyed personal documents. I don’t really ever want to use any of these resources, though. That’s the point of the safe. Incidentally, we just keep the key to the safe tied to it. It’s purpose is fire protection and to be in a central location, not keep away thieves (it wouldn’t do a very good job of that since you can pick it up and carry it like a suitcase). So if anybody reading this intends to rob us, don’t hurt yourself looking for the key.

Other options for storing important documents

1. Safe deposit box. My main objection to using this method is inconvenience. I’m not likely to put stuff into a box I need to drive to during business hours and get someone else to help me open. Contrary to what some people think(myself included until I researched this), in the event of your death, your spouse and/or executor can get to your box provided they have a key (you get two when you rent a box). In a few states, they can only remove a will, but in many states the restrictions are looser.
2. Digital storage. I’ve heard of services where your documents are scanned and stored electronically. The problems I have with this, though, are online security and the legality of a reproduced document. Ultimately, you’d still be storing the originals somewhere anyway, so this isn’t really a substitute but more of a backup.
3. Buried in the yard, under the mattress, etc. Ok, maybe not.

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I’ve written before about financial records and what to keep and what to toss. Squarely in the ‘keep’ category is documentation on the purchase of stocks and mutual funds.

Why it’s critical to keep buy order documentation

Keeping buy order documentation is critical because it provides two key pieces of information - date of purchase and purchase price. When you eventually sell the fund or stock, you must know these two things.

Date of purchase is used to determine whether gains are long- or short-term. There are different tax consequences for each. Purchase price, or cost basis, is also necessary to calculate the actual gain (or loss).

What if I don’t have it?

If you don’t have your cost basis, the IRS assumes it to be zero. That’s right. If you can’t provide documentation, the tax man will assume you got the security for nothing. As a result, you tax bill on sale could be much, much bigger than it needs to be.

But there’s a but. If you know the date of the purchase, you can look up the closing price on that day and the IRS will allow it. And if you don’t know the exact date, from what I can tell by reading their site, the IRS will likely allow you to make an ‘estimate.’

This actually happened to me. I lost/threw away/ate a buy order for a stock I owned. I knew from bank records the day I bought it, though. I went back and did some research on pricing and used the closing price that day as my basis. So far no audit.

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One of Suze Orman’s constantly-preached pillars is that you should have a revocable living trust. I was wondering if they’re really necessary for regular people like me. I’m not trying to spend money on unnecessary legal fees.

I’m not a attorney, by my understanding of a living trust is that it is trust that holds an individual’s assets until death, when the assets pass to the trust beneficiaries. The trust remains under the complete control of the grantor (the person who owned the assets). That is, he/she is the trustee until death.

Orman cites the following reasons to get a revocable living trust:

• It allows you to designate a successor trustee to take care of your financial matters should you become incapacitated

• You get explicit direction over how your assets are divided among heirs if you’re divorced and remarried

• It speeds transfer of assets after your death and may avoid fees associated with probate

I’m not convinced. She always gives specific examples that make her point, but the situations are usually pretty esoteric and uncommon.

I’m looking for input from readers. Does anyone have one of these? What do you think of Suze Orman’s urging us to get one?

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