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Dear Liz: How do you prioritize financial goals on a small salary? I am 24 and a college graduate with about $40,000 in student loan debt. Because I work full-time at a nonprofit educational organization, about half of my loans qualify for the Public Service Loan Forgiveness program, so I currently only pay the monthly payment on a private loan and two other small loans. I earn a small salary, but I have always been drawn to jobs in service-oriented, nonprofit fields, and I am perfectly fine with the fact that I’ll never have a career with a six-figure salary. My problem is that after rent, utilities, student loan payments, groceries and other such monthly bills, I have very little money left over to divide among my different financial goals. I make a small monthly contribution to my company-sponsored 403(b) plan, but I’m also trying to rebuild my savings after paying out of pocket for an expensive root canal. I occasionally earn some extra cash from baby-sitting, and I live a fairly simple lifestyle — I own my used car, I walk to work — yet I feel like I’ve barely been making a dent in any of my goals — saving for retirement, rebuilding savings and paying off student loans. How can I leverage what’s left over at the end of the month to reach my goals? Would it be better to focus on one goal rather than all three?

Answer: Many people in your situation focus on a single goal hoping to make faster progress. They don’t fully realize what their single-mindedness is costing them.

Prioritizing debt repayment over saving for retirement is particularly costly. Not only do you give up potential company matches, but the money you don’t contribute can’t earn future tax-deferred returns. At your young age, every $100 you contribute could grow to more than $2,000 by the time you hit retirement age, assuming 8% average annual returns, which is the historical long-term average for the stock market. In fact, the younger you are, the more you give up by not contributing to a retirement fund. Ask any of your older co-workers if it gets any easier to save for retirement. They’ll probably tell you that they wish they’d gotten serious about retirement savings when they were a lot younger.

Building up your emergency savings may seem prudent as well, but you don’t want to do so at the expense of your retirement fund or instead of paying down high rate debt.

So here’s your game plan. Instead of divvying up what you have left after paying bills, start by paying yourself first. Contribute at least 10% of your income to your company retirement plan. Then investigate the possibilities of consolidating your private student loan into a fixed-rate loan, since rates probably will rise in the future. If you can lock in a low rate, it would then make sense to start building up your emergency savings. If you can’t, you might want to divide your money between savings and debt repayment.

It will be tough to swing all this. You may be able to make it easier by finding a roommate or a cheaper place to rent, or looking for more outside gigs such as baby-sitting until your income rises enough to allow you to comfortably pursue all your goals.

Categories : Budgeting, Q&A, Saving Money
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Dear Liz: My husband and I have decided that next year we want to have a baby. So we have at minimum a year and nine months to make sure we’re financially prepared. I did some cursory Googling and I’m already a bit overwhelmed. I’m not sure where to start.

I know I should figure out how much the medical costs will be, but how do I figure out how much everything else costs? Do you have a checklist of things we should be aware of and consider? One thing I could use some guidance on is whether I should stay home or put our baby in daycare so I don’t miss out on work benefits like healthcare and 401(k) matching. I like my job and bosses, and if I leave I will have to find a new job that may not be as good when I decide to reenter the workforce. But if we decide to have a second child, I’m worried that childcare costs will be too much for two young children. Know of any good books on this subject?

Answer: By leaving work you wouldn’t be missing out only on benefits. Research by economist Stephen J. Rose and Heidi I. Hartmann, president of the Institute for Women’s Policy Research, found that women’s average annual earnings decline 20% if they stay out of the workforce for one year and 30% if the absence stretches to two or three years. Many find it tough to rejoin the workforce after extended absences.

Quitting work is the right choice for some parents, but you shouldn’t do so simply because you fear childcare costs. For a few years, those costs might eat up most or all of your paycheck, but such expenses decline over time. If you continue to work, your earning power and retirement contributions will continue to grow.

Meanwhile, some parents find they can reduce childcare costs by staggering their work schedules, tapping family members or sharing a nanny. Research the childcare options in your area so you have an idea of what’s available and the costs.

You can continue your research into budgeting for a child with the excellent, constantly updated book “Baby Bargains” by Denise and Alan Fields. This field guide offers product reviews and realistic assessments of what you actually need to buy for your child and what you don’t.

Another good resource is financial writer Kimberly Palmer’s “Baby Planner,” available on Etsy.

With all your planning, keep in mind that parenting always presents surprises. You may decide to stop after one child or keep going until you have a houseful. The important thing is to remain flexible and don’t assume you know how your future self will choose to live.

One of the best pieces of advice in Facebook Chief Operating Officer Sheryl Sandberg’s bestselling book, “Lean In,” is that women not cut themselves off from career opportunities because of how hard they think combining work and child-rearing will be. “What I am arguing is that the time to scale back is when a break is needed or when a child arrives — not before, and certainly not years in advance,” she writes.

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Dear Liz: My husband and I, both 44, own and live in one side of a duplex. The owners of the other side are moving next year and have offered to sell it to us. We don’t have enough in savings to cover a 20% down payment for a traditional mortgage, but our neighbors offered to do owner financing. Rentals are hot commodities in our area, and we’ve been told by real estate agents that they could get the place rented within a week for more than we’d make in mortgage payments. This would be an amazing opportunity for us, but if for some reason the property went vacant we couldn’t cover the payment unless we make some major changes to our budget, such as selling our RV ($325 a month) or temporarily suspending contributions to our 457 deferred compensation plans (we contribute $300 a month and both our jobs come with pensions that will replace 60% of our salaries). We currently also make a truck payment ($350 a month) and have $2,300 in credit card debt, but we only have $1,000 in accessible savings.

Answer: You’re not in a great position to be landlords. You have too little savings to cover the inevitable repairs and vacancies you’ll face. Plus, your credit card and vehicle debts indicate you’ve been living beyond your means.

Still, this may be a promising opportunity. A rental that is cash-flow positive — in which the rent collected exceeds the cost of the mortgage, property taxes and insurance — can be a decent long-term investment. If you’re willing to commit to improving your finances and taking this risk, it could work out.

Talk to some other landlords first to see what challenges they face and what typical vacancy rates they experience. You’ll want to locate a lawyer who understands your state’s landlord-tenant laws to draw up any paperwork you’ll need.

If you decide to proceed, sell the RV and use whatever’s left after paying off the loan to pay down your credit card debt. Then redirect the RV payment to paying off the rest of the cards and building up your savings. (A note for the future: RVs are fun, but they’re luxuries, and luxuries should be paid for in cash.)

Don’t compromise your retirement savings. Your generous pension could get whittled down in the future, or you might lose those jobs. Having a decent retirement kitty of your own is simply prudent.

Categories : Budgeting, Q&A, Real Estate
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Dear Liz: I’m a single mom with three kids. My mortgage is $1,700. My other monthly bills include $355 for a car loan, $755 for school tuition, $350 for utilities, $790 for credit cards, $200 for gas, $208 for braces and $235 for a 401(k) contribution. This leaves no money for food. I get no child support. How can I pay down my credit card debt? I don’t have any money for a baby sitter or I could get a second job.

Answer: The way you pay down credit card debt is by reducing expenses and increasing income to free up extra cash. If that’s not possible, you may need to consider bankruptcy, given the amount of debt you’re carrying.

If you’re paying only the minimums on your credit cards, that monthly bill indicates you have close to $40,000 in credit card debt. Since you can’t cover your basic expenses, you’re probably adding to that debt pile every month. That needs to stop.

You don’t say why you aren’t receiving child support, but if the father isn’t dead or disabled he should be helping to support his kids. Your state has an enforcement agency that can help you. Child support enforcement is often part of a state’s social services department, although it may also be offered by the state attorney general or its revenue (tax) department.

One obvious, if painful, place to trim is private school tuition. If the school can’t offer you financial aid, you should consider placing your kids in the best public school you can manage.

What you don’t want to do is trim your retirement plan contribution. You’re probably getting a company match, which is free money you’ll need to sustain yourself in retirement.

In general, your “must have” expenses — shelter, transportation, food, utilities, insurance and minimum loan payments — should equal no more than 50% of your after-tax income. If your must-haves exceed that level, it will be tough to make ends meet, particularly if you’re trying to pay off debt and save for the future.

Categories : Budgeting, Credit & Debt, Q&A
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Creating a budget that works

Oct 28, 2013 | | Comments (1)

Dear Liz: I’m beginning to realize that I have no idea how to budget. I make plenty of money but always seem to come up short. I’m trying to find the best person to help me make a budget. Do I talk to a CPA or a financial counselor? If so, how do I find the right person?

Answer: Budgeting has three basic steps: figuring out where your money is going now, deciding where you want it to go in the future, and monitoring your spending to make sure you stay on track with those goals.

Just because something is simple doesn’t mean it’s easy, however. People often fail to account for predictable but irregular expenses, such as car repairs. Once those crop up, the budget is thrown into disarray and people often give up on the spending plan.

Budgeting also can be difficult if you’re overspending on your overhead. If too much of your income is going for basic expenses, you may not have enough left over to live a comfortable life, pay off debt and save for the future, regardless of how many other expenses you trim. People who spend too much on shelter (mortgage or rent) and transportation (car payments and attendant costs) in particular often find they can’t create a balanced budget. Your “must haves” — shelter, transportation, food, utilities, insurance and minimum loan payments — ideally should be 50% or less of your after-tax income to create a workable budget.

Some people find that online solutions, such as the Mint.com financial tracking site, are enough to get them started with a budget. Other people need hands-on help. If your tax pro or financial advisor has experience helping people create and monitor budgets, that’s certainly one place to turn. Otherwise, check to see whether your local community college offers basic money management courses. Another option is a nonprofit agency affiliated with the National Foundation for Credit Counseling at http://www.nfcc.org. Many of these agencies offer classes or hands-on help creating budgets.

Categories : Budgeting, Q&A
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Dear Liz: What are your thoughts on charitable giving? I hear about tithing (giving 10% of income) but would have real problems trying to maintain that commitment. That said, I’d like to become a regular donor to a reputable charity.

Answer: Most U.S. households give to charity, according to the Center on Philanthropy at Indiana University, but the average contribution rate for those who give is closer to 3% than 10%.

If you want to step up your charitable giving, take the time to plan and prioritize as you would any other part of your financial life.

Making larger donations to a few charities is typically better than scattershot donations to a bunch of causes, said Ken Berger, the president and chief executive of nonprofit watchdog Charity Navigator. Charities spend money to process donations, and those costs tend to eat up more of small donations, he said. A $100 donation to a single charity might incur $2 in processing costs, leaving $98 for good works, Berger noted. The same $100, spread among 10 charities, would require each to spend $2 for processing — leaving just $80.

Because smaller donations don’t benefit charities as much, some are tempted to increase their “yield” by selling your information to other charities or repeatedly hitting you up for additional contributions, Berger said. Giving more allows you more leverage to ask that your information not be sold and that the charity limit its appeals.

You can research charities at websites such as Charity Navigator and GuideStar to make sure you understand their finances and how effective they are in reaching their goals.

Finally, consider setting up automatic donations rather than rushing to make contributions at year’s end. Some companies have payroll deductions for charities, or you can set up a recurring charge on a credit or debit card. Making your contributions automatic helps ensure you can achieve your charitable giving goals. It’s like saving or “paying yourself first” — when you don’t have to constantly remind yourself to do it, it’s more likely to get done.

Categories : Budgeting, Q&A, The Basics
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How much should you spend on rent?

Jul 09, 2013 | | Comments Comments Off

Dear Liz: I am wondering about what percentage of your income should your rent be. Ours at the moment is 35% just for rent, not including utilities or anything else.

Answer: In high-cost areas, people regularly pay 40% or more of their income on housing. That doesn’t mean it’s a good idea.

When you spend a big chunk of your income on rent or mortgage payments, there’s often too little left over to save for the future, pay off the debt of your past and live for today.

There are no hard-and-fast rules for what’s affordable, but limiting your housing costs to about 25% of your gross pay or 30% of your after-tax pay will help ensure that you have money left over for other goals. “Housing costs” include rent, utilities and renter’s insurance if you don’t own, or mortgage, property taxes, property insurance and utilities if you do.

If you’re much over these limits, you should look into ways to reduce your costs, earn more income or both. Otherwise, you’re likely to continue to struggle with an unbalanced budget.

Categories : Budgeting, Q&A
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Dear Liz: My spouse has tenure at a university. Given that one of us will always be employed, should we change the way we look at the amount of money we keep in an emergency fund or our risk tolerance for investments?

Answer: Even tenured professors can get fired or laid off. Tenure was designed to protect academic freedom, but professors can lose their jobs because of serious misconduct, incompetence or economic cutbacks, such as when a department is eliminated or a whole university is closed. About 2% of tenured faculty are dismissed in a typical year, according to the National Education Assn.’s Higher Education Department.

That’s more job security than in most occupations, of course. Your spouse also may have access to a defined benefit pension, which would give him or her a guaranteed income stream in retirement. Those factors mean you reasonably can take more risk with your other investments.

As for your emergency fund, you may be fine with savings equal to three months of expenses. But consider that if your spouse were to be dismissed, he or she probably would have a tough time finding an equivalent position. If the institution starts having financial difficulties or if there is any reason to suspect that he or she could be dismissed, a fatter fund could come in handy.

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How much cash should you keep on hand?

May 20, 2013 | | Comments Comments Off

Dear Liz: A few years ago I finished paying off my debt and now am in the very low-risk credit category. I have savings equal to about three months’ worth of bills and am working to get that to six months’ worth. I’m wondering, though, about an emergency that may require me to pay in cash (such as a major power outage that disables debit or credit card systems, or the more likely event that I forget the ATM or credit card at home). How much cash should a person have on hand? Is there a magic number?

Answer: There’s no magic number. You’ll have to weigh the likelihood you’ll need the green, and the consequences of not having it when you need it, against the risk of loss or theft.

Many people find it’s a good idea to tuck a spare $20 into their wallet for emergencies, and perhaps another $20 in their cars if they’re in the habit of forgetting their wallets or their plastic.

Cash for a disaster is another matter. Power could go out for a week or more, or you may need to evacuate and pay for transportation and shelter at a time when card processing systems are disabled. A few hundred bucks in cash probably would be the minimum prudent reserve you’d want to keep in a secure place in your home. You may decide that you need more.

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Dear Liz: My husband and I are recovering from a job loss four years ago. We used up all our savings and home equity. My husband is now employed, but we are struggling to keep ahead even with a salary of about $100,000. I was a stay-at-home mom for the first 10 years of our kids’ lives and now I work two part-time jobs to help with our expenses. We are trying to follow the 50/30/20 budget plan you recommend, but can’t seem to get our “must haves” — which are supposed to be no more than 50% of our after-tax income — down from 80% to 90%. Most of the rest goes for “wants,” such as the kids’ dance classes and soccer teams and for cellphones. We’re not saving anything although we’re trying to whittle down our credit card debt. I have tried several times to refinance our first and second mortgages and home equity line of credit but have found we don’t qualify because too much is owed on our modest three-bedroom, one-bath house, which has gone down significantly in value. We also have two car loans that are worth more than the cars, and the insurance is killing us. Amazingly enough, we have never been late on a payment. We just can’t get ahead. Did I mention that both kids need braces?

Answer: You clearly can’t afford your life, and things will only get worse if you don’t get your spending in line with your income.

Your first step should be to consult with a HUD-approved housing counselor, who can advise you of your mortgage options. You can get referrals from http://www.hud.gov. If your first mortgage is held by Fannie Mae or Freddie Mac, you may be able to refinance it through the federal government’s Home Affordable Refinance Program. Recent changes in the program have helped more underwater homeowners refinance. Even if you’ve been turned down by one lender, you can try with another. One way to search for HARP quotes is through Zillow’s online mortgage quote service at http://www.zillow.com/mortgage-rates/.

The Federal Housing Administration and the Veterans Administration also have streamlined refinancing programs for their underwater loans.

Government programs usually define an “affordable” payment as one that’s 31% or less of your gross income, but that may be too high for many families to comfortably handle. Ideally, your housing costs — including mortgage, property taxes and insurance — would consume no more than about 25% of your gross (pre-tax) income.

If you exhaust your options and can’t get your mortgage payments down to an affordable level, you should consider a short sale of your home. Moving is terribly disruptive and expensive but it’s better than letting a house sink your finances.

Then take a look at your cars. The average annual cost of owning a car is $8,946, according to AAA. You can make the argument that one car is a necessity, but having two is typically more of a convenience than a “must have.” Getting rid of one could dramatically lower your insurance and transportation costs.

Since you’re underwater on both, you’ll need to look at which is cheapest to operate and which is closest to being paid off. If they’re the same, then your choice is easier — you can work toward paying that car off faster so you can sell it. Otherwise, you’ll have to weigh which loan to target first.

Another way to get your budget balanced is to make more money. That may mean asking for more hours at your jobs or looking for opportunities that pay better.