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.
How to avoid tax-return rip-offs Beware of promises to get your refund faster. Refund anticipation loans are gone, and what’s replaced them isn’t worth the cost.
Gay marriage can muddle finances Gay and in love? You might want to wait to marry.
‘Boomerang’ kids: Moving out again Household formation is on the rise and the kids who moved into their parents’ basements are finally able to move out on their own. Here’s what they, and their parents, need to know to avoid future boomerangs.
Simple retirement can be satisfying If you haven’t saved much for retirement, all is not lost as long as you’re willing to pursue a much simpler lifestyle than what you’re probably living now. One man who lives just such a life is happy he does.
Dear Liz: You’ve written frequently about the 50/30/20 budget, where no more than 50% of your after-tax income should be spent on “must haves” so that you have 30% for “wants” and 20% for debt repayment and savings. In which category would alimony fall? How about car payments?
Answer: Any expense that can’t be put off without serious consequences is considered a must-have. Since you could be sued or held in contempt of court for not paying your alimony, that would certainly qualify as a must-have. So too are all required loan payments, since failing to pay those will lead to credit card damage, possible lawsuits and, in the case of vehicles, repossession. Other must-haves include shelter costs, food, utilities, other transportation costs, insurance and child support.
Dear Liz: My husband and I have been aggressively paying down our debts and plan to be debt free by this time next year. We’re devoting about 20% of our income to debt repayment and saving about 6% (not much, I know, but we’re young and just starting out). We were building an emergency fund and currently have enough money in it to cover only a few months of our expenses, since we had to dip into it recently for unexpected car repairs.
My husband just lost his job. I make enough that we would just barely be able to cover all of our minimum payments and our bills, but my employer lost its biggest client and I may be out of a job soon too. Should we continue to make the same debt payments, reduce the amount or make only minimum payments until we are both securely employed?
Answer: As soon as you know that unemployment is a possibility, you should begin to conserve cash. That means making only the minimum payments on your debt and cutting your expenses to the bone. Although the job picture is improving, the average duration of unemployment is still close to 40 weeks. That’s a long time to go without a paycheck.
When you’re both employed again, you should reconsider your financial priorities. Getting out of debt is a great goal, but not all debt is created equal. Paying off credit cards should typically be a high priority, but you needn’t be in as much of a rush to pay off federal student loans, car loans or mortgages, because the rates on these debts is typically fixed and relatively low. Instead, make sure you’re taking advantage of retirement savings opportunities and building up a cash cushion to tide you through the next financial setback.
Dear Liz: I have been granted a Chapter 7 bankruptcy discharge of all my debts. I’m now debt free and plan to stay that way. I’ve been saving like crazy and have enough to afford a cross-country driving trip to attend my son’s wedding. I’d like your advice on using prepaid debit cards to cover expenses such as fuel, food and lodging. My plan is to load each of three cards with an amount of money to cover each category of expense, based on my best research estimates, as a means of controlling how much I spend. If you feel this is a good plan, which would be the best brand of card to use?
Answer: Your determination to stay out of debt is admirable, but prepaid cards are problematic. You don’t have the same federally mandated consumer protections you have with a debit or a credit card, so merchant disputes or a lost or stolen card can wind up costing you big time.
Furthermore, these cards can be expensive. You often pay to activate the card, to load it with cash and to access the cash in transactions. Card comparison site NerdWallet.com studied 40 popular prepaid debit cards and found that the average card cost nearly $300 annually in basic fees. Monthly fees of up to $14.95 took the biggest toll, but $1 to $2 fees per transaction and for ATM use could easily cost a typical user more than $20 a month.
If you’re convinced prepaid cards are the best money-management tool for your situation, though, you might want to choose the American Express Bluebird, which was dramatically less expensive than its competitors in the NerdWallet study. The Amex card charges no monthly or per-transaction fees and allows for direct deposit. ATM withdrawals cost $2 apiece and cash reloads are just a buck, compared with an average of $4.50 with other cards.
Eventually you may want to look into getting a secured credit card to help you rebuild your credit scores, since prepaid cards won’t help with that. A secured card is one in which you make a deposit at the issuing bank, usually between $200 and $1,000, and get a card with credit limit equal to your deposit. You don’t need to carry a balance on these cards, but you do need to have and use credit if you want to rehabilitate your battered credit. NerdWallet recommends the secured cards issued by Orchard Bank and Capital One.
Dear Liz: How does a family without any income qualify for assistance? My son-in-law has had an Internet business for a few years. He did okay for a while, but not lately. Because he owns his own business, he can’t get unemployment. We’re paying for everything and can’t do it much longer. My daughter has a special needs child and is a stay-at-home mom. The kids have medical insurance, but the parents don’t. What steps are available to them to get the help they so desperately need?
Answer: If your son-in-law incorporated his business and paid into his state’s unemployment fund, he may qualify for benefits. If not, he can start his search for help at Benefits.gov, which is a federal Web site with links to a variety of assistance programs.
The fact that you’re helping the family financially is a blessing to them—but the fact that you’re “paying for everything” is a huge red flag. Families can fall upon tough times, but responsible ones have some savings they can tap and are diligent about finding ways to make money, even if it’s not as much as they were able to command in the past. If they can’t make ends meet, responsible families make changes—sometimes drastic changes—until they can.
What responsible families don’t do is continue relying on relatives until those relatives are bled dry. If your son-in-law isn’t actively looking for a job, he should be. If your daughter is the more employable one and can find work, then he could take over the child-care duties.
They may not take these steps if they think they can still count on you to pay the bills, so you need to be straight with them about your inability to continue supporting their family.
Dear Liz: I’m a mother of two children and I work part-time. On top of that I go to school full-time. Even though I receive financial aid, I still have trouble saving money on a tight budget. How can I do it?
Answer: Saving money in your situation is tough, but it’s not impossible. The most important thing is to make it a priority. In other words, don’t wait until you’ve paid your bills and otherwise spent your paycheck to figure how much is left over that you can save. Instead, pay yourself first by setting up an automatic transfer that moves some amount of money — however small —from your checking account to your savings account. The transfer should occur the day your paycheck is deposited, if possible. Even small contributions build up over time, and you’re unlikely to miss the money if you make the process automatic.
If you’ve found yourself raiding your savings for non-emergencies in the past, then decide now under what circumstances you’ll tap your funds. A car repair may be a good reason. Dinner out, even if you’re bushed from all that working, mothering and studying, probably is not. If you really can’t keep your hands off your savings, you may need to move the money somewhere that’s harder to access. You could set up an account at an online bank or at a bank or credit union that’s different from the one that holds your checking account.
Another issue that prevents many people from saving is that they spend too much on their so-called fixed, or basic, expenses. If too much of your income goes to rent, food, utilities and transportation, for example, you may have continual trouble making ends meet. Trimming those expenses can have a profound effect on your ability to save.
Following frugality-oriented websites can give you ideas for reducing your expenses as well as encouragement that your sacrifices will be worthwhile. As one blogger put it, saving money isn’t about deprivation, it’s about gaining control. When you make the decision to save, and follow through with action, you’re putting yourself back in control of your spending and your own life.
It won’t be easy, but remember you won’t always have to work this hard. Your education should result in bigger paychecks that will enable you to save more easily — as long as you continue to pay yourself first.
Dear Liz: You’ve written about the 50/30/20 budget structure that people should strive to achieve. As you said, it’s a difficult feat. But here’s my question: How does one even come close when you live in a major metropolitan area? In my particular case, home values in my area have remained intact in many places and demand for apartments is so high that vacancy rates are the lowest in the nation. To get into a relatively safe neighborhood with access to public transit, rent is over $1,000 with a roommate or two. Finding that 50/30/20 balance seems impossible for people who live here and we can’t all just relocate.
Answer: If you live in a high-cost area but don’t have a high income, you’ll need to get creative if you want to keep your “must have” expenses—shelter, food, transportation, child care, minimum loan payments and insurance—under 50% of your after-tax income.
Many people in high-cost areas devote 40% or more of their incomes to shelter costs, which makes it all but impossible to have enough money left over for their “wants” (clothes, vacations, gifts and other non-necessities that should consumer 30% of their after-tax incomes savings, according to the 50/30/20 plan) or savings and debt repayment (which should consume 20% of your after-tax income under the plan). The result is a perpetually unbalanced budget, which often leads to more debt and lots of anxiety.
But people have come up with various solutions to better balance their budgets. Blogger Donna Freedman was an apartment manager for several years, which helped lower her shelter costs. Fred Ecks, who retired in his 40s, lived on a boat to reduce his rent in notoriously high-cost San Francisco. Other people have exchanged their services for free or reduced rent—by babysitting or serving as a companion to an elderly person.
If you can’t find a solution that lowers your housing costs, you have two options: continue to live with a lopsided budget, and accept that you may never be able to achieve a balanced financial life, or move to a place where you can make the math work.
Dear Liz: The 50/30/20 budgeting plan you advocate just doesn’t work on a low income. I currently rent because I can’t afford the purchase of a house, and the lowest I can go and still be in a safe neighborhood is $600. That’s well over 40% of my salary, and you say all your “must have” expenses including shelter, food and transportation should be 50% or less of after-tax income. With rising prices, saving and debt elimination seem like an unreachable reality. What concrete advice do you have for someone who doesn’t have a credit card, and is trying to get out of $7,000 of debt, to get to stability to purchase a home?
Answer: Saving and debt elimination are tough on a low income. But that doesn’t mean basic math doesn’t apply in your situation. If you spend too much on your “must have” expenses, there simply won’t be enough left over to live your life, pay off your debt and save for your future.
People on lower incomes manage to stay out of debt and save money. To do so, though, they have to limit what they spend on their overhead. They find roommates or rent a room in someone else’s house, or move in with a family or an elderly person and offer to help out in exchange for part or all of their rent. Some decide they simply can’t live cheaply enough where they are, and opt to move elsewhere. Books and websites devoted to the voluntary simplicity movement can give you other concrete ideas about how to live on a shoestring.
If you can’t bear to trim your expenses, your only other option is to make more money. That’s not an easy prospect in this economy, but a second job or a side business could help you get out of debt and save for a down payment.