Fast ways to cut cable, cell bills
Dear Liz: My cable and cell companies decided this month to hike their fees on me. Do I have any recourse? It’s not like I’m getting more service for their fees (that I know of) or am automatically getting a raise.
Answer: Cable and cell companies have competitors. Start by calling one of the satellite television providers and asking what specials it offers new subscribers. Then call your cable company and let it know you’re thinking of switching. Whatever the first offer is, hold off and see whether you can get a better deal. If not, switch or consider a life without pay television. Many popular shows are available free on the Internet, while others can be purchased as downloads. If you don’t watch much TV (and you’ve got lots of better things you should be doing, right?), you can save a lot of money.
Cell service can be a little trickier, particularly if you’re in the midst of a long-term contract. Consider using BillShrink or Validas (at http://www.myvalidas.com) to see whether you can get a better deal from your current carrier. If you’re not using all your minutes, text and data, your carrier typically will let you step down to a cheaper plan without extending your contract (check to make sure, of course).
If you’re not under contract, the world’s your oyster. Those two sites can help you search among the carriers to find the best fit for the way you use the phone. Or you could consider switching to a prepaid plan with no contract.
What to do with an extra $5,000 a month
Dear Liz: My wife and I are about to sell our home and move in with her parents. We’ll have to drain our savings of $15,000 to pay off the rest of what we owe on the mortgage. After the sale, however, our reduced expenses mean we’ll have at least an extra $5,000 a month. We’re carrying roughly $20,000 in credit card debt and make $130,000 a year in income. I see this mortgage-free living as a great opportunity and don’t want to waste it. Can you recommend a good book or point us in a direction to ensure we capitalize on this interesting time in our lives?
Answer: That must have been one massive mortgage you were carrying. You may feel positively giddy once those payments are gone, but don’t let it go to your head.
It would be easy to ratchet up your spending now that there’s so much extra money in the bank, but resist the urge. Concentrate first on wiping out your credit card debt, then focus on building up your emergency savings. The discipline of paying off debt and building savings will help you learn to live within your means—something you obviously weren’t doing when you took on that home loan and built up credit card debt.
You also should be saving aggressively for retirement, if you aren’t already. Take advantage of any workplace retirement plans, contributing at least enough to get the full company match, and consider funding Roth IRAs for both of you. Roth contributions aren’t tax deductible but the money is tax-free in retirement, and you can contribute up to $5,000 each as long as your modified adjusted gross income as a married couple filing jointly is under $167,000.
You can learn more about the basics by reading Eric Tyson’s excellent primer, “Personal Finance for Dummies.”
Target your toxic debt
Dear Liz: I am a single woman with a base salary of $101,000 plus bonuses, which so far have been significant. I divorced three years ago, and I am still digging out of debt. Last year I put all of my bonus toward debt but still have about $20,000 remaining. I will soon get another bonus of $38,000 before taxes and 401(k) contributions.
Is it wise to just pay off all the debt, or should I target the higher-interest-rate loans and put some in savings? I am thinking that I would have just enough to eliminate all my debt except my mortgage.
Answer: Debt comes in three basic flavors: toxic, good and neutral. Toxic debt includes credit card debt, payday loans and other high- or variable-rate borrowing. Good debt includes borrowing that can help you build wealth, such as a moderate amount of mortgage or student loan debt. Neutral debt includes everything that’s not actually toxic but that isn’t helping you build wealth, such as fixed-rate car or personal loans.
You should get rid of toxic debt as quickly as possible, so use your bonus to pay off any that you have. Then consider any neutral debt you owe. If you already have substantial emergency savings, you could pay off that neutral debt. If, however, you don’t have an emergency stash equal to at least three months’ worth of expenses, and your neutral debt has low rates, consider building up your savings instead.
Finally, make sure to review your spending and saving plans to make sure you’re living within your base salary. Bonuses are great but are variable by their nature, and you don’t want to count on them to pay your bills or bail you out of a jam.
Play the percentages to pay off debt
Dear Liz: My wife and I are working to get out of debt, and I am interested in comparing the amounts we spend on mortgage, food, diapers and so on with what would be considered ideal or at least average for homeowners living in areas with a high cost of living. Do you have recommended percentages for various items? I am always looking for places where we can cut our expenses so we can pay off debt faster.
Answer: You can find averages in the U.S. Census Bureau’s annual Consumer Expenditure Survey, which you’ll find at www.census.gov. The categories are fairly broad — you won’t find a line item for diapers, for example — but the bureau provides averages for housing, food, transportation, clothing and insurance, among other categories. The bureau also slices the data various ways: by income, by metropolitan area, by child.
You may find the information more interesting than helpful, however, because every family’s situation is different. A couple with little debt and no children, for example, can comfortably afford a bigger mortgage payment than a family that has both kids and debt.
A better way to manage your spending is to use Harvard bankruptcy professor Elizabeth Warren’s 50/30/20 plan. Warren, who outlined the budget in her book “All Your Worth,” recommends limiting your “must have” expenses to 50% of your after-tax income. Must-haves include shelter, food, transportation, utilities, child care, insurance and minimum loan payments.
That leaves 30% for wants, including clothing, entertainment, gifts and vacations, and 20% for savings and debt payments.
Many families in high-cost areas find it extremely tough to keep must-haves to 50% of their after-tax pay. Some spend that much, or more, on their housing. But the 50/30/20 plan underscores how important it is to contain your basic overhead if you want to have money left over to pay down debt from the past, save for the future and enjoy your life in the present.
Planning a family? How to prepare financially
Dear Liz: My wife and I are planning to have a child in the next couple of years, and I realize that I have no idea how to go about preparing for that financially. How much cash should new parents try to have available? What else should we be considering?
Answer: Congratulations in advance on your entry into the great adventure of parenthood. The most important thing to know is that you can’t predict what’s ahead, financially or otherwise.
The U.S. Agriculture Department estimates that it will cost middle-income parents nearly $300,000 to raise a child to age 18. But your costs could be a lot less if you’re particularly frugal, or a lot more, particularly if you have a high income, plan to pay for private school or have a child with special needs.
You can get some idea of what to expect by using the Agriculture Department’s new calculator at www.cnpp.usda.gov/calculatorintro.htm.
Your annual food, clothing and healthcare bills typically rise $3,000 or more with each child. You also may opt for a bigger home or car, which can add to the bill. Child care and education are other considerable expenses.
Then there are the set-up costs. The authors of “Baby Bargains,” one of my favorite books about preparing for a child, say you easily can spend more than $6,000 just on equipment such as strollers, car seats, maternity clothes and nursery care. If you’re smart, however, you’ll try to spend a lot less, buying or borrowing used furniture and selecting well-reviewed, midrange brands of strollers and car seats rather than status brands.
You’d be smart to start trimming other expenses now and saving the difference, so that you have a fund to pay these start-up costs and so that the added expenses of a child don’t push you into debt.
If one of you is planning to stay home with the baby for an extended time, consider starting to live on one income now and banking the other.
