Strategies for saving on a shoestring
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.
A reverse mortgage could keep Mom in her home
Dear Liz: My healthy and active 82-year-old mother is faced with having to sell her home this year because she’s running out of money. She has lived a very minimal lifestyle for many years as her savings dwindled, and her income is now basically Social Security. She owes $25,000 on a home worth more than $700,000 in a top school district. We don’t know if we are jumping the gun with this sale. I could move in with her and pay rent for a year or two, although that would mean a longer commute for me and would just put off the day she has to sell. There are things that must be done to the house for upkeep, and her being cash-poor puts her in a crunch. My brother will help pay for minor sprucing up depending on what the real estate agent says we need to do to make the house presentable, but if Mom remains in the home there are other things to be done. We are assuming that we should sell it and find an apartment for her to rent until she needs more assisted living at a later age. Are we right to take action now?
Answer: Your family needs to take action, but setting your mother up for not just one but possibly two future moves probably isn’t the best course. Moving is terribly disruptive, and AARP surveys show that the vast majority of older people prefer to “age in place” rather than leave their homes.
Investigate reverse mortgages as one option. With a reverse mortgage, your mom could pay off her small mortgage and tap the substantial equity in her home. She could get a lump sum, a stream of monthly checks or a line of credit that could allow her to fix her home and live more comfortably. She wouldn’t have to make payments or pay income taxes on this loan, and it wouldn’t have to be paid off until she dies or moves out.
Reverse mortgages can be expensive because of the fees involved, although a new version of the federal Home Equity Conversion Mortgage offers lower upfront fees, and some lenders will waive or reduce their fees. You’ll want to do plenty of research, and shop around to make sure you get the best deal. The AARP and U.S. Housing and Urban Development websites have a lot of information about reverse mortgages.
If your mom decides she’d rather sell, she should consider a move directly to a senior community that offers assisted living as an option. She will have the most choices if she’s healthy when she moves in. Although she may never need the assisted living option, many people start to need some kind of help with daily activities by the time they reach their mid-80s.
Are businesses protecting your Social Security number?
Dear Liz: Your recent column about disclosing Social Security numbers raises an important question. Federal tax law requires millions of Americans to disclose their Social Security numbers to those who pay a recipient at least $600 in a year. In practice, many payers request this information when paying much less than that. Millions of people have their Social Security numbers floating around on millions of computers, many of which are not secure. Why doesn’t anyone write about this or discuss the consequences of being required by law to disclose your Social Security number all over the place? This requirement is a recipe for identity theft.
Answer: You’ve pointed out another problem with using Social Security numbers as an all-purpose identifier. Federal and state laws require businesses that collect Social Security numbers to protect that information. But the fact remains that the more entities that have your number, the more vulnerable you may be to identity theft.
As an individual, you’re unlikely to change the IRS’ mind about the necessity of collecting this information. But when you’re asked for your Social Security or tax ID number, it’s fair to ask the requester how your information will be protected. That at least puts the requester on notice that you expect the laws regarding the safeguarding of personal information to be followed.
Don’t close accounts if you’re trying to improve your scores
Dear Liz: I was able to pay off 80% of my credit card debt recently. I have several cards from stores I no longer shop at and have not had activity for several months. Should I cancel those cards to reduce the number of active cards or leave them alone?
Answer: Closing accounts won’t help your credit scores, and may hurt them. If you’re trying to improve your scores or plan to get a major loan in the next several months, leave them open.
If your scores are fine and you don’t expect to apply for a mortgage or car loan soon, then you certainly can close a few retail cards. But try to keep open your major credit cards, such as Visa, MasterCard, Discover and American Express.
Should you refinance a mortgage that’s almost paid off?
Dear Liz: We have a second home close to a lake that we bought in 2002 for $370,000. It could have sold for $1 million at the peak of the market but is now worth about $800,000. We owe $100,000 on a mortgage with four years left until it’s paid off, but the payments are a hardship and barely manageable. I don’t expect prices in the area to improve much in the next several years and they may decline more. Since I could sell the house now and get back all the money I ever put into it, I figure that every dollar I pay on it from now on is a dollar of profit burned. Selling the house is not an option, though, as my wife is adamant about keeping it. We are 10 years from retirement and have a kid to put through college. Our income is just under $100,000, we have no other debts and our primary home is paid off. Should we refinance the remaining balance to a 30-year loan, or just grin and bear it until the payoff in a few more years?
Answer: If you’re on track saving for retirement and your child’s college education, then the smart thing would be to gut it out and get the property paid off. You’re so close to the end of this loan that the majority of your payments go toward principal. Refinancing might lower your payments, but would dramatically increase the amount of interest you’d pay over time.
If you’re stinting your savings, though, the math gets more complicated. You could view the paid-off vacation home as an asset you could tap later for retirement expenses or college. In that case, getting it paid off on the current schedule would make sense. If selling or borrowing against the home in the future isn’t an option, though, then lowering your payments so you can save for your other goals starts to make some sense.
If that’s the option you choose, consider a 15-year loan rather than a 30-year loan. The shorter loan will still dramatically reduce your payment but you’ll pay about 60% less interest over time.
