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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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Q&A: Saving loose change

Sep 29, 2014 | | Comments (1)

Dear Liz: My husband recently told me that he has saved many coffee cans full of loose change over the years. When I suggested we might at least roll the change to make it easier to count should we ever need it, he was not interested! I understand he just wants it available in an emergency, but just the transportation of these things to a coin counter (that may or may not be available) makes me want to find a better way to honor his idea of saving change in a more realistic way. Perhaps roll while watching TV, then ask a bank to convert to dollar coins as a way to reduce the bulk?

Answer: It’s hard to imagine how your husband expects to deploy those coins in an emergency. Does he envision lugging them to the grocery store or gas station? Does he imagine any retailer would accept a coffee can of change as payment? Many retailers won’t even accept rolled coins, since they don’t know what’s inside those wrappers.

Converting the coins into bills, or better yet to savings in a bank, is a far more practical option. You can use commercial coin sorters, but they typically take a hefty cut. Coinstar, for example, charges a 10.9% service fee, although that is waived if you choose to be paid with a retailer’s gift card or voucher.

Another place to check is your bank. Some have coin sorters available to customers, although you may have to deposit the result rather than take it immediately in cash.

Alternatively, your bank may supply you with wrappers — or it may not accept change at all. The only way to know is to call and ask.

If you do decide to roll the change, consider making a small investment in a coin sorter. You can spend $200 or more on a commercial version, but there are well-reviewed versions on Amazon that cost around $25.

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Q&A: An Update

May 12, 2014 | | Comments (1)

Dear Liz: I think you were way too hard on the young man who said his 30-year-old girlfriend’s lack of retirement savings was a potential deal breaker. You told him to get off his high horse. He was just being prudent.

Answer: It would be prudent to regard massive debt, alcoholism or drug use as deal breakers for a relationship. Elevating the young woman’s lack of retirement savings to this level is just over the top. But let’s hear what the young man himself had to say:

Dear Liz: I want to say thank you for taking the time to write on my question. I was able to find a few charts online and show her [the power of compounded returns]. She got excited about it and is now putting in to get the company match (5%).

Thank you very much for putting me in my place. I did not mean to come across as if I was better. I have been very lucky to have been able to save and be taught about compounding at an early age.

Answer: One of the potential hazards of being good with money is arrogance. We can become convinced that we know better and that other people should do things our way. It takes some humility to understand that not everyone has had the advantages we’ve had or been able to take in the information as we’ve done. Understanding that makes it easier to find compromises in a relationship that work for both parties.
Good luck with your relationship. She sounds like a keeper.

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Love and money

Apr 07, 2014 | | Comments (4)

Dear Liz: I am in a new relationship with a great woman. I’ve talked a little bit about money and retirement with her (she’s 30). I am trying to let her know that it would be wise to contribute at least enough to her company’s retirement program to get the full match. What are some books or articles that would show her the importance of saving for retirement? I like her, but this can be a deal breaker for me. What is the best way to introduce her to personal finances without scaring her?

Answer: You could start by hopping down from that high horse you’re riding.

The fact that she’s not saving for retirement is unfortunate but hardly unusual. Many people her age have trouble understanding the need to start saving young for retirement. Even those who do may have trouble investing their money, thanks to the 2008 market crash and subsequent recession. A recent survey by MFS Investment Management of people with $100,000 or more in investable assets found nearly half of adults under 34 say they would never be comfortable investing in stocks.

Of course, millennials need to get comfortable with the idea of stock market investing, because otherwise they’re unlikely to grow their wealth enough to afford a decent retirement. Some books that can help them understand the principles of investing — and the importance of scooping up those free company matches — include:

•”Generation Earn: The Young Professional’s Guide to Spending, Investing, and Giving Back,” by Kimberly Palmer.

•”Get a Financial Life: Personal Finance in Your Twenties and Thirties,” by Beth Kobliner.

•”On My Own Two Feet: A Modern Girl’s Guide to Personal Finance,” by Manisha Thakor and Sharon Kedar.

As you talk to your girlfriend, remember that few couples are on exactly the same page financially. Everyone has different family cultures and experiences growing up that inform how we deal with money. Asking her to talk about her background with money and taking the time to understand her perspective is a great place to start your conversations about finances. It’s certainly better than issuing ultimatums at this early stage.

Categories : Q&A, Saving Money
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Charitable giving can help keep tax deductions steady

Mar 17, 2014 | | Comments Comments Off

Dear Liz: Regarding the reader who was worried about not having sufficient tax deductions: I recommend charitable giving. As our mortgage interest per payment fell, I augmented it with charitable giving to maintain the same annual total for income tax deductions (interest plus charity). As the years go by, our interest decreases and charity increases. Payments to charity accomplish a social benefit, while interest payments just line the pockets of bankers. We give to a broad variety of charities: national, local and international organizations, religious and secular, health and social care, care for children at risk, veterans, Red Cross, etc. The great thing about charitable giving is that we get to choose whom we wish to help. When asked, most organizations will keep your demographic information private so that you are not inundated with requests via the sale of donor lists.

Answer: Thanks for sharing your approach, but people should understand that it requires paying out more money over time to maintain the same level of itemized deductions.

Mortgage payments typically remain the same over the life of the loan, with the amount of potentially deductible interest shrinking and the amount applied to the principal increasing with each payment. So as the amount of deductible interest declines, you would have to increase your contributions to charity in addition to making your mortgage payment each month if you wanted to keep your itemized deductions unchanged.

Categories : Q&A, Saving Money
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Why you want an emergency fund

Jan 20, 2014 | | Comments Comments Off

Dear Liz: I regularly read about people in your column who don’t feel the need for an emergency fund, or think they only need a small one. This is one of the many issues that makes me glad that my husband takes care of the finances. We are both professionals with graduate degrees who, for different reasons, were once unemployed for three months at the same time. Because we had a healthy emergency fund, we kept up with our bills with only minimal belt-tightening. If I had been in charge we would have had to flee the country to escape our creditors! That’s an exaggeration, but you get my point.

Answer: Kudos to your husband for being prudent, and to you for cooperating with him.

For most families, growing a fat emergency fund necessarily must take a back seat to more important priorities, such as saving for retirement and paying off toxic debt, including credit cards. As soon as they’re able to add to their emergency savings, though, they should do so. The average duration of unemployment stretched over five months after the recent recession. Although you may be able to live off credit cards and lines of credit, using cash is obviously better — and having that fat emergency fund can help you sleep better at night.

Categories : Q&A, Saving Money, The Basics
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Dear Liz: I have about $16,000 in student loans at 6.8% interest. At the current monthly payment it would take me about 7.5 years to pay them off. I contribute 10% of my income to my company’s Roth 401(k) plan (my employer matches the first 6% contributed). I also contribute 3% to the stock purchasing plan. I am thinking of cutting back my 401(k) contribution to 6% and not contributing to the stock purchasing plan. Applying the extra money to my loans would reduce the payback period to about 2.5 years. After that, I would increase the contribution amount and diversify with a Roth IRA as well and maybe even begin the stock purchase program again. What do you think?

Answer: Not contributing to retirement accounts is usually an expensive mistake. The younger you are, the more expensive it can be.

Every $1,000 not contributed to a retirement plan in your 30s means about $10,000 less in retirement income. That assumes an average annual growth rate of 8%, which is the historical average for a stock-heavy portfolio.

In your 20s, the cost of not contributing that $1,000 is $20,000 of lost future retirement income. The extra decade of not getting those compounded returns makes a big difference.

People have the erroneous idea that they can put off retirement savings and somehow catch up later. Catching up, though, becomes increasingly difficult the longer you wait. A better approach is to save as much as possible starting in your 20s when the money has the longest time to grow. Then you’ll be in a better position to withstand job losses or other interruptions of your ability to save. If those setbacks don’t happen, you’d have the option of retiring early.

Granted, your plan would require reducing retirement contributions for just a few years. But the federal student loans you have are fixed-rate, tax-deductible debt that you don’t need to be in a hurry to pay off. In the long run, you’d be much better off boosting your retirement contributions.

If you’re determined to pay down your loans, however, use the money you’ve been contributing to the stock purchase plan. Continue making at least a 10% contribution to your retirement plan and increase that as soon as you can.

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Dear Liz: I think I have a phobia about spending money. I’m a young professional who has devoted a lot of time to building up my savings account. I also contribute sizable amounts to my 401(k) and IRA each month. I pay off my credit cards each month, and I am making larger-than-necessary payments on my small student loans. Still, I feel as if every time I spend money on something — clothing, travel, furniture, etc. — I am undoing my hard work. It makes me scrutinize every decision until I either give up or make an impulse purchase. Is this normal? How do I know when it is OK to actually spend the money I have worked to save?

Answer: Being cautious about spending money is fine. If making purchases causes you great anxiety, though, or you’re unnecessarily compromising your quality of life, then you may want to seek help.

People with irrational fears of spending money may put off necessary doctor visits, buy unhealthy food because it’s cheap (at least in the short run), refuse to make charitable contributions or forgo pleasurable experiences. Instead of using money as a tool to live a good life, they make saving an end in itself.

Since you’re by nature a saver and a planner, you should use those strengths to free yourself from unnecessary concerns about spending money. If you enjoy travel, for example, plan a few trips and set aside money in advance to pay for them. Do the same thing with clothing or furniture upgrades. Planning and knowing how much you have to spend can help you dispel some of your anxiety and minimize the chances of regret.

Talking to a therapist or a financial planner could give you some additional strategies for dealing with your worries.

Categories : Q&A, Saving Money, The Basics
Comments (7)

Is moving in with Mom unfair?

Jul 16, 2013 | | Comments (2)

Dear Liz: I just read your reply to the woman who was struggling to make ends meet with her part-time job. She was wondering whether she should sell her house and move in with her mother. I couldn’t get to my computer fast enough to ask you how on Earth you can recommend with a clear conscience that someone move back in with a parent because she can’t pay her bills.

Why should she be able to mooch off Mom and expect her to take her Social Security check to pick up the slack? I was in basically the same situation when I was 39, except that I had three kids and my ex passed away within a week of our divorce, so I got no child support. I still managed to find a full-time job, maybe not the job of my dreams, but it paid well and allowed me to keep the house and continue to raise the kids. I built up a good retirement, which I felt I had earned and was enjoying very much, until my adult son went through a bad divorce and “temporarily” moved himself back into my home.

I’ve tried to help him get back on his feet and moving again, but so far all that has happened is my credit cards are getting out of control, my home equity line of credit is maxed out, my property has been damaged, and my life is now miserable, as I share my once-lovely home with an ungrateful jerk, his girlfriend and three cats. I can’t figure out how to get him out, and I can see no end in sight. I’m not saying this woman would do the same, but it’s still not fair to expect her mom’s life to be disrupted, no matter how nice the lady is.

Answer: The other reader was considering going back to school to get training that would qualify her for a full-time job. Selling her home and moving in with her mother would allow her to keep her current part-time job while she went to school. There was no suggestion that Mom would pick up her bills — only that she would share her home for a finite period.

So the other reader’s situation probably isn’t like yours. But perhaps it’s easier to get mad at a stranger than to acknowledge that you helped create this mess and you’re the only one who can fix it.

Schedule a meeting with an attorney familiar with landlord-tenant laws in your state so you’ll understand the best way to evict your freeloader. Then do.

Perhaps your parents did a better job of setting boundaries with you than you did with your son, but it’s not too late to reclaim your retirement, your house and your life.

Categories : Q&A, Saving Money
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Tuesday’s need-to-know money news

Jul 02, 2013 | | Comments Comments Off

Champagne glassesFinancial survival tips for before the wedding and after the marriage ends, freedom from credit card debt, and beating the retirement clock.

Engaged? You Might Need Money Therapy
Things you should know before you walk down the aisle.

How Does Divorce Affect Bankruptcy and Mortgage
Things you should know for when the walk down the aisle fails.

Declare Your Independence From Credit Card Debt
Life, liberty and the pursuit of zero debt.

How to Get Help From a Student Loan Mediator
Student loan battles don’t have to be fought alone.
What to Do When You Haven’t Saved Enough for Retirement
How to get by when time isn’t on your side.

Categories : Liz's Blog, Saving Money
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