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Dear Liz: I have read tons of books on finance and debt repayment, but I’m having trouble deciding what to do next. My husband and I are 52. He receives a monthly disability income, and I work two days a week. We still have about $105,000 left before our mortgage is paid off. We also owe about $7,000 in credit card debt and $5,500 in overdraft charges.
Should I concentrate solely on paying off debt, including the mortgage? Should we modestly renovate our 20-year-old home because after six kids, it is in need of a little TLC? We could downsize, but I’m somewhat emotionally attached to this house, and downsizing would still mean renovating to get the house in shape to sell. At the same time, we’d like to start a small business in our town. It wouldn’t be a huge investment of money, but it’s an outlay nonetheless. I don’t really want to wait five or 10 years to have to do this because it would mean income for one of our children who needs it and sometimes has to rely on us financially. How should I focus?
Answer: You didn’t say a word about retirement savings, but that should be a priority for most people.
If you don’t make a lot of money, Social Security is designed to replace 40% to 50% of your earnings. (The more you make, the less Social Security will replace, on the assumption that you’ve had more opportunity to save.) But most people, of any income level, would have trouble adjusting to living solely on their Social Security checks.
You can estimate your future benefit checks by using the Social Security Administration’s calculator at http://www.ssa.gov/estimator. Your results will be based on your actual earnings. Then you can use the AARP calculator (in the “work and retirement” section of the website) to figure out how much you need to save to have a comfortable retirement. You may not be able to reach that goal, but you should at least try to put aside something to improve your future life.
You don’t need to be in a rush to pay off your mortgage, but you should target that credit card debt and that shocking amount of overdraft charges. You also should know that renovations rarely pay for themselves when you’re ready to sell a home. At best, you typically get back 80 cents for every dollar you spend. A better approach is to make some cosmetic fixes that don’t cost a lot, such as new paint, clean windows and freshened-up landscaping.
As for opening a store, understand that small businesses can take a while to get off the ground. If you don’t have adequate savings or access to a line of credit, the business could fail and take your investment with it. The Small Business Administration at http://www.sba.gov has resources and Small Business Development Centers to help you understand what lies ahead. Do your research before you begin, and consider holding off at least until your toxic debts are repaid.
Finally, you didn’t explain why your child needs your money. If he or she is still a minor, that’s one thing. If he or she is an adult and not disabled in some way, however, then the parental dole needs to stop. It doesn’t sound like you and your husband are adequately providing for your futures. Your kids need to know they have to provide for their own.
Dear Liz: You’ve written about how helpful it can be to have “savings buckets” or separate savings accounts earmarked for different goals such as vacations, property tax payments and so on. I have been trying to do this myself, but every bank I find charges so much in fees that it would cost more money than I would save. Either that, or they tie the savings accounts to a “free” checking account that has a high minimum balance. Can you please pass along any information about free savings accounts that have no minimum balance? I cannot use Internet banks because I cannot deposit cash when I have $5 or $10 in my pocket that I would take to the bank.
Answer: Actually, you can. Internet banks can be linked to your checking account at a brick-and-mortar bank. You can take your money to the bank, then transfer it to one of your savings accounts at the Internet bank. Unlike traditional banks, Internet banks such as ING Direct, Ally and FNBO don’t have balance minimums or monthly fees. You can set up several savings accounts without paying extra fees.
You still need a low-cost checking account, of course. You should be able to find one at a local credit union.
Dear Liz: My husband and I are wondering whether it is time to file for bankruptcy. We have about $20,000 in credit card debt, largely because of a home addition and remodeling project my husband began five years ago. It has been much more costly and time consuming than he anticipated and is not even close to being finished. That prevents us from being able to refinance, which would free up money to pay our debt.
A mortgage broker recently suggested we apply for a home equity line to get enough cash for materials and labor to finish this project. We pay our mortgage and two car loans on time and make at least minimum payments on the cards.
My husband’s health has been declining, making it very difficult for him to do physical work on this project, and one of our kids has had two surgeries in the last few years, so there have been a lot of medical bills as well. How should we proceed?
Answer: You’re having trouble managing the debt you already have, so it’s definitely risky take on more. On the other hand, if you have enough home equity to get a line of credit, that could be a path out of this mess.
First, though, make an appointment with an experienced bankruptcy attorney (you can get referrals from the National Assn. of Consumer Bankruptcy Attorneys at http://www.nacba.org). A credit card balance of $20,000 isn’t by itself insurmountable, depending on your income, but the fact that you’re not paying much more than the minimums on your cards is a huge red flag — as are those medical bills.
The lawyer can review your situation and let you know whether bankruptcy is even a reasonable option. Each state’s laws differ, so you need to consult an expert.
If you decide instead to take out the home equity line, make sure you hire a competent and well-recommended contractor to finish what your husband started. The last thing you need is for someone else to botch the job.
Dear Liz: As an avid reader for years I have never felt as compelled to write as I did after reading your column regarding college financing. I disagree that college financial aid is based primarily on income or that “typically [parents are required to] contribute less than 6% of eligible assets.”
We filed a Free Application for Federal Student Aid for our daughter, and our expected family contribution was calculated at $43,000. The school offered my daughter just $2,000 in work study, at a university with a $38,917 annual tuition. Our combined income is $175,000 and our liquid savings (not including retirement accounts) is $145,000.
We could pay 6% of our income (about $12,000) or 6% of income plus savings ($19,000) per year without taking loans, but not $38,000. I have attended several “paying for college” seminars and found their estimated contributions quite sugar-coated compared with the reality.
Rather than paying 6%, is the reality 25% of our income? Please let me know if we have done something wrong, and how to rectify it.
Answer: The 6% limit on eligible assets is not a cap on how much you’ll have to pay for college. As the original column said, income weighs more heavily in financial aid calculations than assets, and your income is high.
The federal financial aid formula assumes families with high earnings have more disposable income to pay for college than lower-earning families. The formula also assumes high-income families have had ample opportunities to save for college, whether or not they actually have.
You could use the net price calculator on the college’s website to see whether your liquid savings are having an effect on your expected family contribution. At some schools, using savings to pay down a mortgage or other debt could result in a lower expected contribution.
But you still might not get aid, even if you could move the needle on your expected contribution. Many colleges “gap” their students by not supplying enough aid to meet all their needs. And while some private colleges offer merit (rather than need-based) scholarships to attract the children of wealthier parents, top-tier schools tend not to, because they know they can attract excellent candidates without such help, said Lynn O’Shaughnessy, author of “The College Solution: A Guide for Everyone Looking for the Right School at the Right Price.”
Even if your family doesn’t have financial need according to the formula, your daughter is still eligible for federal student loans of as much as $5,500 in her freshman year. Federal student loans are flexible debt with fixed interest rates and many repayment options, so they shouldn’t be feared, especially in reasonable amounts. If, however, you would have to borrow much more, and that borrowing would interfere with your plans for retirement or other financial goals, you probably can’t afford this school and need to start looking for colleges you can afford.
Dear Liz: You write about it not being a good idea in many cases to pay off your mortgage, but does it make sense to do so to reduce savings so that we can be in a better position to help our high school junior get financial aid for college in a year? We also have a 529 and some investments and are savers.
Answer: Your income matters far more to financial aid calculations than your savings, said Lynn O’Shaughnessy, author of “The College Solution: A Guide for Everyone Looking for the Right School at the Right Price (2nd Edition).” Another important factor is how many children you have in college at the same time. If you have a high income and only one child in college, you may not get much or any help, regardless of how your assets are arranged.
Many schools ignore home equity when figuring financial need, however, so it might be worth running some numbers. You can do that by using the net price calculators included on every college website. Pick the schools your junior might want to attend and run two scenarios on each calculator: one with your current financial situation and another in which you’ve paid off your mortgage with your savings.
Many parents are overly worried about how their savings will affect potential aid, O’Shaughnessy said. Parental assets, including 529 accounts, receive favorable treatment in financial aid formulas. Your retirement assets aren’t included in the federal formula at all, and your non-retirement assets are somewhat shielded as well thanks to an “asset protection allowance.” The older you are, the more of an asset protection allowance you get. The allowance will be somewhere around $45,000 for a married couple in their late 40s, the typical age for college parents. For those over 65, the allowance is $71,000. Beyond that, you’re typically asked to contribute less than 6% of eligible assets toward your offspring’s education each year.
Dear Liz: I want to stop contributing to my 401(k). How do I cancel it and withdraw my funds?
Answer: You can stop contributing to most workplace retirement funds by contacting your human resources department. You typically won’t be able to withdraw the money, however, unless you can prove a hardship or you leave your job.
You should think long and hard before you discontinue your contributions, in any case. For many workers, contributing to a 401(k) is their best shot at a comfortable retirement. You may be unsettled by volatile investment markets now, but over time a diversified mixture of stocks and bonds should give you the returns you’ll need to overcome inflation and have a reasonable nest egg.
Not contributing to your 401(k) could mean giving up free money in the form of a company match and could trigger a larger tax bill, since your contributions usually are tax-deductible. Money saved within retirement accounts, including 401(k)s and IRAs, is also protected from creditors should you ever be sued or have to file for bankruptcy.
If you’re disgruntled with your plan because you think the fees are too high, ask your employer to look for a more reasonable-priced option. Now that 401(k) administrators must fully disclose their fees, many companies will be looking for better deals.
Back in June I wrote a post about “How to get free summer travel.” I’d arranged a 5-day trip with my daughter to the Pacific Northwest using a variety of rewards programs. The trip, which we took over Labor Day weekend, was a heck of a lot of fun. Like most vacations, it wound up costing a bit more than planned but I also learned a few things.
Re-price your reservations before you go. I checked both hotel and car reservations a few days beforehand to see if prices had dropped. They hadn’t at the Doubletree in Portland, which was in fact sold out. But the rates at Enterprise car rental fell like a rock. Plus, Enterprise emailed me a last-minute 10% off coupon for being part of its frequent traveler program. My cost for the two-day car rental went from over $100 to just $37. I love that.
Don’t try to make a same-day connection on Amtrak. We took the sleeper car up from Los Angeles, and the train fell waaaaay behind schedule–five hours, in fact. That was good news for us, since we got to see some gorgeous scenery around the California-Oregon border that would normally pass by in the dark. Passengers who were trying to make a connection to the Empire Builder, the train that goes from Portland to Chicago, weren’t so happy. They had to get off in Klamath Falls and ride several hours on a bus to meet the other train. If I were to book an Amtrak trip that involved a connection, I’d try to arrange it so that we had an overnight stay in between.
Portland’s public transportation is awesome. There was a light-rail MAX station right outside our hotel, and it took us everywhere we wanted to go while we were in town, including the Saturday Market and the zoo. A day pass for an adult was just $5. Parking at the zoo alone would have been $4, and a hassle, since there are limited spaces. When it was time to leave, I took the red line out to the airport to pick up our rental car–easy peasy.
Check out the artist/farmers markets. Speaking of the Saturday Market: I was blown away by many of the vendors there. This weekend market along the river features some really skilled craftsman offering handmade stuff at reasonable prices. I stocked up for Christmas.
Splurge a little. My daughter’s a huge fan of the Great Wolf Resort and its indoor water park south of Olympia. The rates in the summer can be steep, but my sister and I decided to split the cost of a Kid Cabin room with bunk beds. That way, we got to spend more time together, our kids had a ball and we were each out of pocket $160 rather than $320.
Peach fritter with cream cheese? Might want to skip that. My friend Michelle Rafter suggested we meet at VooDoo Donuts for a treat. Yes, the long wait was worth it, but no, I don’t think I’d order the peach fritter again–it was almost as big as my head. Next time it’ll be the maple bacon donut, for sure.
Dear Liz: My parents were married for 50 years. When my mother died, my father didn’t inherit a large monetary fortune, but he did get a houseful of family treasures (photos, knickknacks, mementos, documents) that had been cherished and saved for me and my children (I was an only child). Immediately after my mom died, my father found a lady friend and cut off all ties with me and his past. I tried but could not get through.
I know it would not have been my grandparents’ or my mother’s wishes that 150 years of family memories be lost, but unfortunately that is how it turned out. Please encourage aging parents to plan ahead for many potential outcomes so that their wishes and the wishes of past and future generations are honored. I shudder to think of what has happened to my great-grandmother’s journal that I read aloud as a child.
Answer: The German fairy tale about Hansel and Gretel resonates with many people in your situation. If you remember, in that tale a poor woodcutter acquiesces to his second wife’s demand that he abandon his children to die in the woods.
Of course, that tale ends happily. The children kill the evil witch who imprisons them. They steal her jewels and return to share the wealth with their once-again-widowed father. (Children can be remarkably forgiving.)
It’s sad that you’ve lost access to the heirlooms, but it’s much sadder that you’ve lost access to your father. If he’s still alive, though, so is the possibility of rapprochement. If you keep in touch, he may eventually thaw. If not, you’ll at least know you did all you could.
Your mother may not have been able to imagine your father cutting you off the way he has. But expecting a surviving spouse to “do the right thing” in distributing heirlooms may be expecting too much. Dementia could rob the survivor of good judgment, or he could be influenced by a subsequent relationship, as your father was.
So your point is well taken. Anyone who has heirlooms to pass along should make sure to do so — either in a will or, better yet, while still alive to enjoy the next generation’s appreciation.
Anyone who’s lost access to an heirloom should remember that while precious, it’s still a thing — and a thing that could have been lost in many other ways, from a house fire to negligence. Focusing on the loss won’t bring the thing back or restore a troubled relationship. It will just make you unhappy, and life’s too short for that.