Dear Liz: In the last two years, many of my friends and former co-workers have been forced to attempt self-employment, independent contracting, freelancing, etc. None of them had any previous experience working for themselves, and none had personal acquaintances who could provide guidance. Not surprisingly, although many have good business and interpersonal skills, none have yet had success.
Please advise of any websites, books, associations or other resources that suggest what pitfalls to avoid (taxes and benefits have been nightmares for many people I know), how to plan before taking the plunge into self-employment and how to maximize the chance of success.
Answer: An excellent place to start would be “The Money Book for Freelancers, Part-Timers, and the Self-Employed: The Only Personal Finance System for People With Not-So-Regular Jobs” by Joseph D’Agnese and Denise Kiernan, two freelancers who figured out through trial and error how to cope with the erratic incomes while trying to pay for their own benefits and keep the IRS happy. The authors’ system revolves around putting aside a percentage of all income toward these expenses, rather than trying to save specific dollar amounts, which can be tough on an unpredictable income.
Two other great sources include the Small Business Administration website at http://www.sba.gov and Entrepreneur magazine’s site, at http://www.entrepreneur.com.
Your friends also should look for professional groups that can provide networking opportunities with successful freelancers and entrepreneurs in their fields. Nothing beats one-on-one advice and mentoring from those who have figured out how to win the game.
Dear Liz: Our mortgage is paid off and is no longer shown on our credit history since it’s been 10 years. Is there a way to have that information included on our credit report? Seems that our creditworthiness might be enhanced by the fact we own our home outright.
Answer: Credit scoring formulas can be counterintuitive at times. These formulas measure only how you handle the credit accounts your lenders report to the bureaus. So information about your income or assets, including a paid-off home, aren’t included in the formulas.
Lenders, however, often seek additional data to assess applicants. For example, mortgage lenders these days are quite interested in potential borrowers’ income, assets, job stability and debt-to-income ratios. So the fact that you own your home may impress a future lender, even if it doesn’t matter to your scores.
You can’t force a lender to report any credit account to the bureaus, and paid-off or closed accounts don’t have to be reported for any specific period. But you can keep good credit scores even without a mortgage or other installment loan on your reports. The key is to have and lightly use a few credit cards, always paying your balance in full each month. That should keep your numbers high without requiring you to pay a dime in interest.
ear Liz: I’m writing to get some help on what to do with $300,000 that I have recently inherited. My husband and I are in our early 50s. We owe $180,000 on our home at 5% interest, with seven years left on our 15-year loan, and have no other debt. We have a combined $225,000 in retirement accounts and about $15,000 in a regular savings account. Does it make sense to pay off or pay down our mortgage with the inheritance or just keep it in savings?
Answer: You need to take a small chunk of that money and invest it in a session or two with a fee-only financial planner who can review your entire situation and give you personalized advice.
In all likelihood, the advice won’t be to pay off the mortgage. You’re on track to have your home loan paid off before retirement age, and most people have better things to do with their money than pay off a low-rate, often tax-deductible debt.
It doesn’t make much sense to let your inheritance languish in a savings account, however, when you’re likely to need more money for retirement. A planner can help you come up with an investment allocation that takes somewhat more risk but that should bring you greater returns.
You can get referrals to fee-only planners from the Garrett Planning Network at http://www.garrettplanningnetwork.com and from the National Assn. of Personal Financial Advisors at http://www.napfa.org.
Yes, Virginia, you can get free credit scores, but typically you either have to 1) sign up for expensive and possibly unnecessary credit monitoring or 2) accept a score that’s different from the FICO scores lenders typically use. (If a credit score doesn’t say it’s a FICO, it’s not a FICO.)
But credit and debt expert Gerri Detweiler notes over at Credit.com blog that 2011 is likely to be the year when people finally get to see, for free, their FICOs as well as other scores being used to evaluate them. Detweiler does a good job of explaining why this is still a bit up in the air, but it appears that starting Jan. 1, some lenders will begin to share the credit scores they use to evaluate you when you apply for credit.
And then starting July 21, anyone who doesn’t get the best rate or terms because of a credit-based score will get free access to the score used, as Senator Mark Udall’s Free Access to Credit Scores (FACS) legislation, which was part of the Dodd-Frank Wall Street Reform Act, takes effect. Since credit scores are so broadly used, this will affect anyone who because of his or her credit:
- gets turned down for a loan or has to pay a higher interest rate
- is required to get a co-signer
- must pay a higher rate for insurance coverage
- must make a deposit or a larger deposit with a utility or cell carrier
This is a great first step, but really, you should have free access to FICOs and any other score being used to evaluate you.
Dear Liz: We just refinanced our $100,000 mortgage into a 15-year fixed-rate loan at 3.75%. We have an extra $500 a month and want to know what we should do with it. Should we use the money to pay off the mortgage early, increase the contribution to my 403(b), or start a rainy day fund and try to save up to three months of my take-home salary? I’m 44, my wife is 35, and we have three kids ages 5, 3 and 9 months. I would like to retire in 16 years.
Answer: At least two of your children won’t be through college by the time you want to retire, so you may need to rethink your plans unless you have an exceptionally generous pension or a lot of money saved in that 403(b) already.
Most people have better things to do with their money than pay off a low-rate mortgage, and this is especially true for you, given your very low rate and your already short mortgage term. If you’re not already getting the full match in your 403(b), putting the money there is often your best bet. Even if you’re getting the full match, you might want to invest more in your retirement account if you’re not saving enough. You can play with a retirement calculator or talk to a fee-only financial planner to see if your retirement savings are on track.
Once you’re saving enough for retirement, you probably should prioritize that rainy day fund. The fact that you don’t have any savings is worrisome, particularly if you’re the sole income provider. Your initial goal should be to save three months’ worth of your must-have expenses — what you pay for shelter, utilities, food, insurance, child care and loan payments. You may want to expand that goal to six months’ worth of expenses or more if your spouse couldn’t easily return to work, should you lose your job.
Finally, you probably should think about starting college funds for the kids. College educations are all but essential these days if you want your children to make economic progress. (One example: According to the U.S. Census Bureau, incomes for men with only high school educations have dropped 31% in inflation-adjusted terms since 1989.) You may not be able or even want to pay the whole bill for their educations, but any money you save is likely to reduce the debt they would have to take on to get their degrees.
Dear Liz: I work for a small company that doesn’t offer the benefits large companies do, such as a 401(k) retirement account. My husband is a federal employee who contributes 10% to his Thrift Savings Plan at work, and we contribute the maximum to our Roth IRAs. Is there another avenue to save for retirement that would be similar to a 401(k) for me or should I just have my husband ramp up his TSP contributions? We’re both 29 and have $35,000 in retirement accounts and $60,000 in other savings programs, mutual funds and money markets. We own our house (14 years left on a 15-year mortgage), have no student loan debt and have one car loan for less than $10,000. I think I’m on track, but I know it’s better to save early and I’m worried that since I don’t have a 401(k) I’m missing out on some peace of mind.
Answer: You two appear to be nicely on track with your finances, but if you want to retire early or otherwise boost your retirement funds you have several options.
The easiest would be to simply have your husband contribute more to his account, but you also could open a joint or individual brokerage account and invest for retirement through that. You wouldn’t get a tax break for your contributions, but your gains could qualify for favorable capital gains rates.
Another option is to start a sideline business and contribute some of your profits to a simplified employee pension, or SEP, IRA. Self-employed workers have several options for retirement savings, including solo 401(k)s and even traditional pension plans, but the SEP is an easy way to start.
The insurance quote site Insure.com has developed a little sideline in presenting grisly, but fascinating, articles about how we often worry about the wrong risks. This year’s installment is “What’s more dangerous?” which claims, with statistical precision, that you’re more likely to die at the hands of your spouse than of a serial killer and more likely to perish in evening rush-hour traffic than you are after the bars close (or, for that matter, on New Year’s Eve, the night seasoned alcoholics like to call “Amateur Hour”). A previous installment pointed out you’re more likely to be killed by a bee than a shark.
Pieces like this remind me of how frequently we misjudge financial risk as well. Many people mistakenly think:
- Their company’s stock is less risky than a diversified mutual fund
- Stocks are less risky when the market’s booming and more risky when it’s falling
- That it’s better to put off investing for retirement when the stock market is volatile (fact is, the market is always volatile, and delays just mean you have to save more or settle for less when you retire).
Other common misjudgments: deciding you don’t need health insurance because you’re currently healthy (when you’re just one accident or illness away from potentially bankrupting bills without it) or following an investment guru because he’s made a good call lately (without checking to see how his last dozen or so predictions panned out).
It’s not easy to be rational in this world, but our financial security depends on it.
But there are a ton of money books out there that can provide inspiration, either for yourself or for the people you know who may be struggling. This year alone has brought a bumper crop of great titles, including:
“The Money Book for Freelancers, Part-Timers, and the Self-Employed: The Only Personal Finance System for People with Not-So-Regular Jobs” by Joseph D’Agnese and Denise Kiernan. This is, quite simply, a must-have book for those who work for themselves—including regular W-2 employees who have a business on the side. Written by two freelancers, it’s clear, it’s funny and the money management system they outline is simply brilliant. Give this to your contractor/freelancer/self-employed friends and get prepared for them to start lavishing you with thanks when they’re only a few pages in.
“Generation Earn: The Young Professional’s Guide to Spending, Investing, and Giving Back” by Kimberly Palmer. Palmer, who blogs as the Alpha Consumer, turns the idea of the debt-riddled “slacker generation” on its ear, using solid research to show that the youngest generation of professionals has more skills, and far less debt, than is generally acknowledged. Palmer also reaches beyond tried-and-true personal finance advice to discuss values, giving back and living more lightly in the world. This would be a great pick for a recent college graduate or really anyone in his or her 20s or early 30s.
“Psych Yourself Rich: Get the Mindset and Discipline You Need to Build Your Financial Life” by Farnoosh Torabi. People who keep trying to get their financial act together, only to have everything fall apart, may want to reconsider how they think about their money. Torabi points out the many ways we can sabotage ourselves as well as techniques to get beyond the roadblocks that prevent us from taking control of our cash.
“Your Money: The Missing Manual” by J.D. Roth. Roth’s popular Get Rich Slowly blog documented his journey digging himself out of debt, but his first book goes lightly on the personal anecdotes and focuses more on the nuts and bolts of getting your finances in order. Refreshingly, he doesn’t assume his readers all want to become Donald Trumps, assuring us that it’s more important to be happy than to be rich—but having a handle on your money can help you reach either goal.
“The Simple Dollar: How One Man Wiped Out His Debts and Achieved the Life of His Dreams” by Trent Hamm. Hamm is another popular blogger, and—in contrast to Roth’s approach—this book is all about his journey out of debt. It’s inspirational and accessible and, like the other books on this list, all about creating a happy and prosperous life rather than just an impressive balance sheet.
“Be Centsable: How to Cut Your Household Budget in Half” by Chrissy Pate and Kristin McKee. Even black-belt frugalistas are likely to learn something from this book, and it’s an absolute goldmine of great advice and tips for newbies just starting to get a handle on their household spending.
Update: And how could I forget “Debt-Free U: How I Paid for an Outstanding College Education without Loans, Scholarships or Mooching Off My Parents” by Zac Bissonnette? Bissonnette is one of the new shining lights of personal finance, who wasn’t even out of school yet when he wrote this book, which delivers some great ideas for getting an education without drowning yourself in debt.
Got a book to recommend? You can do so in the comments.
I was shopping online for a certain gift for my husband. Google Products provided a price comparison chart, and one of the best prices came from a retailer I didn’t know but which had received hundreds of positive reviews from users and few negative reports.
I was just about to pull the trigger on the purchase when I remembered to check the return policy–and I’m so glad I did, because it said “No Refunds or Exchanges will be made after 7 days.”
The retailer didn’t specify whether the 7 day period started: when you ordered, when it was shipped or when you actually received your shipment. In any case, the return period would have expired long before Hubby opened the box on Christmas Day.
I was burned once before on a return policy, when Overstock refused to return my money even though it shipped me the wrong item, and acknowledged it had done so. So I learned that no matter how tempting the savings, you have to weigh it against the fact that mistakes happen, and I’d rather deal with a retailer that makes it easy to rectify those mistakes.
So I paid a little more for a retailer that offers a 14-day return period, starting the day you receive the item, and that has extended the warranty through January for purchases made this month. (I’d tell you who it is, but then Hubby would know what I got him.)
In my view, these are the retailers we should bless with our business–not those who undercut on price and then skimp on customer service.
Dear Liz: I’m in my early 50s and in good financial shape. I have no debt and a comfortable savings account and am working toward retirement goals with my wife of 21 years. For years I have lived very modestly (some would say cheaply).
However, recently I had a health issue that is making me rethink my future finances. I was told I had about a 20% chance of surviving this thing and, although I’m OK for now, there is no guarantee it won’t return at any moment. So should I keep planning for retirement, or should I take the “You can’t take it with you” attitude and start having some fun? Of course I know my wife may survive me by many years, so I am not talking about blowing everything, just lightening up.
Answer: Given that all of us are going to die someday, and few know exactly when, financial planning is all about balancing future needs with current fun. Blow too much money now, and you (or your spouse) could suffer for it later. Defer too much gratification, though, and you miss out on life.
Add to that mix the fact that medical prognoses can change. New treatments could extend your life or you could beat the odds and survive this thing.
The prudent thing to do would be to take your situation to a fee-only financial planner and discuss the options. Perhaps you could free up more money for travel or other memorable experiences with your wife in exchange for accepting that if you survive, you may have to work longer than you’d originally planned.