Dear Liz: I’m 56, make $30,000 and have no credit card debt. I rent and I have no assets except for about $350,000 to $400,000 in cash, stocks, oil and gas leases and property that I will inherit from my mom’s living trust. She is 85 years old. Are there any specific suggestions you would give me to be preparing for my retirement years?
Answer: Let’s be clear: You have no assets. Your mother does, and she may plan to give those to you, but those plans could change. She may well need her money for living expenses and long-term care, which could easily eat up that nest egg.
So you need to start saving on your own for retirement. You may think you can’t live on less than you are now, but make no mistake: You’ll be living on significantly less if you don’t save. Your Social Security benefit, if you retire at 66, will be around $1,000 a month.
If you have a workplace retirement plan such as a 401(k), start contributing to that. If you don’t, put money aside in an individual retirement account. If your adjusted gross income is under $27,750, you may qualify for a tax credit that can help you, known as the Retirement Savings Contributions Credit or Savers Credit. (You’ll use Form 8880 to figure the credit; visit http://www.irs.gov for more information.)
Dear Liz: I recently got a loan to buy a new car, but my bank refused to give me its best, 1.5% interest rate and I was forced to take a 2.25% rate. My credit scores are in the mid-700s, but the bank denied me its best rate because I have no revolving credit. I haven’t had credit cards for over 20 years. I have bank accounts and installment loans, including a 20-year loan I paid off in two years and a 30-year loan that was paid off in less than five years. Since when is it a law that I have to have credit cards, and why should I be discriminated against for not using revolving credit? It should be against the law (and probably is) to force me to use revolving credit cards when I do not wish to, and suffer a higher rate if I don’t.
Answer: Lenders aren’t required to give you their best rates because you think you deserve them. They are allowed to use reasonable criteria to judge your creditworthiness, which can include credit scoring formulas — and those typically reward people for having and using different types of credit (credit cards as well as installment loans). You can have good scores using only one type of credit, but the best scores are typically reserved for credit reports that have both.
The good news is that you don’t have to carry credit card debt to have great credit scores. Using two or three cards lightly and paying them off in full each month is the best way, both for your scores and your pocketbook.
Dear Liz: I have a terrible habit. I’ve been clean and sober for 24 years now, but I’m a gambler. I’m in debt over $100,000. Yes, it’s bad, but it used to be worse: I owed $204,000 to banks, loan sharks, family members, you name it. In the last seven years I’ve been able to cut the debt in half, but when I’m done paying off the debt I’ll be 62 with no savings and no 401(k) plan. I’ll get a pension from my work of about $3,400 a month and $1,400 from Social Security. I’m afraid $4,800 a month will not be enough for me. Is there anything I could do now to make things better?
Answer: You don’t have a habit. You have an addiction. And it’s not clear you’re dealing with it, since you refer to yourself in the present tense as a gambler. If you’re still gambling, all your efforts to pay off your debt and build a financially secure future for yourself are likely to be pointless. Although $4,800 a month is more than most people have in retirement, you’re right that it won’t be enough to feed your addiction.
If you haven’t already, check out Gamblers Anonymous, a 12-step program based on the principles of Alcoholics Anonymous.
Anyone who wants to build a retirement fund can contribute to an individual retirement account (IRA) or Roth IRA, as long as the person or the spouse has earned income. You can contribute up to $5,000 a year if you’re under 50, or $6,000 if you’re older.
Dear Liz: I have high student loan debt. When I pull my FICO scores from Equifax and TransUnion, the only thing that’s keeping my scores low is that I have a 99% debt-to-income ratio on my student loans. The length of credit history and payment history are fine. I have two credit cards and I use 20% or less of the credit limits, paying in full every month, but I still have mediocre scores of 620 to 680. What to do in this situation?
Answer: Income is not a factor in calculating your FICO credit scores, so your debt-to-income ratio wouldn’t affect your scores. What you may be referring to is your credit utilization — how much of your available credit you’re using. While high utilization of credit cards and other revolving accounts can hurt your scores, it’s unlikely that high balances on installment accounts would be enough of a negative to make your scores so low.
What you need to do is pull your credit reports and examine them closely to see what’s wrong. You may have late payments or collection accounts you don’t know about, or you could be the victim of identity theft.
Dear Liz: You’ve made it clear that we should try to keep our credit card balances to no more than 30% of the credit limits. Many of us haven’t been able to do that because we’ve needed to put charges on or take cash advances from credit cards while we’ve had no work, so 50% was the revised goal. However, if still more charges or advances have to be done, is it better to still spread them around so that all credit cards are over 50% but below 60%, or is it better to just “max out” one card and keep the rest of them under 50%?
Answer: How about plugging the leaks that are causing your financial ship to sink, rather than musing over how much water you can take on before you’re swamped?
Steadily growing credit card debt is a clear sign it’s time to make changes to get your spending in balance with your current income. That’s because carrying credit card debt is simply too dangerous to your financial health and can lead you straight to Bankruptcy Court. It’s too easy to see something as a “need” and charge it, rather than make the tough decisions to cut back on what you can no longer afford.
For credit scoring purposes, it’s better to spread out the balances. For life purposes, it’s better to stop charging.
Today’s MSN column focuses on “How to eat when you’re really broke.” It’s written for a general audience, but here are three more kid-specific ways to save on your groceries:
Make water the go-to drink. Don’t stock sodas or fruit juice, and limit milk to mealtimes. (Kids under 4 need two servings of dairy products a day; kids 4 to 8 need two to three; kids 9 to 18, four servings.) One cup of milk or yogurt or 1.5 ounces of cheese (think 6 dice-sized pieces) counts as a serving.
I used to be shocked at the idea of limiting milk—until I became a parent and saw how much a child who likes dairy will drink if left to her own devices.
Fruit juice is another liquid that’s easy to overdo. Many juices are loaded with sugar, and even those that aren’t have plenty of calories. Nutritionists tell us eating whole fruit is a better way to get our vitamins.
Forget the clean-plate club. A better way to control waste is to reduce portion size, and offer seconds if the child wants. Encouraging kids to keep eating when they’re full can set them up for eating disorders. And shrinking those portions means you can use leftovers for other meals, rather than fighting over uneaten food or scraping it into the trash.
I once watched a distracted mom grab a soup bowl, scoop about two cups of cereal into it and soak the pile with milk—before putting the meal in front of a two-year-old, who had about three spoonfuls before she declared herself “done” and toddled off. The mom probably would have had trouble finishing that much cereal. Often we don’t pay enough attention to how much food we’re shoveling into ourselves or onto our family’s plates, but cranking back can lead to dramatically less waste—and lesser waistlines, if that’s an issue.
Limit grazing. If you have athletes or teenaged boys in your house, you’ve probably come home to cupboards and a fridge that appear to have been cleaned out by locusts. (One friend’s son ate an entire loaf of bread in a single sitting.) Giving kids free range of the kitchen is expensive, and bound to lead to frustration when the ingredients you counted on for dinner have been hoovered up by Billy and his buddies. So stock a snack cabinet or shelf with healthy, relatively cheap options: air-popped popcorn, pretzels, whole grain cereals, raisins, peanut butter, apples, bananas and whole-grain crackers. Tell them they can have at those, but touching anything else will lead to dire consequences–such as cooking duties for the next week.
Dear Liz: I am 22, single, work full time and have no outstanding debts. I have $18,000 in a savings account and am contributing 15% of my paycheck to a 401(k). How do I invest my savings to get a better return? I’ve been looking into certificates of deposit, money market accounts, IRAs and Roth IRAs, but don’t know enough to start.
Answer: Let’s first get clear on some terminology. CDs and money markets are types of investments, while IRAs and Roth IRAs are types of accounts — specifically, they’re retirement accounts. Think of IRAs and Roth IRAs as buckets into which you put investments, such as CDs, money markets, stocks, bonds or mutual funds.
The next thing you need to get clear about is your plan for your savings. If the money is meant to be an emergency fund, to tide you over in case of job loss or a large expense, then you probably shouldn’t put it in a retirement account, which could have penalties or restrictions on withdrawals.
You also shouldn’t put your emergency fund into investments that could lose value in the short term, such as stocks, bonds or most mutual funds. The best place for emergency money is usually a federally insured bank account. If your bank isn’t paying much interest, you can check with others, including online banks and credit unions, to see if you can get a slightly better return.
If you don’t need the whole sum as an emergency stash, however, then you might want to think about taking more risk to get more return, and perhaps using an IRA or Roth IRA as your savings vehicle. To learn more, check out Kathy Kristof’s “Investing 101″ or Eric Tyson’s “Investing for Dummies.”
Dear Liz: My husband recently was placed on a pricey medication ($20 a day) that is not covered by insurance. Any suggestions to getting help with this added $7,000-a-year expense?
Answer: Doctors can be surprisingly ignorant of the cost of medications, so your first call should be to your pharmacist to see if there are more affordable options, such as a generic drug. If so, call the doctor back to see if your husband can switch.
Either way, start shopping around. Medication costs vary enormously from pharmacy to pharmacy. You also should check to see if a mail-order pharmacy might save you some money.
Be sure to ask about discounts. Pharmacies may offer discounts for cash or with certain memberships, such as with AARP. Prescription discount cards are easy to find — just type “prescription discount card” into an Internet search engine — but steer clear of those that charge fees.
Also check NeedyMeds.org, which lists discounts and assistance programs specific to hundreds of medications. NeedyMeds also has a free prescription discount card.