Ask Liz Weston

Get smart with your money

Liz Weston

Hoard cash if unemployment looms

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Dear Liz: My husband and I have been aggressively paying down our debts and plan to be debt free by this time next year. We’re devoting about 20% of our income to debt repayment and saving about 6% (not much, I know, but we’re young and just starting out). We were building an emergency fund and currently have enough money in it to cover only a few months of our expenses, since we had to dip into it recently for unexpected car repairs.

My husband just lost his job. I make enough that we would just barely be able to cover all of our minimum payments and our bills, but my employer lost its biggest client and I may be out of a job soon too. Should we continue to make the same debt payments, reduce the amount or make only minimum payments until we are both securely employed?

Answer: As soon as you know that unemployment is a possibility, you should begin to conserve cash. That means making only the minimum payments on your debt and cutting your expenses to the bone. Although the job picture is improving, the average duration of unemployment is still close to 40 weeks. That’s a long time to go without a paycheck.

When you’re both employed again, you should reconsider your financial priorities. Getting out of debt is a great goal, but not all debt is created equal. Paying off credit cards should typically be a high priority, but you needn’t be in as much of a rush to pay off federal student loans, car loans or mortgages, because the rates on these debts is typically fixed and relatively low. Instead, make sure you’re taking advantage of retirement savings opportunities and building up a cash cushion to tide you through the next financial setback.

News you can use right now

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Here’s a round-up of good recent stories tied to Tax Day (deadline’s tomorrow) and one of my favorite topics, credit scores.

Can’t pay? Amy Feldman’s article “What if you can’t pay your taxes?” for Reuters walks you through what to do if you’re facing a big bill, rather than a refund. Bottom line: don’t ignore the problem.

Tax liens and credit scores. The IRS has many ways to make your life miserable if you don’t pay your taxes. One weapon used by the IRS and other tax authorities is the tax lien, which can trash your credit scores and which is one of the few negative items that can show up on your credit report indefinitely if you fail to pay. Learn more from Tom Quinn’s column “Not paying your taxes can hurt your credit score” on Credit.com.

Plan to buy a car with your refund? If you’re one of the many getting money back from Uncle Sam and considering using it to buy another car, beware. Dealers know you’re coming, and you don’t want to have a big red target on your back. “Dealers are well aware that buyers may suddenly have an influx of cash on hand this time of year, so it’s not uncommon to see promotions and offers tied to tax season,” says Carroll Lachnit, Consumer Advice Editor at Edmunds.com. “And while there are good deals to be had on new cars, we strongly encourage consumers to take advantage of every research tool at their disposal before they plunk down their refunds as down payments.” For more, read Edmunds.com’s “Do your research before spending tax refund dollars at the car dealership.”

Good credit scores and a fat down payment may not be enough. You’ve heard that it’s harder to get mortgage these days, but you might be surprised at how much harder it is. Real estate columnist Kenneth Harney details the average FICO scores, down payments and debt-to-income ratios of those who did and didn’t get a mortgage in February. Most shocking: the group that got turned down had numbers that would have made them great candidates for loans just a few years ago.

Unexpected ways to better your numbers. Speaking of credit scores, Daniel Bortz wrote “6 surprising ways to boost your credit score” for U.S. News. I’m quoted, along with Beverly Herzog of Credit.com, Bill Hardekopf of LowCards.com and Anthony Sprauve of FICO.

 

How I outsource my life (Part III)

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The homes in our Los Angeles neighborhood tend to have small back yards. We’ve struggled to make ours liveable for most of the 14 years we’ve been here. We wanted to have space to entertain and relax, as well as room for our dog to run and our daughter to play. What we wound up with was an awkward mash of concrete and brick, overgrown plants and a “grassy” area that was slowly dying, thanks to said dog. In a place with beautiful weather year-round, we rarely ventured into our own back yard to enjoy it.

We liked the concept of expanding our living space with an “outdoor room,” but weren’t quite sure how to pull it off.  My husband’s a skilled artist and designer, while I’m an amateur gardener, but we didn’t really have the skill set to create a functional, attractive space. We’d interviewed a few landscape designers, but their visions collided with my basic frugality. I really couldn’t stomach the idea of spending $40,000 to $50,000 on a few hundred square feet of yard. Ripping out everything that was already there, and replacing it with all-new materials, didn’t seem very environmentally friendly, either.

Enter Karen Miller, CEO and principal designer of Sacred Space Garden Design. She had a $40,000 vision as well, but she didn’t balk at scaling back to fit what we were comfortable spending, which was about $10,000. Even better, she was willing to collaborate. If we didn’t like an idea or wondered about an alternative, she was happy to toss around the possibilities with us.

We wound up expanding the brick to create a bigger entertainment area. Now we have flexible seating around a firepit, and everything’s moveable, so we can create new arrangements. A burbling fountain surrounded by potted plants provides a focal point we can see from the house. Not only is it a nice view, but it draws us outside. Our daughter’s Play-Well swing set stands in a field of rubberized mulch. She uses it daily; part of every playdate with her friends is spent swinging or swooping along the monkey bars.

Karen retained most of the plants we had, but trimmed them back and added new plants to give more color and contrast to the yard. She added succulents as well, and everything is on automated drip lines so I don’t have to worry about watering. We eliminated the grass entirely, and the small stretch between the brick and the playground is planted with elfin thyme, which is supposed to expand and fill the area. It’s still not clear, though, whether the thyme can survive the dog. If not, we may have to switch to a hardier surface.

All in all, we love our new space. We’re actually using our backyard regularly, instead of ignoring it. The money we spent adds some value to our home, but more importantly, it added value to our lives.

This is the third in a series about how I’ve outsourced certain parts of our lives. In Part I, I wrote about how we used a car concierge service to buy a new car. In Part II, I wrote about hiring a wardrobe consultant to help me sift through my closet and find flattering outfits.

Beware your financial planner

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Financial planner Allan Roth has a pretty good piece in the latest issue of AARP the Magazine on “The Two Faces of Your Financial Planner” (renamed “How to Choose Your Financial Planner,” a much snoozier headline, in the online version). Although it’s geared for older readers, it should be read by anyone who gets professional advice. The piece discusses the inherit conflicts of interest with every method of compensation, from commissions to assets under management to hourly, and points out that the people you trust with your money may not be worthy of that trust:

My point is this: Bad advice is epidemic in my industry, and it doesn’t come only from villainous fraudsters such as [Bernie] Madoff. It also comes from pleasant, empathetic folks who are merely responding predictably to my industry’s perverse incentives and self-serving ethical standards.

We financial planners are masters at persuading ourselves that what’s in our best interest also happens to be the moral thing to do. By and large, we’re good people, which is why we can be so convincing — and so potentially dangerous to your money.

The conflicts inherent in a commission-based model are pretty apparent. If a planner gets a big payday when you buy a specific investment, but less of a payday or none at all if you buy another, that’s a pretty good incentive to rationalize putting you in the investment that will do the most good for him or her.

There are also conflicts that come with the hourly model (the potential to run up the bill) and the assets-under-management model, although I don’t quite agree with the example Roth uses: “That’s why few of us will ever tell you to pay off your mortgage: Using $100,000 to discharge a loan rather than investing it could cost us $1,000 a year in fees.” Actually, the reason fee-0nly planners typically don’t recommend mortgage prepayment is that most people have much better things to do with their money than pay off a low-rate, tax deductible loan–things like catching up on their retirement savings, paying down every other debt and making sure they’re adequately insured, among others.

The article offers some excellent advice for how to get the best money advice, including checking credentials, refusing to commit to a plan or investment on the first meeting, asking what the penalties are if you want your money back from an investment and requesting the planner to put in writing why he or she thinks an investment is suitable and the total cost you’ll be paying.

New tool helps you compare financial aid offers

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You’ve gotten the college acceptance letters, and their accompanying financial aid offers. But how do you really decipher how much college will really cost you? More than 1.5 million students and their families are wrestling with these issues, and the Consumer Financial Protection Bureau wants to help. The bureau just announced a tool that can help you evaluate your options. From the CFPB press release:

The beta version of the Financial Aid Comparison Shopper has more than 7,500 schools and institutions in its database, including vocational schools and community, state, and private colleges. It draws information from publicly available data provided by government statistical agencies. With the prototype, students and their families can compare the following across multiple financial aid offers:

·         Estimated monthly student loan payment after graduation;

·         Grant and scholarship offers;

·         School-specific metrics such as graduation, retention, and federal student loan default rates; and

·         Estimated debt level at graduation in relationship to the average starting salary.

The Financial Aid Comparison Shopper also includes a “Military Benefit Calculator” that can estimate education benefits for servicemembers, veterans, and their families. The calculator includes military tuition assistance and Post-9/11 GI Bill benefits.

You’ll find a link to the cost comparison tool here. Take a look, run some numbers and give the CFPB your feedback.

How not to owe half a million in student loans

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Most college students graduate with manageable student loan debt, but there are plenty of exceptions. Marketplace Money highlighted one case last week: the medical student who expected to owe nearly half a million in loans by the time he graduated. I was in the studio with host Tess Vigeland and senior producer Paddy Hirsch to talk to this guy and discuss his options, as well as the choices he made that led him into such whopping debt. You can listen to our conversation here.

One point that Tess made, and that I’d reiterate to anyone thinking about student loans, is that taking on debt is a choice. No matter what your financial situation or education goals, you don’t “have to” borrow gobs of money to pay for school. You can go to a cheaper school, serve in the military and pay for school with the G.I. Bill, or work while you study, among other choices. You reasonably may choose to borrow some money to get through college, but if you borrow more in total than what you expect to make the first year you’re out of school, then you’re borrowing trouble.

Our caller was in a bind since he’ll need to start paying back his loans while he’s in residency. But with federal loans, at least for now, he has the option of an income-based repayment plan that will ensure he has enough money left over to eat. Once he’s in practice, he should make somewhere around $300,000 a year, which will ease the pain of paying back all that debt.

Far too many borrowers aren’t as lucky. They’re unemployed, or never got their degrees, or owe far more than they’re ever likely to earn. Nobody warned them when they were 17 or 18 and beginning to sign up for this debt that it could dog them for the rest of their lives. Private student loans in particular should come with warning labels, since they’re like paying for college with credit cards–except, unlike credit cards, the debt can almost never be erased in bankruptcy court. Read “Wipe out your student loan debt,” my column for MSN on this topic, for more details about the differences between federal and private loans, plus strategies that can help you deal with your education debt.