Ask Liz Weston

Get smart with your money

Budgeting

Q&A: Giving financial advice to family

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Dear Liz: I am 30 and have two sisters, ages 31 and 27. My wife and I both have good jobs that allow us to live comfortably and save for retirement. My sisters, on the other hand, have severe money problems. My older sister works a low-paying retail job. She is unable to save and is currently at risk of having her wages and tax refunds garnished because of unpaid student loans. My mom provides her with support when she asks for it. The other sister still lives at home. While she makes decent money by working two jobs, she spends all of her money on “wants,” and my mom pays all of her living expenses. The only bill my younger sister pays is her car payment. She also currently has close to $100,000 in student loans that she just had to start paying on.

I have tried to provide both my sisters with budgeting advice, and I have recommended books that I have used as the blueprint for our budget. Neither of them takes the advice. I have talked to my mom about both sisters’ situations. While my mom agrees that both are in bad shape, she is unwilling to show either of them the tough love that they need to improve their situations. Do you have any advice on recommendations that I could make to help any of them out?

Answer: The best advice is to stop offering advice.

Your mom and sisters have made it quite clear they’re not interested in what you have to say. Continuing to offer your opinions on their situations would be tiresome and pointless.
Yes, it’s hard to watch people struggle when you think you know what could help them. But keep in mind that: a) you might be wrong about what they need right now, and b) nobody asked you, anyway.

If you’re passionate about teaching people to manage their finances, you might look into becoming a certified financial planner or other planning professional. The CFP Board of Standards has information at http://www.cfp.net. If people are paying you for your advice, they’re somewhat more likely to listen to it.

Otherwise, you’ll have a captive audience for your financial teaching if you and your wife should have children. And as a parent, you’ll get to experience firsthand how it feels to be the target of unsolicited advice.

Q&A: Prioritizing your financial goals

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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.

Baby coming? What to consider before you quit

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Dear Liz: My husband and I have decided that next year we want to have a baby. So we have at minimum a year and nine months to make sure we’re financially prepared. I did some cursory Googling and I’m already a bit overwhelmed. I’m not sure where to start.

I know I should figure out how much the medical costs will be, but how do I figure out how much everything else costs? Do you have a checklist of things we should be aware of and consider? One thing I could use some guidance on is whether I should stay home or put our baby in daycare so I don’t miss out on work benefits like healthcare and 401(k) matching. I like my job and bosses, and if I leave I will have to find a new job that may not be as good when I decide to reenter the workforce. But if we decide to have a second child, I’m worried that childcare costs will be too much for two young children. Know of any good books on this subject?

Answer: By leaving work you wouldn’t be missing out only on benefits. Research by economist Stephen J. Rose and Heidi I. Hartmann, president of the Institute for Women’s Policy Research, found that women’s average annual earnings decline 20% if they stay out of the workforce for one year and 30% if the absence stretches to two or three years. Many find it tough to rejoin the workforce after extended absences.

Quitting work is the right choice for some parents, but you shouldn’t do so simply because you fear childcare costs. For a few years, those costs might eat up most or all of your paycheck, but such expenses decline over time. If you continue to work, your earning power and retirement contributions will continue to grow.

Meanwhile, some parents find they can reduce childcare costs by staggering their work schedules, tapping family members or sharing a nanny. Research the childcare options in your area so you have an idea of what’s available and the costs.

You can continue your research into budgeting for a child with the excellent, constantly updated book “Baby Bargains” by Denise and Alan Fields. This field guide offers product reviews and realistic assessments of what you actually need to buy for your child and what you don’t.

Another good resource is financial writer Kimberly Palmer’s “Baby Planner,” available on Etsy.

With all your planning, keep in mind that parenting always presents surprises. You may decide to stop after one child or keep going until you have a houseful. The important thing is to remain flexible and don’t assume you know how your future self will choose to live.

One of the best pieces of advice in Facebook Chief Operating Officer Sheryl Sandberg’s bestselling book, “Lean In,” is that women not cut themselves off from career opportunities because of how hard they think combining work and child-rearing will be. “What I am arguing is that the time to scale back is when a break is needed or when a child arrives — not before, and certainly not years in advance,” she writes.

Lack of savings makes becoming a landlord risky

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Dear Liz: My husband and I, both 44, own and live in one side of a duplex. The owners of the other side are moving next year and have offered to sell it to us. We don’t have enough in savings to cover a 20% down payment for a traditional mortgage, but our neighbors offered to do owner financing. Rentals are hot commodities in our area, and we’ve been told by real estate agents that they could get the place rented within a week for more than we’d make in mortgage payments. This would be an amazing opportunity for us, but if for some reason the property went vacant we couldn’t cover the payment unless we make some major changes to our budget, such as selling our RV ($325 a month) or temporarily suspending contributions to our 457 deferred compensation plans (we contribute $300 a month and both our jobs come with pensions that will replace 60% of our salaries). We currently also make a truck payment ($350 a month) and have $2,300 in credit card debt, but we only have $1,000 in accessible savings.

Answer: You’re not in a great position to be landlords. You have too little savings to cover the inevitable repairs and vacancies you’ll face. Plus, your credit card and vehicle debts indicate you’ve been living beyond your means.

Still, this may be a promising opportunity. A rental that is cash-flow positive — in which the rent collected exceeds the cost of the mortgage, property taxes and insurance — can be a decent long-term investment. If you’re willing to commit to improving your finances and taking this risk, it could work out.

Talk to some other landlords first to see what challenges they face and what typical vacancy rates they experience. You’ll want to locate a lawyer who understands your state’s landlord-tenant laws to draw up any paperwork you’ll need.

If you decide to proceed, sell the RV and use whatever’s left after paying off the loan to pay down your credit card debt. Then redirect the RV payment to paying off the rest of the cards and building up your savings. (A note for the future: RVs are fun, but they’re luxuries, and luxuries should be paid for in cash.)

Don’t compromise your retirement savings. Your generous pension could get whittled down in the future, or you might lose those jobs. Having a decent retirement kitty of your own is simply prudent.

Single mom’s expenses leave no money for food

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Dear Liz: I’m a single mom with three kids. My mortgage is $1,700. My other monthly bills include $355 for a car loan, $755 for school tuition, $350 for utilities, $790 for credit cards, $200 for gas, $208 for braces and $235 for a 401(k) contribution. This leaves no money for food. I get no child support. How can I pay down my credit card debt? I don’t have any money for a baby sitter or I could get a second job.

Answer: The way you pay down credit card debt is by reducing expenses and increasing income to free up extra cash. If that’s not possible, you may need to consider bankruptcy, given the amount of debt you’re carrying.

If you’re paying only the minimums on your credit cards, that monthly bill indicates you have close to $40,000 in credit card debt. Since you can’t cover your basic expenses, you’re probably adding to that debt pile every month. That needs to stop.

You don’t say why you aren’t receiving child support, but if the father isn’t dead or disabled he should be helping to support his kids. Your state has an enforcement agency that can help you. Child support enforcement is often part of a state’s social services department, although it may also be offered by the state attorney general or its revenue (tax) department.

One obvious, if painful, place to trim is private school tuition. If the school can’t offer you financial aid, you should consider placing your kids in the best public school you can manage.

What you don’t want to do is trim your retirement plan contribution. You’re probably getting a company match, which is free money you’ll need to sustain yourself in retirement.

In general, your “must have” expenses — shelter, transportation, food, utilities, insurance and minimum loan payments — should equal no more than 50% of your after-tax income. If your must-haves exceed that level, it will be tough to make ends meet, particularly if you’re trying to pay off debt and save for the future.

Creating a budget that works

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Dear Liz: I’m beginning to realize that I have no idea how to budget. I make plenty of money but always seem to come up short. I’m trying to find the best person to help me make a budget. Do I talk to a CPA or a financial counselor? If so, how do I find the right person?

Answer: Budgeting has three basic steps: figuring out where your money is going now, deciding where you want it to go in the future, and monitoring your spending to make sure you stay on track with those goals.

Just because something is simple doesn’t mean it’s easy, however. People often fail to account for predictable but irregular expenses, such as car repairs. Once those crop up, the budget is thrown into disarray and people often give up on the spending plan.

Budgeting also can be difficult if you’re overspending on your overhead. If too much of your income is going for basic expenses, you may not have enough left over to live a comfortable life, pay off debt and save for the future, regardless of how many other expenses you trim. People who spend too much on shelter (mortgage or rent) and transportation (car payments and attendant costs) in particular often find they can’t create a balanced budget. Your “must haves” — shelter, transportation, food, utilities, insurance and minimum loan payments — ideally should be 50% or less of your after-tax income to create a workable budget.

Some people find that online solutions, such as the Mint.com financial tracking site, are enough to get them started with a budget. Other people need hands-on help. If your tax pro or financial advisor has experience helping people create and monitor budgets, that’s certainly one place to turn. Otherwise, check to see whether your local community college offers basic money management courses. Another option is a nonprofit agency affiliated with the National Foundation for Credit Counseling at http://www.nfcc.org. Many of these agencies offer classes or hands-on help creating budgets.