Ask Liz Weston

Get smart with your money

Budgeting

How to make charitable giving part of your financial plan

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Dear Liz: What are your thoughts on charitable giving? I hear about tithing (giving 10% of income) but would have real problems trying to maintain that commitment. That said, I’d like to become a regular donor to a reputable charity.

Answer: Most U.S. households give to charity, according to the Center on Philanthropy at Indiana University, but the average contribution rate for those who give is closer to 3% than 10%.

If you want to step up your charitable giving, take the time to plan and prioritize as you would any other part of your financial life.

Making larger donations to a few charities is typically better than scattershot donations to a bunch of causes, said Ken Berger, the president and chief executive of nonprofit watchdog Charity Navigator. Charities spend money to process donations, and those costs tend to eat up more of small donations, he said. A $100 donation to a single charity might incur $2 in processing costs, leaving $98 for good works, Berger noted. The same $100, spread among 10 charities, would require each to spend $2 for processing — leaving just $80.

Because smaller donations don’t benefit charities as much, some are tempted to increase their “yield” by selling your information to other charities or repeatedly hitting you up for additional contributions, Berger said. Giving more allows you more leverage to ask that your information not be sold and that the charity limit its appeals.

You can research charities at websites such as Charity Navigator and GuideStar to make sure you understand their finances and how effective they are in reaching their goals.

Finally, consider setting up automatic donations rather than rushing to make contributions at year’s end. Some companies have payroll deductions for charities, or you can set up a recurring charge on a credit or debit card. Making your contributions automatic helps ensure you can achieve your charitable giving goals. It’s like saving or “paying yourself first” — when you don’t have to constantly remind yourself to do it, it’s more likely to get done.

How much should you spend on rent?

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Dear Liz: I am wondering about what percentage of your income should your rent be. Ours at the moment is 35% just for rent, not including utilities or anything else.

Answer: In high-cost areas, people regularly pay 40% or more of their income on housing. That doesn’t mean it’s a good idea.

When you spend a big chunk of your income on rent or mortgage payments, there’s often too little left over to save for the future, pay off the debt of your past and live for today.

There are no hard-and-fast rules for what’s affordable, but limiting your housing costs to about 25% of your gross pay or 30% of your after-tax pay will help ensure that you have money left over for other goals. “Housing costs” include rent, utilities and renter’s insurance if you don’t own, or mortgage, property taxes, property insurance and utilities if you do.

If you’re much over these limits, you should look into ways to reduce your costs, earn more income or both. Otherwise, you’re likely to continue to struggle with an unbalanced budget.

“Permanent” employment? No such animal

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Dear Liz: My spouse has tenure at a university. Given that one of us will always be employed, should we change the way we look at the amount of money we keep in an emergency fund or our risk tolerance for investments?

Answer: Even tenured professors can get fired or laid off. Tenure was designed to protect academic freedom, but professors can lose their jobs because of serious misconduct, incompetence or economic cutbacks, such as when a department is eliminated or a whole university is closed. About 2% of tenured faculty are dismissed in a typical year, according to the National Education Assn.’s Higher Education Department.

That’s more job security than in most occupations, of course. Your spouse also may have access to a defined benefit pension, which would give him or her a guaranteed income stream in retirement. Those factors mean you reasonably can take more risk with your other investments.

As for your emergency fund, you may be fine with savings equal to three months of expenses. But consider that if your spouse were to be dismissed, he or she probably would have a tough time finding an equivalent position. If the institution starts having financial difficulties or if there is any reason to suspect that he or she could be dismissed, a fatter fund could come in handy.

How much cash should you keep on hand?

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Dear Liz: A few years ago I finished paying off my debt and now am in the very low-risk credit category. I have savings equal to about three months’ worth of bills and am working to get that to six months’ worth. I’m wondering, though, about an emergency that may require me to pay in cash (such as a major power outage that disables debit or credit card systems, or the more likely event that I forget the ATM or credit card at home). How much cash should a person have on hand? Is there a magic number?

Answer: There’s no magic number. You’ll have to weigh the likelihood you’ll need the green, and the consequences of not having it when you need it, against the risk of loss or theft.

Many people find it’s a good idea to tuck a spare $20 into their wallet for emergencies, and perhaps another $20 in their cars if they’re in the habit of forgetting their wallets or their plastic.

Cash for a disaster is another matter. Power could go out for a week or more, or you may need to evacuate and pay for transportation and shelter at a time when card processing systems are disabled. A few hundred bucks in cash probably would be the minimum prudent reserve you’d want to keep in a secure place in your home. You may decide that you need more.

When “the basics” eat up too much of your income

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Dear Liz: My husband and I are recovering from a job loss four years ago. We used up all our savings and home equity. My husband is now employed, but we are struggling to keep ahead even with a salary of about $100,000. I was a stay-at-home mom for the first 10 years of our kids’ lives and now I work two part-time jobs to help with our expenses. We are trying to follow the 50/30/20 budget plan you recommend, but can’t seem to get our “must haves” — which are supposed to be no more than 50% of our after-tax income — down from 80% to 90%. Most of the rest goes for “wants,” such as the kids’ dance classes and soccer teams and for cellphones. We’re not saving anything although we’re trying to whittle down our credit card debt. I have tried several times to refinance our first and second mortgages and home equity line of credit but have found we don’t qualify because too much is owed on our modest three-bedroom, one-bath house, which has gone down significantly in value. We also have two car loans that are worth more than the cars, and the insurance is killing us. Amazingly enough, we have never been late on a payment. We just can’t get ahead. Did I mention that both kids need braces?

Answer: You clearly can’t afford your life, and things will only get worse if you don’t get your spending in line with your income.

Your first step should be to consult with a HUD-approved housing counselor, who can advise you of your mortgage options. You can get referrals from http://www.hud.gov. If your first mortgage is held by Fannie Mae or Freddie Mac, you may be able to refinance it through the federal government’s Home Affordable Refinance Program. Recent changes in the program have helped more underwater homeowners refinance. Even if you’ve been turned down by one lender, you can try with another. One way to search for HARP quotes is through Zillow’s online mortgage quote service at http://www.zillow.com/mortgage-rates/.

The Federal Housing Administration and the Veterans Administration also have streamlined refinancing programs for their underwater loans.

Government programs usually define an “affordable” payment as one that’s 31% or less of your gross income, but that may be too high for many families to comfortably handle. Ideally, your housing costs — including mortgage, property taxes and insurance — would consume no more than about 25% of your gross (pre-tax) income.

If you exhaust your options and can’t get your mortgage payments down to an affordable level, you should consider a short sale of your home. Moving is terribly disruptive and expensive but it’s better than letting a house sink your finances.

Then take a look at your cars. The average annual cost of owning a car is $8,946, according to AAA. You can make the argument that one car is a necessity, but having two is typically more of a convenience than a “must have.” Getting rid of one could dramatically lower your insurance and transportation costs.

Since you’re underwater on both, you’ll need to look at which is cheapest to operate and which is closest to being paid off. If they’re the same, then your choice is easier — you can work toward paying that car off faster so you can sell it. Otherwise, you’ll have to weigh which loan to target first.

Another way to get your budget balanced is to make more money. That may mean asking for more hours at your jobs or looking for opportunities that pay better.

Avoid tax refund ripoffs, and think twice about getting married

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Tax refundMy recent MSN Money columns, in case you missed them:

How to avoid tax-return rip-offs Beware of promises to get your refund faster. Refund anticipation loans are gone, and what’s replaced them isn’t worth the cost.

Gay marriage can muddle finances Gay and in love? You might want to wait to marry.

‘Boomerang’ kids: Moving out again Household formation is on the rise and the kids who moved into their parents’ basements are finally able to move out on their own. Here’s what they, and their parents, need to know to avoid future boomerangs.

Simple retirement can be satisfying If you haven’t saved much for retirement, all is not lost as long as you’re willing to pursue a much simpler lifestyle than what you’re probably living now. One man who lives just such a life is happy he does.