My husband and I are starting to discuss babies. How do we know when we are financially ready for this step? Our only debt is our mortgage and we are both working. We contribute to retirement, pay our savings account first and have about $30,000 in savings. After living your no-debt, live frugally mantra for many years, and looking at all of the expenses related to children, Im starting to think I may never feel ready!
Child you are more ready that I would guess 99.9 percent of people who have kids. Let's see. You have:
-- Good jobs.
-- No other debt except a mortgage.
-- Saving well for retirement.
--- Saving for emergency.
-- $30,000 in savings.
-- Great attitute about your finances.
Yup, more ready than most.
Honestly, you could pick apart your financial life and always come up short for the money it takes to raise a child. I'm not there is ever just the "right" time.
But to put your mind at ease try taking these steps"
-- Talk to your husband about who will care for the baby. Do either of you plan on being a stay-at-home parent? Or maybe you might just take off for a short time.
-- If you are both going to work, start looking around for what it cost for childcare. Infant care can be very expensive. See what options you like and the price. Then begin to see if your budget can handle the expense without changing much of your lifestyle. If you need to change to factor in the cost, what would you need to cut or reduce?
-- See if your budget can handle saving for college. The earlier you start the better your chances of saving enough so your kid won't have to take on debt. Google college savings calculator and just monkey around with different ones to get an estimate of how much you need to save every month.
My point is you can plan for the baby financially and how the extra cost fits into your budget. Once you have that information you can look to see if you need to adjust anything.
Hi Michele I love the chats and they've given me such good advice. I'm just curious though - has there been a time in your life when you weren't financially responsible or drove your credit cards up to high, struggles etc? What were they and how did you overcome them? A lot of us feel there's no end in sight to debt, have you always been so rational?
Me, financially perfect my entire life?
Not at all. I've made some mistakes -- not a lot and not a lot that cost me a great deal of money. But I have done some things I great.
For example, at one point early in my marriage right after we had our first child, my husband and I accumulated about $5,000 in credit card debt. The crazy thing is we have money in savings to pay it off but I was too scared to touch our emergency money.
It seemed to happen so quickly and most of the purchases involved items for our new baby -- 18 years ago this Sunday actually.
But we quickly realized the error of our ways and worked hard to get rid of that debt in about six months without touching our savings.
We vowed then to never let that happen again and thankfully it hasn't. We pay off our credit cards every month.
So you have to believe and trust there is an end to that monkey on your back. You have to work to get it off and keep it off. However, I know you can do it because I've seen hundreds of others do it.
Stick to a plan and just do it!
I find myself facing $11,000 in credit card debt with a tough choice I need advice on. I have four children under the age of 10 for whom I have set up savings accounts for. Not for college (that's separate), for "life happens" stuff like braces, summer camps and proms. Between the four of them I have nearly $7000 total. Should I empty them out to get this monkey mostly off my back and start over (big lesson learned), or should I stop contributing to the accounts and shift the money to paying off the debt. Or both? I always considered myself good with money and never had much debt but here I am and for the life of me I can't even remeber what I spent all that money on.
Well this is a great question to take after the last one.
First, stop beating yourself up. As I admitted happens to the best of us.
If you have a separate emergency fund, yes, I would clean out the accounts and get rid of that debt. Then of course work rapidly to get rid of the balance. Then you can go right back to building up the life happens accounts for the kids (Love that idea of a separate life happens for children.). I'll have to start recommending that too. :)
I recently changed jobs and I cannot contribute to the 401(k) plan until after being with the company for a set period of time- six months. Over the last several months, I have accrued a pretty substanial amount in my checking account. My savings account is intact with a large about six months of emergency funds. Should I put the money in an IRA or should I buy stocks with it with the idea that the stock portfolio would be part of my retirement planning?
Actually, I would boost the emergency fund to 12 months of expenses. In this economy it's taking people a year to 18 months to find a job. And if you still have money left over after doing that start a "life happens" account to cover the things in life that happen, car repair, etc. You can also use the life happens fund to stash the money for vacations, etc.
Hi Michelle, I love your chats. I have an opportunity to go on a vacation that I have wanted for a long time. Normally, this vacation would cost $1000+, but I can go on it now for about $400. However, I don't have $400. Is it a terrible idea to borrow the money from a friend (who wouldn't charge interest)? I will have the money by September, but by then the chance to go on it cheaply will be gone. (Since I know this is bad economics times, let me say that yes, I am sure I will have it later. :P) I think I know what you are going to say, but I want to hear you say it...
Okay, here's me saying what you don't want to hear.
No, you cannot go on the trip. I really don't care that it's a deep discount (and since you can't tell my tone from I'm saying it lovingly.) And here's why you can't take the trip:
-- If you can't come up with $400 save for the trip I'm assuming that means you don't have an emergency fund.
-- You don't have a life happens fund so that you don't raid your emergency fund for stuff like a cheap vacation.
-- You need to spend the time you would have gone on the trip going through your finances and figuring out what it will take for you to begin saving regularly.
-- I don't lend money to friends. Ever. Ever. And did I mention EVER? Don't do it. Many such transactions have ruin friendships. And even if you did pay the money back, it's not a good practice. But what if life happens and you can't pay the money back and trust me life happens when you really think you will have the money.
So no, you get to have a "staycation."
Can you explain the advantage of having a Living Trust? And the person who setup the Living Trust, can they withdrawl money from it on as needed? Thank you
Oh my, the answer is so much longer than the time I have in the chat. So I'm sending you to a good source that I often use, www.nolo.com.
There are pros and cons to trust (nameing the con is the cost to set it up and then who will run it and can you trust that person over a long period of time, etc.
But yes, you can set up a trust to dictate how many is distrubuted to a beneficiary. And it can be set up so money is distrubuted only on an as needed basis. But again who will make that decision.
Really, read what's on nolo and then get a consulation from a good trust attorney.
Where was your Sunday column? Will it resume?
Ah, you missed me.
Seriously, I had a torn retina and had to have laser surgery to fix it. I'm healing but my doctor ordered me to stay way from reading and computer use for a week. It was so hard because I read so much.
My I'm back to my regular schedule. Column on Wed. and Sunday and weekly chats, weeky emailed newsletter, etc.
I know you encourage readers to keep their cars until they die. Our car is 10 years old. We have kept up the maintenance, and just spent over $600 to fix our brakes last year. We were given a list of other maintenance/repairs that our car needs in January and are considering what to do. It would probably cost us another $600. At one point do we buy a new car? We would buy it in cash, but I am reluctant to spend any of our savings at the moment. We have student loan debt and a mortgage otherwise. Thanks.
Okay you had me until you said student loan debt. I was going to say, well if you have the cash and you are tired of the old car -- and you have a fully funded emergency fund and life happens fund (at least $1,000) treat yourself to a new or used car for cash.
But you said the dreaded three words -- student loan debt.
So no, you don't get a car.
It's cheaper to keep her.
Paid off the student loans and then we can talk.
Hi Michelle, I am married, file jointly with two kids. Every year we'd have a large surplus from both fed & state refunds. This year feels like everything was cutback.. We only had one income of $49,000 so I know I haven't changed tax brackets. What do you think happened? Are there more/higher taxes this year?
Without knowing more I couldn't tell you. The tax brackets changed for people making big money. And also don't forget there was theexpiration of the payroll tax.
The payroll tax holiday cut 2 percentage points from every American's Social Security payroll tax at the end of 2010 until the end of 2012.
Really, talk to a tax professional and compare your tax returns from the last few years.
Lastly, it's not good to being getting what you called a "surpluss," which I assume you mean a big refund. Unless your tax situation drastically changes year over year, getting a regular large refund means you are just giving the government your money to hold interest free all year.
Now that your taxes are done sit down with a professional and do some tax planning for the future starting with looking at your W-4.
When it comes to a tax audit, are you assumed guilty until proven otherwise? Are most audits caused by people trying to cheat the system or people who made mistakes or misunderstood how to report things? I have a friend being audited and she said her biggest mistake was not paying sales tax on items purchased over the Intenet for her small business.
In America we are assumed innocent until proven guilty or that's what I was told in school :)
Seriously, people get audited for all kinds of reasons, all of which you mention. Some are just cheating and get caught. Some make honest mistakes or not understanding tax law, which quite frankly is pretty hard to figure out. If I owned a small business, I would definitely work with a tax professional. I hear so many stories of small business owners in tax trouble.
But read my eletter this week. The link is with this answer. Kiplinger did a great piece on who gets audited and what happens.
Related to the first question - I struggle to come to terms with the fact that we have a lot of financial responsibilities. Student loans and helping out an elderly relative are two big ones. We have put having a child on hold because of this, but I wonder how long we can do that for. We are in our mid-thirties as it is and the student loans won't be paid off for another five years minimum (even with aggressive extra payments and cutting back). I cried last night thinking about this, and my husband said we shouldn't put our life on hold forever. Thoughts?
Listen to your husband. As I said, for many people there will never be the "right" time to have a baby. And you are right to consider your age since for many women it becomes harder to conceive as they get older. Nonetheless work through the numbers. You may have to pull pack on the debt payoff plan to find the money for child care and other expenses. And honestly, I'm okay with that as long as you have a plan and the discipline to stick to it.
Don't do it if the strain is too heavy. But I suspect you can do it with some planning.
Hi Michelle, I am a Jr. Partner in Prosperity Partners at FBCG and doing well on the finanical fast, I might add! Quick question about taxes. I recently began a new business venture and work as a consultant with a National Organization but I work from my home. I used to get paid twice a month and now I get one lump sum with no taxes taken out (federal or state). I know they have worksheets to help you figure out how much to withhold or pay at the end of each quarter but honestly those look they are written in a foreign language to me. Is there a quick and dirty way to figure out how much I should pay at the end of each quarter. I don't want to allow the government to "hold" my money for me...so I don't want to overpay...but I also don't want to underpay and owe the money next year. Any suggestions?
Hey PPM member (that's the ministry I run at my church to help people with their finances).
Get thee to a tax professional.
This is too important to try and do a "quick and dirty."
A good tax professional, can help you work through the numbers and tell you what quarterly payments are due and when. It's worth the money because I've seen far too many people in your position end up with a hefty tax bill and fines for underpaying.
Happy birthday in advance to your oldest, Michelle! Mine just turned 11, and when she asked to put about 90% of the birthday money she got from my dad into her college fund I was as proud of her as I've ever been!
Ah, I want to hug your baby!!!
But as you say, train a child up in the way he or she should go and he or she won't depart from those ways -- usually.
also - they supposedly randomly select people to audit, don't they? To ensure that everything is working properly. At least that is what I thought...
The IRS does do random audits. Here's what the IRS says about audits:
Selecting a return for audit does not always suggest that an error has been made. Returns are selected using a variety of methods, including:
- Random selection and computer screening - sometimes returns are selected based solely on a statistical formula.
- Document matching - when payor records, such as Forms W-2 or Form 1099, don't match the information reported.
- Related examinations - returns may be selected for audit when they involve issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for audit.
See this link. Good information if you are concerned. Watch the video clips.
Hi Michelle, It is a wonderfully beautiful day isn't it...Re: Tax Deductions...what is a good website to go to find the best tax deductions?
All the major firms actually have good consumer information on deductions, H&R Block, Turbo Tax, Jackson Hewit, etc.
And check out the IRS site. It's really good and full of great information. The IRS will send tax tips right to your email box. Go to www.irs.gov
Dropping back to one income meant that their withholding also dropped. If the lost income provider had a higher withholding level, there would be less withheld and therefore less to refund. Review the W2s from 2011 and divide the tax withheld by salary for each spouse. I'm willing to bet the spouse whose job ended has a higher rate.
I thought that too, but I thought she said nothing had changed.
But either way, thanks for the extra input.
you are never ready. no matter what. even emotionally, you really won't be. it's kind of a learn on the job thing. And really - when we had our first, we were both working at pretty darn well paying jobs. and well, I had lost mine in the 8th month of pregnancy (with a great payout for being laid off, but still). I went back to work at some point after the second was born, but am not working now. And you know what? before kids, I never felt we had enough money. after, we had had our income cut basically in half. And we were fine. And we're fine again, even after I had left my job after returning to the workforce. Just breathe.
Thank you for sharing. Good stuff especially about not being emotionally ready. Heck I'm still trying to master the emotional thing. Wait til the kid hits the teen years.
I worked with someone keeping an old car. The car proved to be unreliable, he was fired. I guess he did save on not buying the car.
I typcially tell people when you can't plan for repairs and the car is breaking down unexpectedly, then yes, it's time to get a car especially if it means getting to work on time.
But if the repairs can be planned, keep the hoopty.
Thanks. I knew the answer, I suppose, considering our debt. I sometimes get silly and feel self-conscious about driving my old car when I see others driving shiny new ones. I know it sounds absurd!
No worries. Coveting is the American Way.
So glad I put you back on the right path. Besides many of those people in those nice shiny new cars are probably up to their eyeballs in debt!!!!!!!
Here's something to think about. When you look at how greeen somebody else's grass keep in mind that you don't know how much crap they used to get it that green.
Should I borrow from my 401 (k) ? I have a loan at $6,000 with a 13.12 percent interest rate and it's killing me with the $75 in interest a month. I am almost but not sure what else to do. Do you suggest that route or something else?
So you want to borrow more money to pay off old debt?
Yes, I know the terms might be better. But consider the money you remove from your retirement plan won't be there to work for you.
Do you know if you lost your job that loan would become due and if you don't pay it, you get hit with taxes if you are not older than 591/2.
I would rather see you really hunker down and cut expenses to the bone to aggressively pay down the $6,000 loan.
Hi, Michelle...I always appreciate your common-sense approach to financial matters, so wanted to run this by you. Our soon-to-be college grad is moving in with her boyfriend soon. We're not thrilled about the living together part, but worry about the financial impact of her post-grad life (her part-time job doesn't offer health insurance). We want her to be covered in case of an accident or something serious, so we are thinking that we will put her on our health insurance (after her student insurance runs out in May) and have her pay for the difference in our premium. Does that seem like the right and responsible thing to do, or do you have any other suggestions for how to handle this? We don't want to risk her going without insurance, but we aren't sure if this helping hand is somehow enabling her move-in with the boyfriend, which we don't support. Help!
Boy this is a tough one. And it's tough because a major medical illness could really hurt your daughter financially for years.
BUT . . . she is acting grown and going against what you believe she shouldn't do (totally with you on the shacking up part).
So no. Don't help.
She's acting grown. Let her be grown and take on the risks of being an adult making a bad decision (in our opinions).
I'm also wondering if her money is so tight and she can't come up with the premium then what?
You would probably cover it, right?
You would because you are a caring parent.
So you may have to stand back and let her be an adult.
Hi Michelle! Love the chat - I read it every week! I have a question regarding credit scores: what's the single most important thing a person can do to raise their score? I'm in the 650 range with 2 'old' accounts in collection status. I'd like to raise my score to 700: I've paid off all of my credit credit cards, and even my auto loan - so the only debt I have now is my student loan (which is current and in good standing). What else can I do? Paying off the collection accounts at this point won't raise my score... or will it?
Thank you for your kind words.
The biggest factor contributing to your credit score is paying your bills on time. So keep paying your bills on time and your score will go up.
You also did the second most important thing. You got rid of debt.
Nothing else you can do now but just wait. Give it time.
Audits are a civil matter, so you are "presumed guilty" if they find something wrong--you have to be able to prove that they are incorrect. That doesn't mean that you're being audited *because* they presume you're guilty. Audits can also reveal that you didn't claim deductions to which you were entitled, in which case they'd come out in your favor. Also, if you use a tax preparer, you may be audited in the course of an investigation into your preparer. I heard of one preparer who was caught giving elderly clients 10% contributions to charity across the board (whether they donated or not), but ignoring their deductible medical expenses. Their audits tended to be good for them.
Not sure about the presumed guilty part. Don't have time to investigate that.
But your other points are very helpful.