Color of Money Live

Feb 03, 2011

Need advice about how to handle your personal finances? Whether the struggle is saving for retirement, organizing your bank files, or talking about money responsibility with your spouse or loved one, Post personal finance columnist Michelle Singletary offers her advice and answers your questions on Thursday, Feb. 3 at 12 p.m. ET. She will be joined by Melinda Emerson, author of "Become Your Own Boss in 12 Months: A Month-by-Month Guide to a Business That Works," this month's Color of Money Book Club selection.

No snow, warmer temps. I'm in a good mood today!

Glad you all could join me. I hope you have a chance to read the review of the book today and if you haven't already subscribe to my weekly eletter.

Let's get started.

My girlfriend and I are 34 and 31 years old and both professionals in DC with good paying jobs (combined income $250k+ year), but with substantial student loan debts ($150k+). We have talked about future plans (marriage and starting a family, whether to move locations, etc...) which includes the possibility of starting a new business. We are still in the brainstorming phase. My question: Should we wait to pay down debt and decide on future plans (family and location) or progress with the new business idea regardless of those plans? How long should we keep our jobs while launching the new business? At what point is the debt load manageable to do this?

I think you are in a great position to get a plan together for your future lives together and your future business.

Since you all are making good money I would really tackle your debt and save as much money as possible. Your combined student loans are a mortgage payment right now. 

Consider your wedding plans carefully. Does it make sense to have a 60K blow out for one night. Only if her daddy is paying the bill. Consider buying a new house and having your wedding and reception in the backyard.

Since you want to get married and start a family, I would look at who has the better job between you with the most upward mobility.  One of you will need to keep a regular job for cash flow and the health insurance for the family while the other one works on launching the business.  You should start your business as a side hustle first and work the day job and the business for at least 12 months before leaving your full-time employment.

I'm a 25-year-old in D.C. with a job paying $45,000/year and no debt (got a bachelor's and master's with scholarships!) except about $2k in credit card debt. Would love to have that wiped away. I have about $6,000 in savings. Would you recommend I use my savings to pay off my credit card debt in one fell swoop?

I would get rid of the debt as soon as possible. You'll still have 4,000 in your savings so you'll be able to continue building up your coffers.

I ditto that. Get rid of that debt.

And whatever you were paying monthly on the credit card bill put that into your savings.

What can a parent create to help a child save for college themselves from a early age?

Teach them from their first allowance to pay themselves first. They must learn that they should save 20% of all money they are given or earn.  Take them to the bank and show them that there money is growing.  It's a habit they'll never forget.

Also open a 529 plan. Show the kid the statement. And when the child gets money encourage that some of it be put into the college plan.

Most of all talk about college...a lot. We mention it every chance we get with our kids.

Mommy: Can we go to McDonald's

Us: (or really me): You do know we have to pay for college right?

Them: Again? You do know they have nice nursing homes in our area.

No matter. We are at least talking about a very expensive cost to the family.

Why is this allowed to happen? People who for whatever reason do not bank in a traditional bank are sent down the UGLY path of payday loans, prepaid credit cards/debit cards, charged huge fees and there seems to be nobody reigning these "businesses" in. I am glad that I have never had this issue in my life, but everytime I read about it, I get angry that we allow the least of us to be screwed.

I get angry too.

We all just have to get the word out to the unbanked that that do have alternatives.

Michelle, I have had an almost perfect credit rating for at least 20 years. I check my credit reports annually to make sure there's nothing fishy. I always pay my credit cards off in full every month. This past year, I didn't pay a small credit card bill on time (they sent the bill electronically, I didn't see it, long story). When they sent me a letter about the bill, I paid it immediately. Now there's a ding on my credit report. Since I've always had terrific credit, will it hurt me when I refinance my house? Would it make sense for me to write the credit bureaus to explain what happened? Any suggestions?

How long did the bill go unpaid?

That's the thing. If it were two or three months, yes you got a big ding.

You could try and negotiate with the credit card company to ask them to remove the negative information explaining what happened. The change would have to come from them, not the bureau. If they change it then the bureau will update your files.

Going forward, given some time, if you continue to pay your bills on time this one-time ding shouldn't greatly impact your refinance.

Hi Michelle. Last month we were about $300 under our budgeted spending amount, due to a trip wherein my dad spoiled us rotten. But already this month, I incurred $250 in charges for eye exam and new contacts. Is it okay to "pretend" these costs came about in January, so that this month we're not totally poor?

If by pretending you mean you got the cash for the eye stuff, okay. I'm all for pretending.

But in reality I would hope you have emergency savings and life happens fund to cover such things. Then you don't have to pretend.

If you have that money, it's okay to pull from the funds and not worry that you were under or over in your budget.

 

I know I shouldn't focus on numbers or comparisons, but it bugs me that the calculation of net worth excludes equity in a primary residence. That means that if I take some of my cash and pay down my mortgage, my net worth declines. How does that make any sense? I fully realize that I should just chill out and know that reducing my debt makes me better off.

Your net worth is a calculation of your current assets and liabilities.  You can't calculate it based on the future.  In this housing marketing, home equity is very fluid so you can't calculate it in your net worth.  The less debt you have the better you are always.

 

Technically, you can list your home as you calculate your net worth. You would list the market value on the asset side.

On the libability side you list your mortgage and any home equity loans or line of credit.

If you owe less than your house might be worth on the market you have equity, which you could count toward your net worth.

But to Melinda's point. In this housing market your home's equity isn't something you can completely count on.

So best to pay down debts, save as much as you can, and invest to add to your net worth.

Here's a link on calculating your new worth

http://cgi.money.cnn.com/tools/networth/networth.html

My husband's job is relocating to Virginia Beach. My job isn't.  So me and our children are going to stay in NoVa, and he's renting an apartment and coming home on weekends. Is there a way to deduct these additional expenses on taxes?

Here's a link on the IRS website about moving expenses

http://www.irs.gov/taxtopics/tc455.html

If you moved due to a change in your job or business location, or because you started a new job or business, you may be able to deduct your reasonable moving expenses but not any expenses for meals.

But to my knowlege you can't deduct the ongoing expenses (rent, food, etc.) for running a second household.

And I hope this isn't a long-term plan for your family. That's a lot of stress and wear and tear on the marriage and family. I  know jobs are hard to come by so I'm sure you are making what you feel is the best decision for your family. But I also hope you are working on a plan to get you all together again. I know I need my hubby during the week to help with kids as much as the weekend. If nothing else to keep me from going insane. (Got a teen so pray for me).

Just saying. None of my business. But just saying.

How can a new business owner attract a business mentor? How can you reduce the finance impact of starting a business? Do you have tips for having a writer, book reader, and internet savvy workers to help with your business?

You should join small business organization that has networking events to find a business mentor.  You probably already have someone in your network who can advise you as well.  In order to reduce the fiancial strain of entrepreneurship you should lie below your means, have zero debt and save 20-40% of each paycheck.  Your ability to save has everything to do with your ability to start a business.

Social media is now a key component of any successful business. Engaging a virtual assistant to help you manage your social media footprint is a very smart this to do.  I have two people who help me in this capacity.

Bought a second home 2 years ago (first home is rental property). I'm deploying to Iraq in a couple of months. I'm not sure if I should sell or rent. I have no intentions of moving back to the home. Any advice?

Its hard to sell homes right now unless you want to give it away.  I say engage a management company and rent out your home.  Wait until you have a more favorable housing market to sell it. 

Hello: I created a budget based on the actual amount I take home (the money I can spend) rather than my gross. When I read books about budgeting, some of them say to include everything down to how much is taken out for my health insurance and such. Is that necessary? I can't touch that money anyway, so why include it in my budget?

I do not think you need to include the expenses automatically deducted from your paycheck, but you should be aware of your monthly contributions to your health insurance as it does effect your cost of living.  Use you budget to manage what you spend and save.  Do not spend $1 in a vending machine that's not in your budget. 

You shoud capture in your budget what you spend for health insurance because you are spending the money. So do both. Capture that expense but also work with your "net spendable" income, which is what's left after such expenses to run the rest of your household.

Michelle, I've done well, and have a good amount of cash sitting around. I'm maxing out my 401k, have six months of cash savings, have some additional money in the stock market (fairly high risk portfolio), and an investment property which is basically a monthly wash (though I do owe a mortgage). Any thoughts on what I can do with the money? Currently it is just lazing about in my checking account and accomplishing nothing. Short of buying a Porshe, I'm not really sure how I should be putting it to work. Suggestions?

It does appear you have done well.

How about paying off that investment mortgage?

As long as you have debt, you ain't got no "extra" money for a Porshe.

Having started my business 4 months ago I feel overwhelmed. What are some thing that one can do to develop a support team? Also, how much money do you believe someone should invest in their startup business that does not require a store front?

I bet you feel overwhelmed because you started and didn't finish a marketing plan or business plan.  Take a step back and make sure you have a specific target customer, and a niche. Develop your signature move so stand out in the market place.

When you are starting out interns are a good resources also look at the skills in your friends and family.  If you can afford help that's a great place to start.  Elance.com is a great place to find creative professionals to help with your website and blog support as well.

The average small business spends $25K to launch. It costs $75K to launch a franchise.

I've saved a fair amount of money for a down payment, but am not quite ready to buy. Where should I put that money? It's parked in a savings account, which seems wasteful, but I do want to be able to get to it in case I find a place I want to buy. I was thinking maybe 50% in an index fund, 20% in CDs or something like that, and 30% still in savings.

If you plan on buying a home in the next five years, leave that money parked. You can't afford to risk it to the market.

Do you prefer a prepaid tuition or a fund based plan? I live in Washington State so state taxes aren't an issue preventing us from choosing a different state's 529 plan. The prepaid with a guaranteed positive return sounds good except that each tuition credit appears to have a 25% load.

It's hard to give you a full answer in this forum. Personally, I prefer the fund rather than prepaid tuition. For a few reasons:

-- I'm not sure my kids will go in-state. While a plan may give you money back if your child goes out of state, the promised return is much lower or can be much lower than the return from straight investing

-- prepaid only covers tuition, which means you still have to save. Many people forget that unless they plan on having their child live at home

Go to savingforcollege.com for lots of tips, etc. on prepaid vs. fund based plans.

After 26 years,I was laid off 2 years ago and have not found a job. I recently converted my 401K to an IRA. I have credit card debt at 18%. Should I take money from my IRA to pay off the credit card?

First, I'm so sorry about your job situation. I know it's tough. And I know because I've worked up close and personal with people in our position.

As for cashing out your IRA money to pay credit cards. I'm sure you know it will cost you a lot if your younger than 591/2 because of the 10 percent penalty for early withdrawal. So you would lose with taxes, penalty probably about 40 percent of whatever you take out.

If you can try to hang in there without touching the retirement money. See if you can work out something with the credit card companies.

Besides if things get really bad you may need that money for just basic living expenses (food, shelter, etc.).

 

What is the best way to set up a business plan? And where can you find an angel investor?

I just did a three part blog series on how to write a business plan  How to Write a Business Plan Part I, II and III

But here's the bottomline: Get some business plan software and then take a business plan course to finish the plan.  Often you need to ask questions to fill in the holes in your plan and the local community college or small business development center will have resources to help with the financials which is often the hardest part of a business plan.  Just remember your business plan should be reviewed every 90 days in the first three years of a business to make sure your business is on the right track.  

Good afternoon! About 6 years ago, I had an unpaid bill to the Book of the Month Club of about $325. In the years since, my financial picture has improved. I applied for a loan recently and was denied - this old debt was specifically mentioned as part of the reason why I was denied. How should I handle this? Will paying the old debt, then sending a copy of the check to each of the credit bureaus remedy the situation? How long will it take for me to qualify for a loan afterwards? Should I even pay it, as the statute of limitations will make it fall off my credit report once it is so many years old (7, I believe). Thank You for answering my question.

If you are applying for a loan for a home, then pay the $325.

BUT don't pay until you get proof that you owe it and that it's all you owe. Then get a promise that the $325 will satisfy the debt.

Then pay the bill. Keep the proof FOREVER. Since this type of debt can pop back up as companies sell this type of overdue debt over and over again.

Once you paid the debt and have the proof this should help you get the home loan since I'm assuming that's what this is about.

And if all else fails you do have that 7-year window when negative information does drop from your credit files.

I paid for college myself, as did my husband. He has two children from a previous marriage.  One is currently in college, and he pays half his tuition and fees. I think that's more than equitable. I know every one is different, and there's different situations, but expecting the other parent to pay for some as well as expecting the student to pay for some makes complete sense.

If you don't know where's this is coming from see my eletter this week. Link above.

As for your word "equitable" I'm not sure I agree. It's all about what's fair to the kid. I don't believe in 50/50 when it comes to the kids. If your husband can afford more and the ex-wife can't afford much, he should pay what he can afford even if it's not an even 50/50.

We have these kids. We know for the most part they need a college education so we should do what we can to help them get that education. All is not fair in life.

What are the first steps to take when trying to establish a budget and stick to it? I'll start one but never finish it.

I would track all of your household receipts for 30 days to see where you spend money and can cut back and then develop a budget.  Be sure to include how much you are saving in the budget too. 

I am in the enviable position of being able to save money. I see that the advice today was to save 20% - is that including the 401K or after the 401K is taken into account? Thanks!

that's 20% After the 401K savings, in fact if you can raise it to 40% saving that would be even better.  Your ability to save money gives you the power to do whatever you want to later down the line.

Oh no, we have the money. In fact, this month we have an extra $300 unspent from January. So I'm guessing you're saying it's okay to use. But in general, if you are under your budget for a month, what do you suggest doing with the leftover money? Thanks!

Any left over money should be used to tackle debt or saving for a business idea or family emergency. Do not go blow it.

 

What to do with extra money should be part of an overall plan.

If you have kids, putting the extra in their college fund perhaps.

Or paying down mortgage.

Or putting more toward car loan, student loans, etc.

I think of extra only if you don't have ANY debt (mortage, credit cards, student loans, ) you've fully funded retirement and college fund, have made generous donations to charity, tithe, etc.

See where I'm going?

If not, how about this.

Every penny should have a purpose.

So you should always have a plan for any "extra" money.

I am a 41-year old stay-at-home mom ready to go back to work. We are an active duty military family and move often. I have a BA in Psychology and MA in School Psychology. My professional background and interest is in educational psychology, family management, and child development. I have many ideas on how I would like to pursue my professional ambitions, one of which includes family and educational consulting. Due to our constant moving, is it advisable to start my own consulting type business or try to get piggy back on someone in the areas we live who are already established? Also where do I look for information about jobs or professional organizations in this area?

You are a perfect candiate for an internet business. If you are a good writer you can start blogging in your subject area and building your social media footprint.  As you move you should certainly build relationship to do face to face counseling, but with technology such as skype and web conferencing software you can meet your clients wherever you are.  Technology is awesome for this kind of issue, but it starts with demonstrating your thought leadership.

Putting away just a small amount every month (we do $25 per kid) adds up. We have it in a 529, but putting it anywhere you can't get to it works. It's adding up quite nicely, one kid is almost 9 the other almost 6, and we won't look at it for a while. it probably won't pay for the whole of a college education, but I want my kids to contribute also, in any event, I want them to want to get scholarships, work hard to go where they want, etc, to have some skin in the game so to speak. Although the conversations in my house go more like: i want that toy. me: you want that toy or you want to go to college? Answer: I want that toy. I don't care about college.

Sounds like my house too.

But you are right, whatever you can put away adds up. You might be able to cover everything but something is better than debt.

As for a skin in the game. I sort of agree. I think if you can't save enough to foot the whole bill, yes the kid should contribute. Yes, summer work money and part-time work money should go to help.

But, as I believe, we had these kids. We owe them a good start in life.

And people will say, "but if they don't pay something they won't appreciate the college education."

Really?

So if they get a full scholarship, which isn't paying anything, they won't appreciate their education?

The bottom line. Save what you can. If it's not enough then think differently about how to pay. Community College, live at home, in-state, etc. Anything to minimize to eliminate borrowing for college.

I my apologize that I didn't get a chance to read your book before this chat but am already looking on my library's website to see if they have it. Life with a full-time job, position on a large non-profit board and a 9-month old makes for very little time for reading. Anyway... my husband bit the bullet and licensed our business, product testing is underway and we're looking to rent out production space right now. I'm excited about it and know that there is a market for it but just feel overwhelmed about the thought of launching it. How do I get past this feeling and get on board knowing that it's short-term overwhelm for what (hopefully) is long-term gain?

You will get over you fear if you have a plan.  Then all you need to do is work your plan.  Do you have a detailed marketing plan and business plan?  Do you know who your customer is, competition is, how you will stand out in the marketing place. Do you have a marketing budget and sales plan.  If you have these things there is no fear needed, just patience.  Please read my book.

Thanks for taking the question. I knew about the moving expenses, I was just hoping there was a way to deduct the expense of needing a second household. Its only for 18 months, so it could be a lot worse. Plus there's a train twice a day, so when he comes home he doesn't have to drive and its cheaper than what the drive would cost. Plus no speeding tickets. lol

Never hurts to ask. And of course check with a tax professional. There may be some tax deductions I'm not thinking of.

While I understand her frustration, your home's equity is zero unless you are selling your house. Your mortgage is more important because that is a debt you HAVE to pay that. Your equity in your home is only based on what a buyer will pay. Even many of us that purchased with more than 20% down are at risk for being underwater on our mortgage due to the high volume of foreclosures and short sales in our area. My home value has dropped 20% in the last 4 years. You should never consider your home equity...and especially you should not tap into that equity unless you are putting the money back into the house. Do not take out HELOCs or HELs to use the money for anything else. If you don't believe me, watch the HGTV show Real Estate Intervention and find out what type of financial crises that you can set yourself up for when you can't afford the house and the two loans and you can't sell it without having to bring a lot of money to the table.

Good points.

Starting a new business is exciting. What are your thoughts about keeping the business going five, ten, 15 years out?

Staying in business is a lot harder than starting a business. You need to constantly reinvent your business ans listen to your customers. you should be doing a trends analysis on your industry to make sure you are no operating your business based on the "old way" of doing things.  Invest in your business by getting a coach and going to confernces and workshop to keep your management skills up to date.

I respectfully disagree about a $60,000 wedding being okay  if "Daddy" foots the bill.  Even if you were kidding, it sends the wrong message. This recession is a great time to put the hyper-drive wedding message to a peaceful death.  Cake, finger food, punch, flowers in the yard, with a friend DJing some background music and a friend shooting pics.

I was kidding.

Some of you may be shocked.

But may I disagree a little.

If daddy is well-heeled and can really, truly afford a $60,000 in cash then it's really their (bride and daddy, mommy, Big Mama, etc.) business to want such a lavish thing.

Now I say that knowing full well I wouldn't put out that kind of money for a wedding even if I had it.

But some people do. And some people can afford to live the high life.

It's like telling people they can't have their expensive Starbucks. I try not to say that.

Have you luxury latte if you can afford it.

It's when you are trying to have it all with no money that I have a problem.

And can I add, I wouldn't do it if I didn't feel like I was giving back via tithes, charity, etc.

But let's say someone is very generous and gives to the community and helps family but still has $60,000 for a wedding. We may not be in the position to judge that expenditure.

You and I might still give a good fraction of that money away, but I'm not mad at folks who can spend their hard earned money on themselves.

Hi, I want to teach new homeowners how to maintain the plants in their new home. How can I make contacts? Thanks.

Starting blogging about the topic you will attract your clients to you.

I have about $8000 in savings and only owe $2000 on my home equity loan. Should I pay it off with savings or continue to pay $235/mo until it is paid off in Oct? Thanks - love the chats. Due to you I am debt free other than the loan.

Pay it off if you have the cash.

LOL!! Michelle, that is my problem in a nutshell. I WANT to go and blow it!! It's hard to wean yourself off that, but I think it's for the best in the long term. Love the chats!

Love you right back!

Irony: The stepmother who wrote in to complain that she wants her new husband to contribute only 50% or less of the costs of his children's education is a *perfect* example of how divorce hurts students.

Interesting point.

I'm a retiree, with an old-fashioned pension and a 401K. I have a couple of ideas I'd love to develop. Not really inventions, but useful products. Would your book help me put one foot in front of the other to develop my products?

Absolutely my book will help you flush out your ideas and walk you step by step through starting a small business.

Hi Michele, My wife and I are developing our annual spending plan and we are having problems with figuring out the proper breakdown between savings and paying down debt. Currently we have virtually no savings, and a lot of credit/student loan debt. Should we work on a life happens fund and devote the rest of the money to aggressively paying down debt? Currently we pay enough over the minimum payment to get out of CC debt in three years, but not sure if we should allocate more to get that down to 2 years, or if we should focus on the life happens and emergency funds. What do you think?

I would build up at least one month's living expenses in emergency fund (for job loss, extended sick leave etc.)

Build up a few thousand in life happens fund (car repairs, etc.).

Then stop and toss every penny you can get toward the credit card debt.

While you are building up the emergency and life happens still pay as much as you can on the credit card debt.

I used to do speechwriting and marketing work for an international financial services company (an instantly recognizeable name) so I have some background in this. Many of the unbanked are immigrants from countries where banking systems are either very rudimentary or, in some cases, not to be trusted. And the vast majority of the unbanked, whether immigrant or native born, simply don't have a sufficient level of financial literacy (or even basic literacy) to deal with managing the simplest checking or savings account. What these folks understand is cash in hand. Until that changes (and I hope it will with a generational shift), you are going to have millions of people at the mercy of payday lenders and the like.

I appreciate your insight.

Isn't it easier to start a business than it is to sustain one? What are some of the key things to do to avoid failure soon after beginning a business?

There are 5 reasons why small businesses fail.

1) no life plan--- people do not think asbout what their life will be like running their business. So what can happen is they start a business they hate.

2) no network-- People do business with people they like, know and trust.  You should spend 12 months cultivating your network as that is where your first customers will come from.

3) not saving enough money-- Starting a business with a bunch of debt is not a good way to start. You will be too stressed out.

4) no target customer. Too many small businesses try to sell to anyone who has money as opposed to a niche customer they specialize in serving.

5) poor fiscal management -- if you do not manage your household with a budget you will not manage your business with one. You must use up-to-date financial information to run a successful business.

 

Contact your local SCORE chapter: it's retired CEOs who volunteer to mentor entrepreneurs.www.score.org Small business mentoring and training.

Great advice! SCORE is a great free service to small business owners.

Michelle is absolutely right (of course) about keeping that money out of the market. But CDs would be OK, as long as you choose the timeframe carefully (i.e., so there is no chance that you would buy early and need that money before the maturity date). But look carefully at rates -- everything is low right now, but some savings accounts (like ING, at 1.1%) are actually paying the same or better than many short-term (12- to 18-month) CDs.

Good tip. Thanks.

If you can truly afford it, please DO spend lavishly. The small businesses that provide flowers, invitations, food, etc -- and their employees -- will thank you. I am quite thrifty by nature, but I was already living within a good budget, so with the recent cut in social security taxes withheld, I decided to devote half of that monthly amount to charity and half to spending at small local businesses.

Well, I don't think you should spend with the idea that you are keeping small businesses in business. They take the risk that they will have customers.

Spend because it makes sense for you. And if it helps others, more the better.

Presumably some of that money is going into supporting local businesses and their employees... (I can't imagine spending that much on a wedding, but if someone honestly can afford it, I'm not going to object. I know many kids who did very well by high school/college standards as waiters, etc., at such events.)

I see lots of you really think about small businesses. How nice.

I don't think Ms. Emerson gave the best advice, as it really depends on where the house is located. If he's in a bad market and can't sell, then that's that. If he could sell at a loss, then he should weigh the loss versus how much he'd bring in as rent and how much his carrying costs are, including paying the agent. If he's in a decent market, it may just make sense to sell now. My place in VA was on the market for 15 days before it sold at my full asking price.

It's hard to give complete answsers when you are rushing to answer many questions.

But the bottom line is you should look at all angles.

So thanks for the reminder.

Wow, time up.

Thanks so much for joining me today. And big thanks to Melinda.

Take care and be financially safe.

In This Chat
Michelle Singletary
Singletary writes the nationally syndicated personal finance column, "The Color of Money," which appears in The Post on Thursday and Sunday. Her award-winning column is also carried in more than 120 newspapers. In her spare time, Singletary is the director of a ministry she founded at her church, in which women and men volunteer to mentor others who are having financial challenges.

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Melinda Emerson
Emerson is the author of "Become Your Own Boss in 12 Months," the Color of Money Book Club selection for January.
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