Color of Money Live

Jul 26, 2012

Join The Washington Post nationally syndicated personal finance columnist Michelle Singletary Thurs. July 26 at noon ET. Singletary will be discussing her July Color of Money Book Club pick, "Worth It...Not Worth It? Simple and Profitable Answers to Life's Tough Financial Questions" by Jack Otter, executive editor of CBS MoneyWatch.com. Otter will be Singletary's guest and available to take your questions about his book. During the chat, Singletary will also be available to answer your personal finance questions. Here are links to Michelle's latest columns and e-letter:

Today's E-letter

Friends, loans and consequences

Colleges should offer transparent cost sheets

Michelle's column on Otter's book

So glad you could all join me today for the discussion. I hope you had a chance to read this month's Color of Money Book Club selection but if not Jack Otter can still answer your basic personal finance questions. So let's get started.

Good Morning Michelle, I just happen to catch your morning show last weekend. I think it was called Aspritations. Is this going to be a regular radio program or was it a special? It was a pleasant surprise to turn on my radio on my to work and hear your voice. Thanks.

Afternoon. And yup that was me on the radio. The program was a special but I do hope it becomes something regular. I love radio. I had lots of fun talking about debt, credit and death.

Getting married next year, just bought a big house in a community where everyone around us is retired...we need everything and I'm overwhelmed by how much my neighbors seem to have. I've got to work another 8-10 years so I know I can get to a certain point, but it's going to take a minute. How can I keep my priorities straight?

First congrats on the new marriage. How wonderful. Now, how do you keep your priorties stright.

Stop looking at how green your neighbors grass is. You have no idea is what they got was gotten with debt and whether they are still in debt. Many retired folks are trying to live large with debt too. But even if they aren't you know the drill. You state it yourself. they worked a lot of years to get where they might be. So take your time, enjoy what you have and save to get more of what you want. You can do this. And if all else fails put on dark sunglasses when you ride through the neighorborhood, keep your blinds closed so you can't covet what your neighbor has.

I'm so glad you're chatting today! This might be a silly question, but...we're refinancing and I'm nervous. In the past I've had mortgages with USAA and Pentagon Federal - both sturdy and reliable organizations. But now we're going with a "big bank" because they have the best rate. Am I silly to be hesitant? Thanks SO much!

You are not being silly. From the recent recession and housing crisis we all know that big doesn't mean better. Just make sure you keep asking questions, perhaps even ask to talk to some of the bank's mortgage customers to see how they handle things.

Both of my parents have died within a year of each other. I would give anything to have them back, including the $200,000 plus inheritance they left me. My husband and I are in our '50s and have a $400,000 balance in our retirement accounts, as well as six months of living expenses in our emergency fund, and five years left on our mortgage, two cars, paid off and one daughter just finished college. So that's behind us without any loans. I want to put 100 percent of the inheritance toward our retirement, but then wonder if we should use some of it to pay off our mortgage since the stock market is so volatile. Advice? Thanks!

I am sorry for your loss, I am bracing for that day myself. It sounds as if you are in fairly good shape; congratulations on paying off those debts.  Assuming that one or both of you is employed, I would not suggest using the money to pay off the mortgage, for a couple of reasons. First of all, an academic study I like found that investors were better off putting money in their 401(k)s than paying off their mortgages early, largely because the 401(k) is pre tax money. Other considerations: With only 5 years left, you have already paid most of the interest, so you won't save much by paying it off early. In fact, I'm hoping that diversified investment portfolio will give you a better return than the amount you would save. Also, I like people to have the options that come with extra cash in case something unexpected happens. 

Good Morning Here is my tough financial question: I have $5000 in an old account - 20 percent interest- and I have a car loan that has a balance of $3500 at 4.5 percent with eight months left. Do I pay off the loan now or keep making the payments?

Can you clarify your question for me? Are you paying 20 % on a $5,000 loan? I can't imagine you have an accoutn that's earning 20%, right?

 

I'm confused too. An account paying 20 percent?

 

Hi Michelle! Love your articles and advice. My question is this: my husband and I had our first baby four months ago. I've been back at work for a month now and have a strong desire to leave full-time work and become a stay-at-home mother. My husband and I have talked about what this move would mean to our finances. Currently, we gross over $110,000 per year. If I leave my job, it will cut that number down by almost half. Our expenses are about $3000 per month. Now, I do not plan to stay out of work forever. I'm enrolled in graduate school to get my Master's degree and am not opposed to working part-time. If we decide to go this route, what steps do you suggest we take to make for a smooth transition and to ensure we're able to pay our expenses every month? FYI: we do not own a home yet, paying on one vehicle, and have very little credit card debt.

I totally understand your situation. I've got three kids and I spent 6 months home with each of them before returning to work. About half that time I was not earning a paycheck.

So before you leave, if you can wait, really do the math. Look over your budget. Cut what you can. The point is you have to prepare yourself quickly for the reduction in salary if you choose this route. I would most definitely while you are still working pay off that "little" credit card debt. I hope you aren't taking out loans for school too. You want to get your expenses down quickly otherwise you will go into financial shock. So to recap

-- Sit down with your budget.

-- Look now to see what you can cut (cable, eating out, etc.

-- Pay off the creidt card debt.

-- Don't assume any more debt while you are staying at home.

Before Elizabeth Warren became a politician, she wrote an important book called "The Two Income Trap," about the precarious financial situation of many middle-class families. One of her contentions is that it's not those frequently cities bugaboos like Wal-Mart, Visa and HDTV's that get families into trouble, but the relatively fixed costs of housing, health care, higher education and automobiles (need two, one of them an SUV). For those of us constrained by career interest to live in an expensive metro area (my job doesn't exist in low-cost places like Oklahoma), what are the financial requirements to even consider adding a spouse and child(ren) to one's life?

There are many, many answers to your question, but I will quote my mother-in-law as my wife and I wondered when we should have children.  She told us that if we waited until we were "ready" we would never have children. So we jumped in, and it's been a wild ride, but I wouldn't think of trading my children for all the things I could buy with the money i spend on them.

Also, I'll channel Michelle and suggest you think hard about your "needs." Do you really 2 cars? If so, could one be a cheap old beater, a "station car?" Think hard about where your money goes and see if you can cut back somewhere. We still have an old tube TV and I drive a 9-year-old car.

Amen. Amen. Amen.

I've read the book and in fact it was a Color of Money Book Club selection when it came out.

Warren is right about the financial situation of many middle income families. But I also know from experience, as Jack, points out that many families don't want to give up on some comfort. As I've said I have three kids and we did consider our financial situation before having each one -- well okay the first two. The last one we call the "love child." Anyway, we did calculate whether we could afford kids and how many. As a result we cut back on some things. We drive our cars until we are on a first name basis with the local tow truck drivers. We watch our debt load. Right now we only have a mortgage. It is about choices. If you decide to have kids then you can't have a lot of things or if you do, you'll find yourself in a lot of financial trouble

When is long term care insurance a good choice? I am presently 62 years old and in good health. My parents are in their early 90's and did not require special assistance until recently when my mother broke her hip five years ago. They live in a senior community but have sitters early in the day and at night. Considering this family history of longevity and good health, is long term insurance something I might consider perhaps in the next decade. The cost of the senior retirement monthly fees and sitters is about $4000/ month. Thank you!

LTC is an extremely complicated product, and tough to budget for since there are so many unknowns, from the rate of premium increases to your health and longevity. In my book I suggest that if you are not wealthy, but have some assets, you buy a policy that will pay for 3 years of care, which is much less expensive than policies that pay for care as long as you need it. A study found that only 8 percent of 100,000 customers needed more than 3 years of coverage. Fewer and fewer companies sell LTC, I recommend only companies with a long history in the business -- Genworth, Prudential or Northwestern Mutual. 

 

Michelle, Last week I talked with my husband about the life happens fund. I think that once we get to $2000, we should begin contributing the savings to the emergency fund. My understanding from your advice is that the emergency fund should be in a separate account and "for deposits only" until a true emergency occurs. My husband didn't agree. However, I don't think it's smart to mix the life happens and emergency fund. What do you think?

On this point you are right. And tell your hubby I said so (in love and with a sweet tone).

The accounts should be separate (although if you are very, very disciplined they could be in teh same account).

But I keep them seperate. The life happens fund is something you will be constantly dipping inton, replinishing, dipping into, replinishing.

The goal for the emergency fund is to get it full (three to six months to a year's worth of living expense, ie. rent/mortgage, car payments if you have them, cable bill etc.). Once you've reach the emergency fund goal, you stop contritbuting to it and let it sit until as you indicate a true emergency occurs. So yes, you are right the emergency fund is for deposits only. Otherwise what I've found people do it they put money in the emergency but keep dipping into it so that when a real emergency comes there isn't any money or enough in the fund.

Think of it as two pots. One you'll be dipping into a lot. The other you just let stew.

Hi Michelle - Do you have any insight to the housing situation? We've owned a house for three years and I may be faced with a company move. We could probably sell without bringing any money to the table, but would lose the down payment that we put into it. If we sold, we would be buying in Florida where the cost of living is much lower. I'm not sure if that is the best move or if we should hold onto our house in DC and rent it out, then rent in Florida and sell later. Who would be the best person to talk to? A realtor? Thanks!

Unfortunately the answer to this question requires a crystal ball, which I don't have. But a few things to consider: Are you in a desirable section of DC where you can expect a steady stream of potential tenants? Certainly there are many transitory residents, given the political cycle. Are current rents higher than your mortgage/maintenance/taxes? If not, you should sell, but if so, it might be worth hanging on. If inflation increases, it will turn out to be a good move (though if we get hit with deflation, which is possible but less likely, you could get stuck with lower income or selling at a loss). 

Of course, if you do keep the property and move, you will face uncertainty on all these issues -- if you sell you might sleep better. You might also consider renting in Florida for a year or so, that way your financial future will not be so tied up in the real estate market.

 

-- Jack Otter, author of Worth It…Not Worth It

 

 

I agree with Jack. But I also think it would be worth while to talk to a realtor here and in Florida. Get a sense of both markets as they stand today. However, since realtors are in the business of helping people buy and sell homes, just listen to the advice and weigh it with all the things Jack pointed out.

"Need" an SUV? No one needs an SUV. You can raise a family quite successfully with: one car, or one old station wagon, or one used minivan, etc. Our priorities are mixed up in this country.

I really do agree with you. People have blurred the line between a "need" and a "want." As the mother of three I understanding wanting the room of a SUV so your kids don't kill each other. But you can get back with a smaller car. Might it be cramped? Yes, but the kids will survive.

I think i will be receiving a large sum of money in the next few months. I am thinking of placing most in a mutual fund. Will I still be able to access that money if something comes up and I need it ? How do I begin to research this ?

The most basic answer to your question is that the higher return you want on your money the more risk you will need to take. There is, unfortunately, no way to get a decent return without taking risk. So if you cannot afford to have the value fluctuate, your best bet is probably  a short-term CD . One trick that I write about in Worth It.... Not Worth It is to look for long-term CDs (which pay higher rates) that have low penalties for early withdrawal. In many cases you're better off, say, pulling your money out of a 7-year CD after 2 years than buying a 2-year CD.

If you can afford to leave the money in there for a long time, I'd recommend a diversified portfolio of low-cost index funds, which will include a mix of stocks and bonds. My no-brainer portfolio consists of four funds and gives you exposure to stocks and bonds around the world. I would avoid "actively managed" funds in which stock pickers try to beat the market. They are more expensive and usually don't end up beating the market.

To the young whipper-snapper worried that she/he can't afford all of what her retired neighbors have accumulated over the years - rest assured that most of us old people would trade places with you in a heartbeat and give up our decorated homes for your youth and health. And Michelle - thumbs down for suggesting that we did this all by taking on a lot of debt. If her neighbors were in their 30's, sure, but I doubt that many of her retired neighbors accumulated debt to furnish their houses.

Thumbs up for the first part of your answers. I wouldn't mind getting back some years. But thumbs down for misreading what I wrote. I said the retired neighbors may have used debt to get what they got. I said they may still be in debt but I also said even if they didn't use debt, you shouldn't look at what others got to determine what you should have in comparison.

Dear Michelle, My husband and I are delightedly expecting our first child in November. I think our finances are in fairly good order, but I'm hopeful for your advice and counsel. We both spent a long time in graduate school and got started a little late on the stable life we now have; we are both professors. We bought a new car for cash last fall and it's our only vehicle. We became homeowners in May and the $150,000 mortgage, along with about $18,000 in student loans (at 1.875 percent), are our only debts. We have an emergency account of one year of expenses, plus another $10,000 life happens fund. We are maxing out our employers' retirement plans and our IRAs each year, and by careful budgeting manage to save another $10,000-15,000a year, just to try to catch up for not having started retirement accounts until our late 20s. So the question is about college savings and baby budgeting. We anticipate a few thousand dollars in household expenses related to the arrival of the baby, and several thousand dollars in repairs to our 1930 house to make it safe for the new baby, all of which we have budgeted to come out of our salaries. I will be on paid family leave for the spring semester and we won't start incurring child care costs until the baby is about 9 months old. We'd like to start a 529, but aren't entirely sure where to start. Can you give us some suggestions? College cost calculators are terrifying, and even to pay for in-state public school education, indicate that if we want to save enough, we should put away $1000 a month starting at birth. I don't think we can afford to do that much once we start paying for day care, but how much do you think is enough to be saving for college? Thanks for your help!

You guys are in fantastic financial shape, congratulations! Obviously you've been reading Michelle for a long time. Don't let those calculators scare you. You are correct, the cost of an education is extraordinarily high. A child born today can expect to pay more than $600,000 to go to Harvard. But saving something is better than saving nothing, and time is powerful when it comes to investing, so open a 529 the month your child is born and contribute what you can. Unless your state offers a tax deduction for using the in-state plan, you should shop around for the best 529, which usually means the cheapest. Both Utah and New York have outstanding, low-cost plans that invest in Vanguard funds. You can choose the age-based option, which automatically gets more conservative as your child gets closer to college. 

 

I agree with Jack. Don't let the calculators scare you. Start saving whatever you can afford. Check your state's plan and shop around. We have a 529 for all three of our children. The oldest is about to go to college. It's looking like you might get a full scholarship but even if she doesn't we manage to save just enoug and I mean "just" enough to pay for her for four years with state-level type of tuition, room and board. If she ends up not needing the money, we've told her she can keep it and use it for graduate school. The point is we didn't save $1,000 a month or the equivlent given inflation for the time we were saving. We just saved as much as we could, adding in any extra money we got starting when she was very young. And if we didn't have enough, trust me, we would be living at home, commuting or starting out at community college, etc. We planned but we also talked to her about other choices had there not been enough money.

Hi Michelle - I generally agree with your advice, but I don't agree (as you often advise) that it is not worth taking on some debt to go to a top-ranked, prestigious university. While I agree that an undergraduate degree from a top-ranked school is not as important, I think it is for graduate school. I just finished a two-year graduate degree program from a top school. I took on about $70,000 in debt to do that (paid my first year in cash from savings). I now have a position where I'm making over twice the salary that I made before graduate school. With over $150,000 salary, I'll be able to pay off my debt in just a few years while still saving a great deal. Sure, I could have gone to my state school and taken on little to no debt, but there is no way I would have landed this job (they only recruit at certain schools) or ended up with a salary this high (the school's salary statistics are drastically different). There was a slight risk going to the prestigious school since there was no guarantee that I would end up here, but if you look at career statistics at the two schools, it was a clear no-brainer.

I respect your opinion and perspective. But for every one of you -- those who have taken on an amazing amount of deb for graduate school -- I can find 10, 20, 30, etc. people who are not reaping the same rewards. You took a leap of faith and bet. You won. But many others lose. And really I'm not sure you are really giving yourself credit for your skills, etc. Maybe it was the school but maybe it was the school and your amazing self.

I still stand by my advice to not take on the debt.

I believe they meant that they already own the SUV. Maybe the "need" for two cars is questionable but there really was no need to turn this around on the poster. We all know that it often makes sense to hang on to what you already own.

You may be right and I don't think turn on is totally fair. People just trying to get out the message that what you think you need is often still a want.

Not the original poster, but I'm confused. I thought there were annual contribution limits for 401(k)s that are well below the $200,000 mark. So are we talking an IRA instead? And isn't that not pre-tax? Plus, wouldn't the estate be paying taxes on the inheritance - it's not regular income?

Yes, the max contribution level is $17,000 per person, for a total of $34,000. But if the couple is not maxing out their 401k because they cannot afford the cash flow, they can tap that $200,000 to help them get by. The money comes out of their paycheck, but that's just an accounting detail, the point is they are putting away $34,000. And if they are over 50, the max is $22,500. Multiply that times 2 and you get to $200k fairly quickly. 

But more important is the idea that resources should be focused on saving for retirement rather than paying off a mortgage.

And unless the estate was more than $5 million, there should not be any taxes on that money, 

Hope that helps. 

 

just wanted to point out that the poster was asking what to do wtih inherited cash. . . that money CAN'T be added to a 401(k).

You are correct that the money can't be added directly, but if a couple is not maxing out their 401k, and they get an inheritance, they should start maxing out their 401k, and then if they need to supplement their cash flow they can tap the inheritance. In effect, they are putting the inheritance in the 401k.

 

We had a will done by a lawyer in 1982. Nothing has changed except we now have grand children. After our spouse, our two children will split everything. If Congress doesn't extend the $5 million estate tax exemption. Our total asset amount is below that amount. Is a living trust worth doing? We know a will is public access and probate can take a long time but living trusts are expensive. What is your opinion?

I would wait and see what Congress does. Given the powerful Republican opposition to estate tax and the probability that any political changes will be fairly modest, I think there's a good chance the estate tax exemption will remain fairly high.

 

sorry it was a typo I meant .20 interest on savings account

Ah ha! that makes more sense. In that case, yes, I would suggest you pay off the car loan with that savings -- in effect you are earning 4.3% on that transaction. BUT: Keep on making those car payments....to yourself. Funnel that money back into your savings account every month.

LOL!

Ditto on paying the car loan off but keep making car payments to yourself. With this method my husband and I have been able to buy our cars with cash for the last several years.

Hi Michelle, I just discovered your chat. I'm a young professional. I have been in the workplace for three years. In this time I have focused my efforts on 1) paying off student loan debt, 2) building and emergency fund and 3) contributing to retirement. I've been fortunate and disciplined and I have now paid off my student loan, I am contributing 12 percent of my salary to my 401(k), and my emergency fund will be just about where I want it to be in the next month or two. My question is, once my emergency fund is complete...what should I do with the extra cash? Longer term potential goals/expenses in the next 5-10 years would be a house and a wedding. Any advice on what savings vehicles I should take advantage of?

You go boy or girl (not sure). So, so proud of you. You are doing what many young and old people don't do. You are planning. And love that you got rid of that monkey on your back early. YEAH!

So I'll add one more account to you mx. Start a "life happens" fund for the things in life that happen -- car repairs, etc.

Aim for a few thousand.

Then yes start those other accounts for house and wedding. But if you are goig to need that money in 5 years or less I wouldn't invest it. I would just stash it in the life happens fund. If you have a longer time frame look into mutual funds, especially good low cost index fund.

I will be 62 years old soon and will be eligible to start collecting Social Security, at a rate considerably lower than if I waited until age 66. Do you have any thoughts on whether it is better to delay collecting SS and draw money from an IRA, or to leave the money in the IRA (where it can grow tax-free) and take the lower SS benefit? (Yes, maybe it would be even better to have a job or some other source of income, but it looks like those will be the only realistic alternatives.)

Yes, it would be great if you can find a way to boost your income now to reduce the amount you need to withdraw from your IRA. That said, I would recommend holding off on SS and tapping the IRA because every year you wait on SS gives you the equivalent of an 8% return. You cannot get an 8% risk-free return anywhere else, including your IRA. The longer you live, the more you will be rewarded for waiting. 

That said, if you are in ill-health or have reason to expect a short life expectancy (not much fun to think about, I know) then the math changes and you might want to tap SS on the early side.

I am happily engaged to a man who is debt free, but I am currently have student loans that are about half of our combined annual salary. We hope to pay off my loans, buy a house and start a family in the next three years. We are both in stable jobs and can afford to do this with 20 percent down and still having an emergency fund. Do you recommend us paying off my loans before buying a house or buying a house first to save on taxes?

I would definitely pay off the student loans first. Go into your marriage and new home without that monkey on your backs. By the way, don't ever buy a house just to save on taxes. Makes no sense really when you compare it with the interest you pay to buy the house. Getting the tax break is a bonus for sure but it shouldn't be the driving focus. Because to get a tax break that means you have to spend money and unless the tax break is a tax credit, it's not a dollar for dollar return.

I feel more and more helpless as expenses are moved from discretionary to fixed. For example, telephone bills used to be something you could cut back on, but now you mostly pay one set price - and it's difficult to change. Television used to be free, now it's a fixed price. And it's normally not a good deal to go back to pricing based on usage - it's usually higher. Another example - it's really more prudent to have AAA or other auto emergency service than to put a reserve of $100/yr in your bank account. But it's frustrating when you think about economizing.

I can offer one tip here: Yesterday I called my cable/phone/internet provider (which had failed to show for a planned service call) and threatened to cancel service unless they dropped the price. I wasn't bluffing -- a colleague had told me he'd switched to FIOS and gotten better service at a lower price. In order to keep me, the provider (TWC) offered to lower my bill $70. I took the deal.

Jack is right. Even fixed expenses can be unfixed. You don't "need" premium cable. Go basic or get rid of it altogether if you are really hurting for money. It's all in how you look at it.

Seriously, what is the deal with people who insist on posting insulting comments to this chat? The person owns an SUV, I think it's totally reasonable for them to hold onto something they own rather than buy a new car to conform to this person's idea of what is an "acceptable" vehicle. These people with the holier-than-thou attitude just drive me up the wall!

Hold your horses or outrage. Maybe I was reading and typing fast, but I didn't read the notes as a criticism of the type of car only the idea that someone thinks they need a bigger car that typically cost more when a smaller, less expensive one will do.

So to calm things down I will say this. Buy your SUV if you like. I don't really care (except for the environment but that's another issue). But be mindful of what you say is a want and what is a need.

I am young (25), married, and already have a Roth IRA account. I am thinking of changing my TSP contributions to the Roth option which is now available. Any reason I shouldn't? Or anything I should consider before making this decision?

Ask yourself a question: Would you contribute a different amount to the Roth option? If not, then yes, take it. You won't get the tax deduction now, but you will benefit from tax free income when you retire. And if you would contribute the same amount under either scenario, the 25-year-old you is making a nice gift to the 65-year-old you.

How about trying to live on your future single salary while you're thinking about it, and banking the rest? Obviously, there are some extra expenses you can't cut until you stop working (like commuting). But once you figure out your one-salary budget for groceries, entertainment, etc., try living on that for a few months to see if it's really liveable long-term -- and put the extra into the credit card debt and a really beefed-up emergency fund, because relying on one income makes you extra vulnerable to layoffs.

About to wrap up but loved this suggestion. Now 3 months might be too long for you to wait but try it at least for the next month or two before you decide to quit. It will give you some real time sense of what it will be like on the one salary.

Thanks and really good luck with the baby, decision.

Hi Michelle & Jack! My car is in the shop and will probably not pass Virginia emmissions without $1000 of work. It is a 1999 with almost 200,000 miles driven. We have very little in the stuff happens fund and a lot of debt we are trying to pay off? Pay the $1,000 and cross my fingers? Thanks!!

Pay the money and cross your fingers. It's still cheapter than getting a new or used car -- for now.

Wow, questions still coming it but I have got to go. Thanks to Jack Otter for joining me today. Great guest. And thanks to all of you for your questions, comments and suggestions. Even the little agrument about the SUV in the end helps inform people and that's what I'm about. Talking money and helping people live a rich life!

Take care and see you real soon right back here.

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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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