Color of Money Live

Feb 21, 2013

Want to chime in on Jesse Jackson Jr.'s money woes? Or do you have a personal finance question you need answered? If so, join Washington Post nationally syndicated personal finance columnist Michelle Singletary Thursday, Feb. 21 at noon ET for a online discussion. If you can't make the live discussion, submit your questions early.

When buying car insurance, compare rates and don't underestimate needed coverage

Stuff gets in the way

Jesse Jackon Jr.'s decline

Thank you again for joining me during my weekly live online chats. I so enjoy this direct contact (or sort of) because it gives me an opportunity to see what's going on in your personal financial lives, and what you think about the top personal finance issues.

Anyway, let's get started.

Hi Michele I'm getting some money back from taxes - not much, about $5,000. It's going to go towards paying off (down) debt however how do I know which debt to put it towards. It's mostly all credit card debt. The card with the highest balance has the middle interest rate. I thought about taking out the two with the lowest balance to get a sense of accomplishment but the interst on those are lower than the highest card. Where would you put it?

First, I have to say this. You said "$5,000" and "not much" in the same sentence. That's a lot of money.

But then I have a rule that helps me always think of every dollar as being much. I try to eliminate the word "just" in front of any dollar amount. So I try not to say, "It's 'just" $10. That way, I'm always conscious that every penny counts.

Anyway, to answer your questions. I would list all the debts, credit cards included starting with the debt with the lowest balance, as was your instinct. Then take all of the $5,000 (assuming you have some money in an emergency fund) and start paying off the debt at the top of the list. Use the money to pay off as much of the debts at the top of the list. Because you are right that getting rid of that debt can give you a great sence of accomplishment and push you to double, triple your efforts on the rest of the debt. It's what I recommend to people I help and it really does work. And for those folks, because they then aggressively attack the other debt, they don't end up paying more in interest rate charges because they get rid of the debt quickly.

Oh and one more thing, since it's tax season, make sure you are having the right amount of money taken out of your pay so that you aren't getting a large refund every year unless you have events that change your tax situation such as buying a home, having a baby, etc. The IRS has a withholding calculator that you can use to tweak your withholdings so that you let the government hold your money all year interest-free.

My husband and I are talking about starting an IRA. However, it's not obvious which we should pick. I understand the differences (tax-deferred now or later). But I read that if I expect to be in the same earnings bracket, I should go with a Roth. But who assumes they're going to be in the same earnings bracket once they're retired? Certainly not I! My husband will receive 40% of his salary, and mine is much less. Does this mean we should choose traditional? Thanks.

Since none of us knows what the tax rates will be down the road, best to talk to a financial planner or tax professional to figure out which is better for you. But generally many experts say it's a good plan to have retirement money in a Roth if you meet the income thesholds because you may be in a higher tax bracket as a senior than you think. 

Hi Michelle, thank you for taking my question. My husband and I have two young children. When we bought our current home 10 years ago, basing our home in a good school district wasn't really a priority. Now, it is. We are faced with the decision of staying in our current home, and sending our kids to private schools (I'm not happy with our school district), or moving to a good school district and buying a new home. If we do move, we're looking at spending about an extra $250,000. The benefits of moving are obviously the great public schools, being near family and overall a better community. If we stay in our current home, the benefits are that we won't be spending more money for the home, but we would have to pay for private schools for 2 kids. What do you recommend? I'm torn. We do love our current home and our neighborhood, but not the schools or the surrounding areas.

So add to the mix, can you afford private schools if you want to stay?

Looka at all the numbers.

Can you afford to move? Will it increase your cost of living so that it overshadows even the amount you would have spent for private school? Would you over the years spend $250,000 to send them to private school? And what about saving for college? How will spending on private school impact your saving for higher education?

Or have you explored the option of staying and sending your kids to public school. Are programs within the schools that would give them a better education? Have you talked to parents sending their kids to schools in the public system? 

Just take the time to look at all the possibilities and the numbers. But if you can't afford to move than explore what you can do. 

Hi Michelle, Thank you for taking my question. I've always been very responsible with money, but recently my husband and I separated and money is now TIGHT for me and my two young children! I know I need to start tracking my spending way more carefully and make a budget. Are there any websites or programs you recommend to do this online or electronically (mint.com for example?) or should I get out the pencil and paper?

I'm so sorry for your situation. I know times like this can be hard.

But pencil and paper is just fine. Works for a lot of folks.

However, you may find some useful tools on www.mint.com

Hi Michelle, my jaw dropped when I read the OP's comment that a $5,000 refund is not much. It's a lot higher than the average tax refund, but it's also a lot of money just intrinsically. I look forward to the day when I have so much money that 5 grand feels like it's not much.

Pick up your jaw. I'm assuming the person was just comparing the $5,000 to the debt that he or she has and thinking maybe it won't make a huge dent in the debt. So that it doesn't appear to be that much.

I just wanted the person to understand that it's still a lot and will help tremendously to start the process of paying down the debt.

Hi there! This question is a little different from those you normally get, but my husband and I are trying to buy a home and are trying to understand how we should think about umbrella insurance policies. We know it's best to get one, but how should one think about the level of coverage? Are there good resources that can help educate us? Thanks!

Insure.com has some good information on umbrella policies. Here's what they say:  "Umbrella policies provide an extra cushion of insurance protection. An umbrella policy covers damage claims caused by you, your dependents and even your pets. It starts paying out after your homeowners and auto liability limits run out."

Here are a few links that I think you will find helpful.

http://www.insure.com/car-insurance/umbrella.html

http://www.iii.org/articles/what-is-an-umbrella-liability-policy.html

http://usatoday30.usatoday.com/money/perfi/insurance/2011-03-24-umbrella-liability-insurance.htm

 

It's not whether you expect to earn more during retirement, as most people don't. The question is whether you expect your tax rate to be lower or higher. It is an impossible question to answer but many feel rates will rise in the future since they are low now (even though it doesn't feel like it!) and we have this looming debt crisis. Another thing to consider is that you might not get any tax benefits from a traditional IRA - if you have an employer plan and make over a certain amount, the contribution is not pre-tax. Finally, it might make sense to have some retirement money that is pre-tax and some that is post-tax in order to help manage your tax burden upon retirement.

Thanks for the extra input. 

Private schools consider the teaching of financial literacy to be a parent's responsibility, but I feel that the ignorance of kids coming out of most schools is truly alarming. They may grasp calculus and algebra, but credit card wisdom, the stock market, insurance knowledge, and basic money management eludes them. (I have a nagging suspicion that years of Wall Street woes might be blamed somewhat on the number of kids from private schools who end up interning in NY on Wall Street without even understanding a paycheck.....) I have tried to talk to headmasters/headmistresses, but have been met with a wall of resistance. If Congress can't understand the tax code, or pass a budget, and Wall Street is unpredictable, is there a powerful incentive for schools to realize the critical need to teach children financial literacy throughout their school years? Is there a pilot program of financial literacy that you could suggest that I might present to schools to urge them to consider a change in curriculum? Thank you,

Actually, I think both of you are right (the school and you). Parents do have a huge responsibility to teach their kids about personal finance. And part of the reason it's their responsibility because they can then impart their own values, values the school might not share such as tithing or that credit is bad, necessary for somethings but bad nonetheless.

But I also know that many parents weren't taught so how can they teach? So schools can and should help with that gap of knowledge. 

Try looking at the materials put out by the Jump$tart Coalition, which is dedicated to improving the financial literacy of pre-kindergarten through college-age youth.

Here's the site: http://www.jumpstart.org/

Hi Michelle, I read that column with interest. Respectfully, I think you're not looking at it the right way. Yes, he accumulated a lot of bizarre but expensive material goods. But why? I think it was because he believed he could get away with it. People in positions of power (and, despite their recent do-nothingness, members of Congress are powerful) tend to become isolated and surround themselves with sycophants who do not speak truth to power. A person in such a situation starts to believe his/her own PR, if you will, and truly begins to believe "I am special and I deserve this." In JJ's case, what he deserved was mink capes and $40K Rolexes. In the case of some others, it's affairs. In the case of Nixon, it was political power at all costs. In the case of Bernie Madoff it was money. In the case of Leona Helmsley (remember her? "Only the little people pay taxes") it was money and power. So, the "stuff" you accumulate may be different, but the underlying reason is the same -- a belief that you're special and, therefore, above the law.

I hear you and your theory may be right. But my point about all this and when it relates to others living above their means is there is usually so much more under it all. It's not that they think they can get away with it. It's even more than that. What leads people to do such things. Why would Madoff rip off so many people, even people he knew and didn't need the money from? What happened to him that he could do such a thing? Same with Jackson. Could it only have been that he thought he could get away with it? Or that he wanted so much no matter the cost? If he thought he could just do it and get away with it, he wouldn't have done so much to cover up his deeds. We have a thriving industry in therapy because neither you nor me can really know what drives people to do what they do to ruin their lives. Only they with help can really know.

But a larger question for me is also why did so many, including his wife, enable him to do this? Just unbelievable and yet believable. 

Hi Michelle, You give great advice on buying used cars. I especially appreciate your www.cargurus.com recommendation. I wanted to share something with you and others that I learned this week. In the state of Maryland, auto dealers must disclose to potential buyers in writing if a used car has previously been in use as a short-term rental. I only learned this because I received notice that I'm part of a class action complaint against a car company that did not disclose this information to buyers for several years. After participating in Prosperity Partners at FBCG, reading your weekly newspaper column, e-newsletter, and online chats - I'll be using the money I receive to pay down some of my credit card debt. Thank you so much for all your lessons. Your hard work is greatly appreciated.

 

When buyingcar insurance, compare rates and don't underestimate needed coverage

Hadn't heard about this either. But how much money are you getting? Typically in these deals people don't get much.

We're getting a pitch that trusts are better than wills. Attorney Michael Ettinger, who has written a book that's on Amazon, tells us that we should put all our assets in a trust in order to ensure an orderly transition, minimize taxes and remove assets from consideration for Medicaid should we need it. What's your take on wills vs trusts?

Nolo.com has a lot of information about this. For some people a trust makes sense but not all. I would get a second free opinion. Often a will will do and cost less.

When considering to trade my current auto (which I still have a balance on), is it best to trade it in to get a lower monthly payment (to reduce my monthly expenses now) or risk trading the car for a new car with a lower monthly payment, but with a higher loan balance in the long run.

Or not trade the car at all. Can't you keep it?

Even if you have an expensive car repair, it's cheaper to keep the car unless it's breaking down so often you can't plan fixes and you are being stranded.

But okay, let's say you want out of the car. Negotiate your deals separately. Get as much as you can for the car and hopefully it's enough to pay off the current loan. If you are upside down on the car, meaning you owe more that it's worth try, oh please, try to hang onto the car. You do NOT want to roll a loan balance into another car note becaus than you become upside down on that car.

So get a good price for your current car and apply that money to a used car. If you are not upside down, then negotiate for the least expensive, safest used car you can get. 

Hi Michelle, I am a federal contractor, so the idea of sequestration probably happening is already stressful. However, to compound that stress, I will most likely need surgery in the next month. My co-insurance is 20%, so I am concerned about how much that might be. Any good suggestions on how not to stress about something I cannot control??

I won't be flip about not stressing because I just know too many people in your situation. 

So be concerned but not so much that you make your health worse. You really can't do anything. So just plan for how you may handle the expense. Start looking at your budget and figure out if you can cut anywhere. Start figuring out where you might get the money. 

And if the stress gets bad talk to someone professionally.

Hi Michelle, thank you for answering. We can afford to send the kids to private school, and we can also afford to move. Sending the kids to my current public schools is out of the question. So it's either private vs. better schools with a new home. If we bought a new home, we'd need to take out a new loan, probably 30 years. If we stay, we are on a 15 year mortgage (currently 2 years into it). The payments will wind up being about the same for both. So essentially, we're paying an extra 15 years,.

Sounds like staying is a good option, especially since you like where you live and you won't obligate yourself for more debt.

I currently pay for 2 children to go to daycare (about $20,000 per child, so $40,000 per year). I feel like our family could continue to make the stretch to pay for private school for both children when the time comes (about $55,000 per year) but I'm wondering if this is a logical way to think about the expense of private school. Thank you for your opinion (no debt, can afford mortgage, no student loans).

The tipping point for private school for me is can you also continue to save for college?

We are in the shop for college phase now and my daughter is coming from a public high school in an area people say isn't a good school district. And yet she's received a great education and not having gone to private school hasn't hurt her chances of getting into a good school.

So sorry times up. But I see your questions, the ones I couldn't get to. I will try to answer next week or in my column or eletter.

Thanks so much for joining me today.

In This Chat
Michelle Singletary
Michelle 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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