Color of Money Live (Jan. 8)

Jan 08, 2015

Washington Post nationally syndicated personal finance columnist Michelle Singletary took questions in an online discussion. Michelle chats live every Thursday at noon.


Read Michelle's recent columns

I hope you all have a great holiday. 

So I'm excited about 2015 and what great things it will bring for me and you. I'm doing the 21 Day Financial Fast again. If you did it before, I hope you will join in again starting Sun. Jan. 11. 

Sign up here to get e-mails with more information.

If you haven't done the fast before, try it. It's hard but boy can it jumpstart your financial life. I'm going to make it an annual thing. 

Anyway, let's get started. I'm here to help.

My husband and I are new pastors of a small church. I have completed the 21-Day Financial Fast twice. We would like to lead the congregation in joining the 21-day financial fast starting January 11th. What support can I share with the congregation who has never participated in the fast before? May I have permission to share youtube videos and materials from your book (all members will receive a copy of the book) on our website and Facebook page?

First, congrats on the assignment. I have such great love for pastors. It's a wonderful but tough job. But you can make such a difference in people's lives.

And so, love that you have done the fast and joining the group fast. I'm super excited. People are contacting me from all over the country.

The Post is doing a lot around the fast. We are redoing the videos some so look for new links to the videos starting Sunday. I'll have a regular blog post and I'll be taking questions on Twitter (@SingletaryM).

I'm also doing a Twitter chat on Monday at noon so if any of your members have questions they can join me or tweet their questions early. 

There's a good introduction in the book to help prepare folks, so have them read that before they start if you can get the books to them before Sunday. 

Happy New Year and thank you for all you do. My daughter and her fiancé are saving for their first home. Problem is that he has mediocre credit which is due to a number of credit cards in default that were not paid. Many go back 6 or more years. While he wants to pay them off, he knows it would take quite a bit of time and delay their home purchase that much further. He lives in Ohio and she's in Maryland. Has statute of limitations not run out? Any guidance you can give would be helpful on the best way to handle this situation of cleaning up his credit. I should add that he was young and didn't know nor understand any better. His active accounts are current and have been for a number of years.

Thank you and Happy New Year to you too.

The most important thing the young man should know is that negative credit information is required by law to be removed from his file after 7 years. So if there is old debt there dragging down his credit scores, older than 7 years, he should contact all three credit bureaus and request that the information be removed. The Federal Trade Commission has a great tip sheet on how to remove negative information.

Next, he should know that debt 6 years and older has less impact on his scores. So let's say he still has debt within the 7 years period but it's 6 or 5 years, it's not going to impact his credit as much. But check to make sure he is paying his bills on time because that is the biggest reason why his scores may still be too low -- that and still having debt to pay off.

If he is current, perhaps he's still carrying too much debt. For example, if he has a current credit card with a $1,000 credit limit and he has more than $300 outstanding that will bring down his scores.

He should also talk to a lender and have the lender show him from their perspective what he should do to improve his scores. Even tho some debt is old, the lender may still require him to pay it off. As for statue of limitations that just means the creditor can't come after him in court but he still owes the money. 

Hi Michelle, I really enjoy your column and chats and often find myself quoting your advice in conversations with friends and family. We are trying to be more organized with money this year and I am wondering, how many accounts do you use? We have 401(k) and 529 money deducted from paychecks and put directly into those accounts. I like the idea of having specific "life happens" and "emergency" funds. Are those actually separate bank accounts? And if so, do you also have (or recommend) an additional checking and savings account for everyday money? Do you keep a separate account with money intended for charitable contributions? Any other logistics/practical organizing advice? Best wishes to you and your family in the coming year.

Thank you.

Really good questions. So I'm a crazy person. I have to say that upfront. I like a lot of pots for my money. It helps keep me feeling safe. So here's what my husband and I do, we have joint everything (well except for retirement because that can't be joint but let him try and run off)

-- Everyday bills, expenses, etc. are paid from a joint checking account with a savings connected to it that keeps the extra money for when irregular bills come in, such as insurance, etc.

-- A credit union account with a checking and saving that holds our life happens money and some emergency funds. The two accounts are mostly  used for life happens stuff -- car repairs, vacation savings, when we bought with cash a car for our teenage daughter going off to college. Most of the money is in the savings and then we transfer as needed to the checking to pay for various things in life that happens. For example, our heater just broke. And you know in the DC we are in the teens. So repair money will come from that account.

-- Money market accounts that hold our big time emergency fund money. It never gets touched. And since we have the limit we want, not much goes in or out of it.

-- 529 plans for all three kids. We've been saving since they all were in diapers. My oldest is at Md and got all her college money there.

-- Vanguard (not a recommendation, just what I have) growth index fund where we stash extra money every month in case 529 plan money won't be enough. Mostly concern for younger two kids. We have this account because we didn't want to tie up all the education savings in a tax advantaged account with penalties if the money isn't used for school. So if the kids 529 plans have enough when the time comes, mama and papa buying a place in Fla.

-- Other various retirement accounts, IRAs mostly.

Anyway, that's pretty much how we do things.

We have a 7 month old, and we are looking to create a 529 for her. Her grandparents have already started one, but with the cost of college, we think another would be needed. Given that we are looking 18 years down the road, are there any reasons not to do a 529? Also, I can't find what the penalties are for withdrawing the money and not using it for school. I am just wondering what happens if our kid decides college isn't for her and then doesn't need all the money we have saved. If we don't go the 529 route, what other savings options do we have? We were hoping to put $100/month into the account.

I'm a big fan of 529 investment college plans. Have 3 with the state of Md. In fact, have to call today to transfer money for my oldest who is at Md (and doing GREAT. So proud of her). 

You are so right about not underestimating how much money you will need. Even at state school. So more is better. But I would talk to the grandparents to see how much they are saving and then save the difference you think you will need. You don't want to overfund this type of account because there is a 10 percent penalty if you don't use the funds for qualified education expenses. Plus you have to pay income taxes on the earnings. However, if your kid doesn't go to college you can transfer the account to another beneficiary. Just keep in mind the money is always yours no matter what with the penalties I mentioned of course.

Here's a website you should got to for more information: www.savingforcollege.com

Happy New Year, Michelle. What’s the best type of investment to supplement a 401K for those 55 and older?

Happy New Year to you too.

There isn't one best for anyone. Where you put your money or invest it for retirement depends on so many things, most importantly your risk tolerance. You might want sit down with a fee-only financial planner and work with the person to come up with a plan for the extra money you want to invest.

Happy New Year, Michelle! After another year of unwrapping gifts which we don't appreciate and which I know were a hassle for the givers to purchase and expensive to ship to us, how can I go about suggesting we not exchange gifts anymore? We didn't in 2013, but then re-started for the past 2 years. I think the complicating factor is that I'm a gift-giver and love to give to others -- and I think they like what I give them, or at least they understand that I actually like the whole giving process. I want to give them an out of the hassle, save them some money, and yes, save myself the unwrapping only to take directly to the Salvation Army thrift shop.

First, realize that others are like you and just like to give. So no amount of, "Please don't" is going to work.

But if you want to stop it, just send a really nice letter to all and say what you just said. That you would rather be delighted with their presence rather than the presents. 

Hi Michelle- I'm the poster from right before the holidays who said I had gotten rid of one of my student loans, and expected to pay off the other by the new year. Well, I just wanted to let you know that I did! It feels great to be debt free! Thanks so much for all your useful columns and advice!

CONGRATS!!!!!!

I would give you a hug if you were here.

So proud of you. And thanks for letting me know.

Love to hear testimonies. 

Hi Michelle: For the longest time, I was one of those people who felt they didn't need to budget, because I felt I had it in my head. Over the summer I tried Mint, and I realized that, while I don't spend an extravagant amount of money in one sum, I had so many "slow leaks" in my monthly expenditure. When I addressed those in the fall, I was able to trim my expenditure by about 15-20%. It also helps with goal-setting-- how can you set financial goals if you don't have an exact assessment of where you stand? I received a COLA from my job this month and I immediately changed my savings auto-debit to increase my savings to reflect the new money I'd be receiving. I'm 24 and hope to buy my first house in a few years! Thanks for your wonderful advice and happy new year.

Happy New Year.

And wow!

Great testimony about the need to budget. Can I be honest?

My husband and I are behind on redoing our budget and I'm going crazy right now. I know we have a leak too -- eating out -- and we need to plug it ASAP. But I have that feeling, which that you know you could be doing more.

So good for you. There are those who say you don't need a budget and I understand why they say it. People hear budget and their eyes glaze over OR like you figure they got it!

But the more you know the more you won't owe and can save. 

I submitted a question a few days ago regarding our error in saving substantially for college in our Thrift savings account. Under old retirement system and still working. Not sure how to deal with taking it out now, given the tax disadvantages. I described the details in the earlier question. Can you help with any advice, please?

I'm sorry I didn't see the question. So can you give me more details? 

 

The second part of that is that YOU can't give then either. It is very frustrating to agree to "no gifts" and then have one family or person give anyway because "oh it was a small thing" which makes everyone else feel like they should have done something small too...and then you are back to excessive gift giving.

Really good point. 

I agree. And I was guilty of that one year. My brother -- not really a gift-giver -- had said don't get him anything for Christmas. Or that we shouldn't exchange gifts. I said ok but then gave him a little something. He said thank you but quickly followed up, "Didn't I tell you not to get me anything. I know you aren't expecting anything from me."

A bit rude but whatever.

But it taught me a lesson. 

Get off the gift Merry-Go-Round. I don't need anything and most of the people I know don't need anything.

So I haven't bought my brother a gift since. Just enjoy his company because he is really pretty cool.

I like the idea of a secret santa. We do this in our family, which is large and still has a rotating gaggle of siblings at my MILs. That way it's still festive, but there isn't the pressie gluttony! Be sure to have a cap on how much you can spend to make the exchange even.

I really think I want to try this next year. Even tho this year we really cut back, it was still too much.

And if you do this, do it early so the early gift buying folks won't have bought gifts. 

Remember, some 529s are pre-paid tuition plans where the age of the child determines how much has to be contributed each and every month so the child, upon graduating from high school, will have tuition full paid for a state school in that state (with some transferability to other states and private schools). The other is a savings plan. What you get is based on what you put it - with no required contributions. If the grandparents opened the first (pre-paid) and are paying each month, that's really good. If the grandparents opened a savings plan and made a one-time contribution, that most likely will not be enough. Open another one and contribute just like you contribute to your retirement. Personally, I say look at the ones offered by the state in which you live since they often offer tax deductions on contributions.

Very true. Thanks.

Also, keep in mind the prepaid is just tuition and fees. People sometimes forget that. So if you child wants to stay on campus, you need to save for that separately. And don't forget books, other expenses.

My husband and I just inherited $500,000 and are considering either 1) placing it an account for retirement or 2) purchasing a home outright 3) paying off our condo and putting the balance into a retirement account. We are in our late 40s and mid 50s and are underfunded for retirement. We pay on a condo that if we sold, would lose about $75,000; we owe $200,000 on the condo. We have a 10-year-old child and because we work for non-profits, our salaries do not quite cover expenses, although her college is funded by her grandparents. If we purchase a house outright, that would free up money to put extra toward retirement as well as close our monthly budget gap. But since we have 10 and 20 years to retirement, if we invested the money it would grow over that time. Your thoughts? Thanks!

Get thee to a financial planner.

Soon.

Seriously, you need an overall plan. There is so much to consider that you really could benefit from sitting down with a planner. But I will caution look for someone that won't rule out paying for the home in cash. That, I believe, is something to seriously consider. Not only will it free up money for you to save for retirement, you will save thousands upon thousands in mortgage interest. So I might sell the condo, unless you want to be landlords. Use that money and some (not all from the inheritance) to buy a house outright. Then, save like a crazy person for retirement because well you won't have a house note. But you HAVE to be disciplined enough to save otherwise you will end up house rich -- most of you money in the house -- and cash poor. 

With the new year and new debt and old debt....New Year's Resolution...get a handle on it all. Once we figure out our financial picture (New Year's Resolution), I believe we will have an out of work emergency fund, hot water heater or car breaks-everyday emergency fund, home improvement fund, vacation fund, charity fund, and a family gift fund, we will only car loans and a mortgage. The car loans have lower percentage than the mortgage. If we have $5,000 to put towards either debts our options are pay down one car loan and then pay it off in a few months that then leaves us with one car note or put the entire amount on the mortgage which has less than 7 years to go. Seeing the mortgage amount shrink is great as well as getting to down to one car note. If we pay off the car, I figure the paid off car note money used to pay down with a higher mortgage payment directly towards the principle. Your thoughts, please! Happy New Year!!

Good for you for taking charge of this.

I like the debt payment method of making a list of all your debt starting with the one with the lowest balance. Tackle that debt first, while making regular, minimum payments on the other debt. Once that debt is paid off move to the next. It's orderly and gives you a great sense of accomplishment to completely knock off debt from the list quickly. 

Thanks for taking my question. My husband and I are in our 30's, and we are in decent financial shape. We have an emergency fund and IRAs, plus a healthy savings account. My work requires me to move every 5-6 years and housing is provided. So we don't have to worry about buying or renting. We are getting advice to go ahead and buy property somewhere as an investment or as a retirement place. But we don't know where we would want to retire or where would be a good investment that we could afford. Is it a good idea to buy property but never use it?

Don't listen to those knuckleheads.

Unless you have a desire to be in real estate investing, don't buy. You don't want to and there are so many other ways to save for retirement that doesn't come with the headaches of owning and renting property. 

Hello Michelle, First let me say I have read you column faithfully for the past 7 months and since doing so have raised my credit score by 55 points. Thank you for your seasoned council. Now for my question: currently while shopping finance options to purchase a new car, I went to my credit union. I know u believe buying a car cash is best however I wanted to use the line of credit to continue rasing my credit score. That being said, after extensive vetting the loan officer responded that dispite all my other qualifications they could not grant me the loan because my permanent resident card was expiring next month. I told the loan officer I have submitted my application for my renewal and have an established life here in the states ( i have been here since I was 2 and I am now 36). Is what the credit union did a valid reason. I know it is any financers perrogative on who they extend credit however I am concerned that although I have been a good customer with the bank for over 5 years. I am being denied. Any thoughts you can add to this I would appreciate it. Thanks

Thank you.

So, I don't know enough about the law to say whether the lender can deny you based on your resident status. But if I'm being honest, I can understand why. It's harder to collect from someone who moves abroad.

And if you listen to my advice and buy the car with cash, which it sounds like you have, you don't need other people's money. Besides, do you know the biggest way to increase your credit score?

Pay your bills on time.

If you're doing that, buy the car with cash and forget about that lender. Their loss.

My son is 23 and graduated from college in May 2013. He decided to live at home to save money and pay off his student loan debt. Now that his loans are paid off and he has bought a car, he's saving the rest of his money. He's investing 20% of his salary to his 401K and getting the maximum employer contribution.What does he do with the rest of the money he's saving? It's currently in a savings account earning .2% What can he invest in to earn some money, but not tie it up too long?

The key to your question for me is "not tie it up too long."

If he wants to use the saved money soon or say to buy a home in five or seven years,  I wouldn't risk it anything other than a simple savings account.

Did he buy the car with cash? If not, he should pay off the car with his savings.

Make sure he has at least six months of living expenses saved as if he were living on his own. So have him calculate what it would cost to be in an apt with all the expenses involved and save six months worth of that money. Then have him save for a life happens fund. Probably a few thousand dollars. Then if he wants to buy a home sooner rather than later, he can begin saving for that. 

If he doesn't want to buy a home anytime soon and has done the other things, I pointed out then he can invest and frankly a growth index fund is just fine.

We have mistakenly used our Thrift Savings to save for college. Now we have a fat balance for our high school senior to use for college, but when we withdraw it, we will have to add the total to our income for next year, and pay taxes on it. That will double our income on paper, and make us look ineligible for financial aid. We are not well off, but we have saved enough for college - though in the wrong place. Is there a solution, please, or a least painful path? Can our Thrift balance be rolled into a Roth without declaring it as income all at once and doubling our income on paper? Not yet retired, but under old retirement system. Do we declare our Thrift Savings on Fafsa, or can it be considered a retirement account? Any suggestions will be appreciated, thank you.

So this way more complicated than I can answer because it involves your tax situation and other information I'm not privy to.

One thing I will say, you aren't going to pull out all the college money at one time so that may help your tax situation. Unless the school your kid is going to is really expensive. To fully understand the tax implication you should talk to a tax professional who can give you guidance. 

The other thing to consider with financial aid is that a lot of it is in the way of loans, which you don't need. 

Every year for Christmas for the past years, I have given my brother a giant container of Tide Pods (the 90 count, ordered from Amazon) and he gives me three bottles of good but not too expensive wine. We are deeply pragmatic people.

Love it.

Love your column Michelle! Here's my personal version of your financial fast: During Lent, I "give up" recreational shopping. No trips to the mall, or the Rack around the corner. Look in drawers at home if I need pens at work. Maybe this year I will incorporate no lunches out. Happy 2015!

Like it!

While eating out with friends, we got into a conversation about personal finances. I told them about my experience when I graduated from college, moved out on my own and got my first job. I went from sharing an apartment in a small, rural, college town and working as a teaching assistant to living in the suburbs of DC with a real job. In college, my rent and utility bills were less than $500/month. My first apartment cost about $800/month and that didn't include the utility bills or the car insurance, or the need to buy a wardrobe, furniture, and other things. I really didn't know how much money I would me earning each pay period or needing to pay my bills. I felt like I was in the dark and fortunately followed a system my roommate in school had done and recorded everything in a ledger. I wrote done each paycheck amount and each bill so I could see how much my monthly expenses were vs income. I eventually was able to create a budget so I knew how much I could spend on eating out, buying toys, or whatever. But, it felt like something I was never taught in school. Who is out there educating the high school and college students about how to become financially independent? I do remember warnings from some of my college professors about going out and buying an expensive car right after landing the first job, but not really about how to set a budget and keep finances balanced. It is too easy to build up a huge credit card debt and not everyone reads the personal finance columns in their papers. This really should be something added to every high school and college program as a requirement for graduation.

Thanks for sharing. There are really a lot of folks trying to help young adults learn about money. The Jumpstart Coalition does a great job in trying to encourage financial literacy in schools.

But I believe the best teachers are the folks who raise you. So I encourage parents to do their best in providing good financial lessons to their kids.

I looked up and it was past 1 already.

I'm so sorry if I didn't get to your question or comment. I promise you, I read them all. And some end up in my column. 

Thank you for joining me today and I hope 2015 is a great year for your financial health. 

See you back next week.

And if you've made a resolution to get better about your finances, join the 21 day financial fast. You can find more information about it at wapo.st/financialfast. Or tweet me @SingletaryM

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Michelle Singletary
Michelle Singletary writes the nationally syndicated personal finance column, "The Color of Money," which appears in The Post on Thursday and Sunday and is carried in more than 120 newspapers.

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