Color of Money Live (January 4)

Jan 04, 2018

Join Washington Post nationally syndicated personal finance columnist Michelle Singletary for an online discussion.

“Knowledge isn’t power. The right knowledge is power.”

Stay informed.

Read & share Michelle Singletary’s Color of Money Column on Wednesdays and Sundays: http://wapo.st/michelle-singletary

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So glad to be back to this forum. I hope you all had a wonderful holiday.

And I hope you are looking forward to a great year financially. 

I have a guest today. Author of Dec.'s Color of Money Book Club pick, "The Infographic Guide to Personal Finance." Send questions her way.

Let's get started. 

I'm getting ready to start my own consulting business. A friend said it should be an LLC. I don't really know what that is. Can you explain what it is and why I should do it?

Congratulations! An LLC is a legal form that helps protect your personal assets in the event something goes wrong with your business. For example, if a consulting client sued your LLC, they couldn't get any of your money, only what was in the business. To keep that protection, you have to be VERY strict about keeping your business finances completely separate from your personal finances. 

As a single mom struggling with student loan debt, it's beyond overwhelming. Not only do I not have the means to dig myself out, but I don't have the time to figure out how! What's the easiest way to manage student loan debt so I can pay it off as fast as possible and stop worrying about it?

So many single moms face that situation. Depending on your situation, there are a few things you could do. If you have a good credit score and some high-rate loans, you could consider refinancing to a lower rate which will help you pay the whole loan off sooner. If your payments are too much to handle right now, you can look into income-based repayment plans at www.studentaid.ed.gov. Also, many lenders will lower your interest rate by 0.25% if you sign up for autopay, which has the added benefit of making sure you're never late with a payment.

Also, in addition to what the other Michele says, don't worry right now about make extra payments. Do what you can to keep your payments current. If you qualify for an income based plan just pay what it says you can afford. 

For now, you need to focus on the necessities and that might mean you won't get out of debt fast. Take that pressure off yourself. 

Now anyone not new to this chat forum knows I'm all about getting out of debt fast. But in time. With your extra money. If you don't have extra for now that's okay. I don't want you to spend so much energy beating yourself up because you can't do more then the minimum payment due. 

When the season is right in your financial life, you'll have the extra to aggressively pay down that debt. 

Hi, Michelle. Thanks for all you do! Want to share that in 2017, I tracked every "extra" bit of money I was able to save, making online purchases by going through cashback portals (like BeFrugal.com and Ebates), cashback on my credit cards (Amex gives us 6% back on groceries), selling stuff online or at a yard sale...and (drum roll, please), I saved $2774! It really, really adds up if you just take the time to think & plan before every purchase. I would hope my results would earn me the Big Mama seal of approval!

Totally Big Mama approves!! 

Good for you. 

Now, let's tweak something for 2018. What if you scaled back using credit at all. Think you might spend less and that's really saving? What I mean is even with the cash back for groceries make sure you aren't spending more than you might if you used cash. 

Is it a good idea to save with debt or wait until debt-free to start saving?

Paying down high-rate debt will do more for your overall finances than earning very low interest on savings. However, it's still a good idea to put some money into retirement accounts so it will have the most possible time to grow. Ideally, you'd put some money into retirement savings while working to pay off your debt.

I would also add that you need to have even a tiny emergency fund while paying down debt. If you don't have some savings and an emergency comes up what will you likely do?

Put it on credit.

So aim to save at least $500 to $1,000 in a rainy day fund. Then stop and put all extra money toward the debt. 

Michele indicated that if one sued the consulting business, one would be limited to the assets of the LLC, not the personal assets of the questioner. If, however, the questioner was himself or herself negligent or responsible for the damages claims, then the questioner would be personally responsible for the debt and the claimant would not be limited to the LLC's assets. Important caveat.

I don't know enough about this area of the law to know if what you say is true. But passing along as something to check out. 

Is it better to pay down student loans and forgo a 401k matching program, or best to take advantage of the matching program through a company?

As long as you can do both, take advantage of the 401(k) matching program - it's free money! Plus, funding retirement accounts as early as possible gives them the most time to grow.

I'm living paycheck to paycheck. I know I should start saving but there's just no money left. Any tips for how to get started when money is really tight?

That's a tough situation, and it's great that you want to start saving. One option: Use an app like Acorns that helps you micro-save by automatically investing your spare change. It does that by rounding up any purchases you make, and that little bit of cash can start to add up pretty quickly.

I am in the process of re-building my credit and I want to make sure that I am not falling into the "credit rebuild cliches" - does loan programs like Self Lender really help with enhancing your score? And why does my credit score go down so much when I pay off a debt?

It's great that you're working to improve your credit. Credit builder loans can help you build up good credit as long as you always make your payments on time. There are a few reasons your score may have dropped: Paying off installment loans, like car loans, when you have credit card debt changes your credit mix which can result in a drop. If you paid off your oldest debt and have new bigger debt, that could change your score as well.

 

As a young person just starting off investing, where is the best place to start?

Congratulations! Investing at a young age is a great way to start building wealth, as long as you don't have a lot of high-rate or credit card debt, and you do have some savings. ETFs (exchange-traded funds) and low-cost mutual funds are a great way to get started. They offer exposure to a wide variety of stocks or bonds, so you can earn while you're learning. 

And if you are working full time and your employer has a retirement plan with a match, do that. Get that free money!

Hey, Michelle, thanks for posting my comment. I agree totally that cash is in many cases better than credit and can curtail impulse spending/splurges. But let's say that if I get 6% back on groceries I'm going to buy anyway, that's an even better return than cash (as long as I don't buy caviar & filet mignon!) Lucky for me, my parents modeled thriftiness so I'm disciplined enough to not go overboard with my spending. I know it's harder for some; for me, it's one of those family money habits you mentioned re: how kids learn by observing their parents.

You are right. If you are only buying what you would buy, then sure the cash back is fine. But for many using credit still ends up making them spend more. Even the most frugal. I know it's true for me. When I go to the store with cash, I put a lot of stuff back. And they are things I could justify as a need. For example, if I sent to the store with $20 and only planned to buy say milk and eggs. But then I see I can get another carton for half off. Well, with my $20 I only have enough for the milk and eggs. And don't need right now the extra carton of eggs. But with my debit card or cash back credit card, I might think "this is a good deal." In that moment I haven't saved. I've spent more than I had planned.

This type of thinking takes a lot of discipline, which appears you have. But it's a lot of work to keep talking to yourself while shopping. 

Hi Michelle - I know you've written in the past that banks and others may be willing to reverse interest or late charges if you've been a good customer and ask nicely. Well, right before Thanksgiving I forgot to pay my credit card bill (first time ever), and paid it one day late (actually a few hours). I was charged a $27 late fee and $62.01 in interest. I always pay off my card in full and haven't carried a balance in almost 10 years. I was so mad at myself. I paid the fees but wrote Bank of America a polite but firm letter asking them to please reverse the charges as I've been a loyal customer and always pay on time. Well, I just checked my account online and they have credited me for those charges! Moral of the story: it never hurts to ask! Definitely worth the cost of a stamp!

Woot hoo!!! 

It never hurts to ask!!!!

Thanks for sharing.

Any more like this?

Just FYI.

Next week, Mon. Jan. 8, the Newseum (Knight TV Studio, 555 Pennsylvania Ave NW, Washington, D.C.) will host a special panel discussion on “The State of Financial Literacy Education Today.” 

I'll be on the panel along with some very impressive financial literacy experts.

If you live or work in the Washington area and you’re involved in teaching students about money or you’re a parent who can get the day off, you need to come to this event.

The panel discussion, which starts at 10:30 a.m., is free but you have to register to attend. 

If you can’t attend in person, the event will be live streamed at Newseum.org.

Come say hello and join the discussion.

My spouse and I have diligently been paying down our student loans, and my spouse’s is now down to a manageable lump sum, although it’s not due to be paid off for another 1.5 years. My spouse’s argument for not paying off the lump sum is that it would deplete our “life happens” fund and we do not have the living expenses cushion we’d like. My argument for paying it off is that we would be able to save up again because we won’t be paying it off. Also, we don’t make much interest to speak of on our bank accounts, but the student loan interest rate is 6.3%. If it makes a difference, we have two small children, so more rides on this than if it was just us. Spouse has a stable job and I work part-time while the kids are small. We have no other debt besides my student loan and our mortgage, which we make an extra payment on every year. This is a friendly argument, but I’m curious to have your opinion on the matter. Thanks!

Over the long run, paying off higher-rate debt does more for your finances than keeping money in low-rate savings. And without those monthly payments, you'll be able to replenish your savings. However, it still makes sense to keep an emergency fund cushion of at least $500-$1000, especially with kids in the mix. 

My first reaction was to pay off the debt. But if this pot is your only emergency funds, don't deplete it. Life has a way of happening when you least expect it.

BUT if this is the separate life happens fund I write about all the time and you have another emergency fund then I say get rid of the debt. 

And honestly, either way you'll okay. Because I love that you are having the conversation and discussing the pros and cons. This is half the battle of being a better money manager. You look at the options and have a reasoned discussion about it. 

The same thing happened to me! I had a busy day and was a few hours late paying my credit card bill. I called Capital One and explained that it was my first late payment and asked for a courtesy waive. They granted it and credited the $15 late fee to my account. Always ask, especially if it's your first late payment!

I'm definitely an asking kind of gal!

And sometimes the answer is no. But that's okay especially if you were in the wrong.

Hi, Michele. My husband and I have several retirement and brokerage accounts. They are in different places (e.g. Vanguard, Fidelity, etc). Is it better to put everything under one "umbrella," or do we benefit from having different minds working on various accounts? I kind of like having a lot of viewpoints on our accounts and with online access, it's not that hard to check on each one. Just didn't know if there was a particular benefit to say, having everything under Vanguard or Fidelity vs. spread around.

There are a few reasons to keep your accounts in one place, like simplicity at tax time and less time you have to spend following up multiple accounts. Also, in some cases, combining your accounts and having them all together may result in lower fees, which means more money for you. You can still invest in funds from a number of different families, even if your account isn't with them.

My grandson is 14 years old. He has not started earning money yet. However, I have mentioned to him that if he always automatically saves 10% of everything he earns or is given in cash gifts he will be well off by the time he is ready to retire. Is this the correct percentage? Whether or not he follows my advice is problematic, but wanted to make sure I was advising him correctly. Thank you, magoe99

Right now, for a young teenager, the habit of savings is even more important than the percentage of savings. 10% is a great starting point - especially if he sticks with it. 

I think any savings percentage is a good lesson. I learned from my grandmother Big Mama to save 10 percent from every dollar I earned. And I became earning at 14 years old. From then until now, I've always had savings because she taught me that lesson. Now teaching it to my children. In fact, they start to get paranoid when their savings dip too low. It's so funny to watch them say stuff like, "Oh, no I can't spend any money, my saving is way too low."

I pump my fist and make a fool of myself. They roll their eyes but hey, they got money!

Yes - most banks and credit card companies will give a discretionary credit for an opps about once a year. Of course, I never have to call them to ask! The key is that they have to see your history with them is excellent.

Right. They key is doing things right so when you do a wrong you get grace.

Sometimes I get cynical thinking of everything I failed to accomplish in a year. No big promotion, same apartment that creates a long commute, no closer to homeownership, etc. However, I realize I was totally looking at the glass half empty. In 2017 I paid off my student loan balance, which now means I carry NO DEBT, and I finished loading up an emergency fund with 6 month's worth of paychecks (not expenses, so that could strength for longer in a stressful time when I'd cancel restaurant date nights, gym membership, etc.). With those two big items checked off, I'm hopeful that 2018 will be a year of another significant accomplishment!

I love, love this testimony. 

Because you are so right about looking at what you did well. And there is always something good to find even if you are the most trifling person. 

So kudos to your for getting that student loan monkey off your back! Wonderful that you have a funded emergency pot. 

Now set some goals for 2018 and go for it!

I suggest the advice to a potential new business owner is to seek a counselor or lawyer to help setting up a new business if there is a potential for lawsuits. Are there licenses needed, for example? Before consulting others sounds as though the individual needs to consult someone.

Good advice. Or maybe get some business insurance. 

Thanks.

Happy New Year, Michelle. Thanks for continuing to share your financial wisdom with us every week. This column is helpful for everyone - millennials, middle agers, and retired folks like me. There's always more to learn, especially with the new tax legislation.

Ah, thank you. 

Shoot, I still have a lot to learn. Spent some time over the holiday break reading what I could about the new tax legislation. And my head hurts!

Michelle: last year instead of the financial fast, I concentrated on purging, and realized my closet was overstuffed. I went on a clothing and shoe fast, and shopped my closet instead. I lasted until September, to my surprise, when I really, really needed to replace my pajamas. But I continue to ask: do I really NEED this before I buy anything. And I surely have enough to wear, and I love the extra money I have.

I love the idea of your shopping fast!

We are routinely (every month) paying extra on our car and home loan. Emergency and rainy day funds are set. Retirement is funded routinely (although mine is low - just a result of not working, so I get no match, and only have my personal IRA, no 401k etc). I got a fairly generous gift for Christmas and want to use ~half to get some extravagant kitchen goodies. But I keep bumping up against the price. We are in good shape, the money isn’t needed elsewhere, but it feels too extravagant. What’s your take?

This is an area where I struggle mightily. I hate spending money on myself. 

But it's 2018 and time to drop the fear.

Get your kitchen gadgets! 

Hi Michelle! (I'm the emergency-kit millennial from last week.) I just started reading the Infographic Guide to Personal Finance and one of their recommendations confused me, specifically when to pay for things on credit or with cash. Most of my purchases are gas/groceries. These are things the book recommends paying for with cash. I always make sure to pay my CC bills in full, on time, each month, but the main reason I put these regular expenses on the credit card is relative security. Losing all the cash in my wallet wouldn't be nothing, and because of my credit card's low limit and ability to contest charges, I'd rather have a hacker get my credit card info than my debit card info, where funds would immediately vanish into the ether. Should I switch to cash/debit anyway, or maybe get a second credit card for such regular purchases? I'd like to hear your thoughts.

It's great that you pay off your credit cards in full every month! Most people don't, and charging small purchases can really add up, and end up costing big bucks over the long haul. As long as you keep up such a good financial habit, using the credit card makes more sense for you - especially if you're earning rewards along the way. 

Here's my take. I use credit for gas. Debit for groceries. I use credit at the pump because there is a lot of identity theft at the pumps. Happened to me, which is one of the reasons I use credit at the pump.

In the grocery story I use my debit because it helps keep me in check with my spending. 

But listen folks keep in mind a number of studies show that when you use plastic -- debit or credit - you tend to overspend. 

For some of us -- people who pay off their balances every month - it's not a big deal. But for man it is. They don't have the discipline. 

In your case, I think it's fine to use your credit card. But keep asking yourself when you do (talking bout in the grocery store) is this a need or is this a want? 

I was trying to increase my credit score so I canceled a credit card I never use...and my score went down! Why did that happen and what can I do to fix it?

Credit utilization - how much of your credit limit is used up - is a big factor in your credit score. When you cancelled your card, you reduced your overall credit limit, which had the effect of increasing your credit utilization. For a quick fix, you can increase your limit on another card without increasing your spending. Aim for credit utilization lower than 30%.

Also consider, if you aren't going to get new credit soon (home loan or car loan) the drop won't hurt you. Your score should go back up as long as you continue to pay off your debts and pay what debts you have on time. 

Good morning Michelle, and Happy New Year! I have a question on the new tax law. Last year I deducted my state taxes and my property taxes. Is the $10,000 deduction limit on the total amount of taxes (state and property combined) or does the limit apply to each type of tax (I can deduct $10,000 in state taxes, then another $10,000 in property tax). Thank you!

Happy new year to you! The $10,000 limit is for combined state income tax and property tax - but that won't take effect until you're doing your 2018 taxes in 2019.

I'm going through a divorce. Is it better for us to file our taxes together or separately?

It depends on your situation. If you're not legally divorced yet, you have the option of filing either married joint or married separate. From a strictly financial/tax perspective, married joint will almost always give you the lowest combined tax bill. If you use tax software like Turbo Tax, you can run it both ways to see which gives you the most tax savings.

The important part is that your history with them needs to be excellent. I work in a call center, and you'd be amazed how many people say they have been "a loyal customer" when you can see on the screen that they make late payments 8 months out of the year. Yes, folks, we can see your *entire* history, regardless of what you say to us.

Lol! 

Yup be honest. They know all!

For a teenager earning money, with few or no required expenses, I would set a much higher savings rate target--maybe 50%. If he's only saving 10% at a time when all his spending is discretionary, he's getting accustomed to indulging most of his wants. That will be a hard habit to break later.

This is a really good point. 

With my kids, they bank nearly all their money from their summer jobs and pinch off sums throughout the year for things they want. 

So to your point, we don't encourage that all their earnings are "fun" money with a little for savings. 

It's actually why we discouraged them from getting jobs while they were in high school except during the summer.

I see too many kids work just to get money to do whatever. No goals. No putting the money away for college. Just all fun money, which does set them up to think most of their earnings are for wants.

My student loan was transferred to a new servicer (during the holiday season!) and I didn't realize that some of the new payment terms were different from the old servicer. The auto payment overdrew my bank account. Calling the servicer was futile and frustrating. So I called PNC to explain what happened and asked if the overdraft fee could be refunded. It was resolved immediately. The best outcome was I decided I was sick of the student loan and didn't want to give that servicer an extra penny for bad service. So I paid off the remaining loan balance before Christmas and started the new year debt free :)

Okay, you buried the lead.

You got that monkey off your back!!!!!!!!!!!!!!

How do I find a good advisor to discuss how to use our retirement savings which will be in 1-3 years. Which is the best resource to find the right person to trust and what fees can I expect?

Look for a fee-based fiduciary advisor - that's number one. Fiduciary advisors are legally bound to put your interests first, and don't profit when you make specific financial moves. A good starting point is the FINRA (Financial Industry Regulatory Authority) website at www.finra.org. You can also ask friends in similar financial situations who they're working with. As for fees, higher levels of service come with higher fees. If they'll be managing your money, the fee is usually a percent of assets, somewhere between 1-2% a year. For occasional advice, they usually charge either a flat consultation fee or an hourly fee. In any case, make sure you know the total fees, how they're earned, and what specific services you'll receive before you hand over any money.

Maybe this is better for Hax's chat, but I have a recent college grad relative who is obsessed with making as much money as possible so that he can start a hedge fund. Even with my limited knowledge of finance, I was like "maybe you should first get your debts settled and get the 401k employee match at your current non-finance job before even considering that." I think I got him to do the retirement and the student loan repayments...I may have even convinced him to have an emergency fund, but he keeps yammering about this. I'm not necessarily risk adverse, but he's never done a finance job nor has had any investments, so I think this is crazy. Do i just let him dream? Are there any books I can suggest for this sort of thing?

With grown folks all you can do is give them the information. You've done that and helped put him set up some really important things. 

Now let him dream. 

I don't really get the differences between 401Ks & all the flavors of IRAs. Roth vs. Traditional IRAs, I kinda get... it's when you pay the tax... now vs. withdrawal. But I've got a traditional IRA and a rollover IRA. Why can't they be combined? They are both (non-Roth) IRAs. Is there any advantage to putting retirement money into a 401K if you're not getting a match vs. a traditional IRA?

First off, it's great that you're saving for retirement. You should be able to combine your traditional and rollover IRAs. One 401(k) benefit: You can put more money into a 401(k) than you can into an IRA. And if you meet the requirements for both, you can do both.

Want to add my 2 cents about thankin you for promoting the life happens fund - needed a new hot water heater and other minor plumbing done just a few days before company came for the holidays! Really hated putting a dent in my savings account but was very grateful it was there when I needed it!

I love the concept of the life happens fund separate from "I just lost my job" emergency fund.

With two -- if you can -- you don't feel so bad pulling from the life happens because you have another pot of money if a big shoe drops such as a job loss. 

So life happens: $500 to a few thousand, whatever you can spare. This takes care of water heater or major car repair. When you take money out, when you can put it back.

Emergency fund: 3 to 6 months of living expenses stashed in a deposit account. Yes sucky interest but you need to keep it liquid in case you need it right away. Once you've got the emergency fund fully funded stop. Any extra money if you aren't paying any debts, goes into the life happens fund. From this pot you can do fun and necessary things like take a big trip or tackle some home improvement job.

My company offer both 401k and Roth 401k ... my match on the 401k is 3% my question ... should I put only the match amount and use the extra money for the roth

I'm a big fan of Roth accounts. As long as you wait til age 59 1/2, all of your earnings will be tax-free. There are some times when Roth accounts aren't the best choice - mainly if you are paying a higher tax rate now than you expect to be paying in the future. Barring that, going for the match, and contributing to the Roth gives the basis for a good future tax strategy.

I was offered a new lease with a 2% increase. And a second 2% increase if I renewed for two years. Now, I had some leverage over the landlord because the office had screwed up my account twice this year. There was no damage done to me except the time to tell them their mistakes, but it could have been a lot worse. I did NOT whine on social media about it. And I brought that to the table on the negotiation (hey, I was nice to you, shouldn't you be nice to me?). I renewed for two years for 0%-1% instead of 2%-2%.

Can I take you to my next negotiation? 

Hi Michelle (and Michele). Happy new year. I am fortunate not to have any debt. Okay, I listened to Michelle's advice some years ago and worked very hard to pay off a lot of credit card and student loan debt. Also followed Michelle's advice and built up quite a bit of cash savings separate from my 401(k). I want to grow some of my cash. Bankrate.com lists the top interest rates for accounts and CDs. Is there any other source you'd recommend for me to research so that I can find the least-worst interest rate out there? Thank you!

Bankrate is a good source for that info. Have you considered investing a portion of your savings? A solid dividend growth fund, or even a stable bond fund can give you some better returns without as much risk as other types of investments. But, of course, investments and investment returns aren't guaranteed like savings are.

For fifteen years, paying my mortgage was a top priority and it kept me on track with paying all of the other bills. My mortgage is done and most of my bills are now online. (A few things like property taxes and insurance still come in the mail) I find I don't have the same focus when it comes to paying the bills. When I was writing checks, I would pay all of the bills at one time around the 20th of the month. Now with online, I have a few due at the start of the month, a few near the middle, and the rest towards the end of the month. I left for vacation over Christmas without paying some of the bills. Fortunately, only the phone bill was due before I got back and was something I could do on my phone. I don't want to do the auto pay options because I know that I would eventually stop reviewing the bills and looking for mistakes or other issues. Honestly, if I could, I would switch to paying quarterly, something I do with the home owner's association bills. What is a good way of keeping track of the bills when there isn't a pile of actual bills that need paying?

I just set up reminders on my calendar and review everything. You can't take your eye off anything. 

What a great start to the new year. As always, good questions and love that so many of you jumped in to offer advice, tips.

Thanks to Michele. She was good, right?

I hope you read about the Jan. 8 event at the Newseum. If you can come by, please do. It's an important conversation. We have to do more to help our children become better money managers. 

Thanks for joining me today and look forward to next week's chat. Talking about retirement planning. 

Happy New Year!

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

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Michele Cagan
Michele Cagan works as a financial navigator, accountant, and tax adviser, helping both individuals and small business owners make the most of their money. She is the author of several personal finance and business books, including The Infographic Guide to Personal Finance.
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