On a recent show you mentioned that in your family, you have a joint household budget and checking account as well as a separate one for personal spending. If we have two individual incomes and one is higher than the other, how do we determine a fair percentage from each income to place in the joint budget to make things equitable? Also, once fixed expenses are covered in a joint account, how do you address covering the miscellaneous household expenses that frequently come up during the month? Any help you can give me regarding this issue will be great. I love your show and look forward to it weekly.
Thanks for the kind words, Jim! I’m glad you’re enjoying the show.
The way you handle disparate incomes is to contribute an equal percentage — not amount — of your incomes. And to figure out that percentage, you need to back into it a little bit. That means calculating how much you need in that joint household account, which may mean spending a month or two tracking your household spending, because some of these expenses, as you noted, are going to fluctuate.
First, add up all of the fixed monthly expenses — the mortgage or rent, the car payments, insurance, cable. Take an average of the ones that fluctuate each month, like the electric or gas bill. And then track your spending to get a handle on those miscellaneous expenses. To account for those, you’ll want to pad the account by rounding up your contribution percentage a little, then keep in mind how much you have in the account to cover them. That means knowing what you can afford that hasn’t already been accounted for (like a slightly-higher-than-average electric bill) and what might necessitate a dip into the emergency fund (like an emergency visit to the vet). You can also include an amount you’d like to save jointly in your total, perhaps to pump up that emergency fund or prepare for next year’s summer vacation.
Once you’ve done this legwork, you’ll have a total amount that needs to be funneled into that joint account to keep your household ticking. To settle on the percentage you’ll contribute, you’ll need to do a little math. So let’s say your household expenses total $3,000 a month. Your take-home pay — and it’s important you use take-home pay for this, which means the money that lands in your checking account each month after deductions for taxes, retirement contributions, and anything else your employer pulls out automatically — is $3,000 and your partner’s is $3,500. That means the amount needed in your joint account is about 47% of your combined take-home pay of $6,500. You each need to contribute 47% of your monthly after-tax income to make it work. But to pad it a little, maybe you want to round it up to 50%. You’ll contribute $1,500; your partner will kick in $1,750, which gives you a nice buffer of $250.
My husband will have a pension and an annuity through his work for retirement, but we also opened a Roth IRA for him about two years ago. I have a Traditional IRA. We currently only have the ability to put $5,000 in a year. Does it make sense to place that $5,000 in just his Roth IRA given the tax ramifications at retirement age or continue to split the $5,000 between the two? We are currently in the 25% tax bracket. My traditional IRA is valued at about $30,000 and his is near $13,000.
Just to recap, here’s the difference: You contribute after-tax dollars to both accounts. With a Traditional IRA, you may receive a tax deduction on your contributions, but you are taxed when you pull them out in retirement. With a Roth, there’s no tax deduction today — but when you tap the account in retirement, you tap it tax-free, meaning your earnings are completely untaxed. There are other differences, aside from taxes, that are important to note, particularly as you near retirement: A Traditional IRA means required minimum distributions at age 70 ½. You may leave the money in a Roth IRA untouched for as long as you like, making it a good way to pass an inheritance if that is your goal.
So the question now is whether you want to pay taxes today, or tomorrow — and whether making a required distribution at age 70 1/2 matters to you. If the required distributions aren’t an issue — you know you’re going to need this money in retirement — then you can look squarely at the tax issue: Do you think your tax rate is lower now than it will be in retirement, or higher? If it’s lower, that argues for paying taxes on the money now, through a Roth. If it’s higher, you may want to defer taxes as long as possible and go with the Traditional IRA. Unless you strongly know differently, the Roth is usually a fantastic deal. And if you don’t think you’ll need the money in retirement because of that pension and annuity, it’s a good idea to choose a vehicle that won’t require distributions.
I work full-time and am married with three children. In 2010, my husband lost his job — we ended up losing our house and were in a crunch to pay off $45,000 in credit card debt, not to mention two cars and PLUS loans. When all this happened, I went to the first credit card company and worked out a payment plan for the next year. However, the other card companies weren’t as easy to deal with. So I went through the National Foundation for Credit Counseling for help in consolidating our credit card debt. Now I am paying for that one credit card and have an account to pay off the others through a credit counselor.
My question: I took a loan out against my 401(k) to pay off those cards and some college expenses that my youngest daughter will have (after her student loans and scholarship, she needed about $9,000 for tuition). The credit card debt now totals $24,000. Did it make sense to take the loan and be done with the debt? I am repaying the loan over three years.
Hi Annette, here’s the deal with 401(k) loans: On the upside, you pay them back, with interest, to yourself, so looking only at the math, they are a better deal than other borrowing scenarios.
The rub is that if you lose your job — as your husband did, so you know this can happen, and often suddenly — you are in many cases required to pay that money back inside of two months. Otherwise, it is treated as a distribution and you are taxed and penalized as such. So it’s risky. You are also taking money out of the market, which could mean selling investments and locking in losses if you do this at the wrong time. And recent research suggests that if you borrow once, you’re more likely to do it again. All of these things make 401(k) loans a last-resort option.
But you already did it, and the good news is you’re paying it back to yourself, not a creditor. It also likely has a lower interest rate than your debt, although I don’t know what interest rate was negotiated by the credit counselor — it may be very good. In any case, just make sure you continue paying it and your credit card debt off and hang on to that job. And note: In general, I don’t recommend borrowing from or shortchanging your retirement to pay for college expenses. There is financial aid available that your children can tap if necessary, but you are not going to find financial aid resources to fund your retirement.
You’re not kidding — despite gains in the economy, it’s still tough to find work, particularly for baby boomers, who have been deemed the “new unemployables” several times this year by the press. I do have a few out-of-the-box suggestions about where to look. First, try searching for a part-time job with benefits, which can hold you over in the meantime while you continue to search for full-time work. Companies like Costco and Trader Joe’s pay well and offer benefits to their employees.
If that doesn’t suit you, think about brushing up on your skills. The Occupational Outlook Handbook, published by the Bureau of Labor Statistics, is a great place to start — you can search for jobs in various areas, find out what sort of education is required, and how much the average position pays. If you find something interesting, do some research about training. Your local community college or adult education program is a great place to start. Growing areas right now, according to the BLS: personal care and home health aids; veterinary technicians; carpenter’s helpers; meeting, convention and event planners; interpreters and translators; and physical therapist aids.
You might also consider temp work. There are temp agencies in every major city and many smaller towns, and this kind of job can give you the flexibility to test the waters in a variety of different fields, all while continuing your job search. It’s a great way to get a foot in the door — you never know when something temporary is going to turn permanent.
Finally, think about ways you might be able to work for yourself, even part time to fill in some gaps. What is your work history? Could you do some consulting? Don’t be afraid to get creative here: Are you an avid gardener? Perhaps you can start a small business helping people start their own vegetable gardens. Do you dabble in art projects? Sell your work on a site like Etsy.com to bring in some side cash. Every little bit helps.
Let’s first talk about what life insurance is for: You purchase this insurance product when you have someone who is dependent on your income — a partner, children, perhaps elderly parents — and you want to protect them in case you die prematurely. That means the vast majority of people do not need life insurance unless they have an income, which means many retirees should pass on this product.
There are, however, a few exceptions: If your spouse is dependent on a pension or annuity that will cease or decrease payments upon your death, or Social Security payments that will be reduced. Or if you want to use it as part of an estate planning strategy, as you indicated – if you plan to pass on a large amount of money, you can use a life insurance policy to pay for estate taxes. You can also set a life insurance policy to pay into that trust you have.
But purchasing life insurance at age 74 will be extremely expensive, even if you are in good health and you’re looking at a term policy. The high premiums may not be worth it – you may be better off investing that money elsewhere. If you’re planning to go this route, I would work with a good fee-based financial advisor who focuses on estate planning to make sure you’re taking the correct approach.
I wanted to ask your thoughts on finding the right 529 plan. Aside from hiring an actual financial planner, are there any resources that you would recommend as starting points in our search (websites, etc.)? There are so many options that finding the plan that best fits our needs seems daunting.
The best resource for this is Savingforcollege.com, which has information about fees, plan ratings, and comparison tools. You’ll find everything you ever wanted to know – and then some – on that site.
The first step is to look at the plan or plans offered in your state, particularly if you get a tax credit for contributing there. Check out how well your state’s plan performs — the site has 2013 performance rankings listed here, broken down by the last year, the last three years, five years and ten years.
You also want to look at investment options, because you want a menu of investments in line with your goals. If, for instance, you’re risk adverse, or your child is older (and you’ll need this money soon), you want options that allow you to tone down the risk, like a CD. Your best bet? Finding a plan with age-based options, which will work much like a target date retirement fund — when the child is young, your investments are fairly aggressive. As he or she ages, they automatically rebalance to be more conservative and lessen your risk.
Finally, expenses. Fees eat up your earnings, so they matter a great deal. In DC, for instance, a plan might cost you over $2,400 on a $10,000 investment over ten years. Louisiana, on the other hand, has one of the lowest-fee plans, with a cost of only $591 over that same time period with that same investment. For more on fees, check out Savingforcollege.com’s fee study here.
If you plan to work with a fee-only financial planner, he or she can help you with this. You can also enroll yourself — the process is fairly simple. There are also broker-sold plans, which come with fees and sales charges. I would avoid these if possible, because these costs will cut into your return.
I am a 62-year-old single female, recently retired and able to live fine on my only income–$1,050/month Social Security. My home and car are paid off and I have no credit card or other debts. The only savings I have is in an IRA and Money Market totaling $55,000. Question: I have $125,000 equity in my town home. If I had access to that money without selling my home and having to move, it would offer me a more relaxed life to do a few things I can’t do now because $55,000 has to last for my lifetime. I have no heirs, and no family to leave anything to. Are there any options other than a reverse mortgage? Several local finance experts tell me that reverse mortgage is the only option, but not recommended. Or, are there any reputable financial organizations that do reverse mortgages without charging such high fees that I would end up losing most of my house’s value? I “could” sell my home and move to an apartment…but, it was passed down from my parents six years ago, and I don’t want to do that.
Ali, if you truly don’t want to sell your home, you might consider a roommate – that could provide more money for extras. You can find someone through the National Shared Housing Resource Center, or ask around to friends and neighbors and see if they know anyone who is looking for a place to rent.
Otherwise, a reverse mortgage is probably your best bet for tapping that equity and not having to pay it back down the road, as you would with a home equity loan or line of credit. I would actually put off on this reverse mortgage until you truly need the money, since you say you’re getting by fine right now — the older you are, the more you’re likely to get out of a reverse mortgage because the amount you can borrow is a calculation of your age, interest rates and the home’s appraised value.
If and when you do decide to go with a reverse mortgage, you should know that yes, they do typically come with a great deal of fees. The best way to eliminate upfront fees is the HECM Saver option from the FHA. With that option, the amount you can borrow against equity is reduced by about 10 to 18%, but you’ll pay an initial mortgage insurance premium of only .01 percent of the home’s value. If you don’t want that reduction, you can go with the HECM Standard, which charges a 2% mortgage insurance premium upfront. In both cases, you can finance the charges with the loan if you would prefer. You are also charged annual mortgage insurance premiums of about 1.25% of the mortgage balance, and a few thousand dollars in mortgage origination fees and closing costs.
My wife and I will be a first-time grandparents in six months. We’re very excited, as you can imagine. It is our desire to start a college fund for our grandchild. If it is within our means we would like, over the years, to grow the account so that the entire college education will be paid for. What recommendations do you have regarding investment vehicles and amounts to save so that we will have enough in 18 years?
What a nice gesture. You probably want to look at a 529 plan, which is offered by every state and gives you a tax-advantaged way to save: money in the account grows tax-deferred, and distributions are tax-free if they are used to pay for the beneficiary’s college expenses. In addition, you may get a state tax break for participating in your own state’s plan — though you don’t have to contribute in state, if you find that your state’s plan doesn’t cut it, performance-wise.
That said, you have to be careful as a grandparent because this kind of plan can impact their financial aid eligibility. The plan itself when owned by a grandparent isn’t considered an asset, but when the child is the beneficiary and a distribution is made to pay for college, that distribution can count against him or her when the FAFSA is filed the following year. Note that this is NOT the case with 529 plans that are owned by the parent.
To solve that issue, perhaps your best bet, if you’re willing to do this, is to have the parents open up a 529 plan and then simply contribute to it each year. You will, of course, lose control over the money, so that has to be a risk you are willing to take. As far as how much to save, SavingForCollege.com has a “the world’s simplest college calculator” which you can use to get a ballpark. They also have information on each state’s plan, so you can compare performances and ratings across the board.
One final note: No matter what number a calculator spits back, I want to urge you to save what you can while keeping your own retirement needs front and center. Your grandchild will appreciate this money, of course, but there are also loans available for college expenses — no one is going to lend you money for retirement.
My wife’s parents just earned their Resident Alien status, and plan to spend half the year in the United States. They would like to lease a car, but have no Social Security number, established credit or pay stubs to show. They do own a condo (no mortgage) and have savings. Could the condo be used as collateral in leasing a car, as I would prefer not to be a co-signer.
Brett, this is tough to work around. In a lease, the car itself is the collateral. If the lease or loan is not paid, the vehicle is repossessed. Unfortunately, putting a lien on a condo in order to lease out a vehicle wouldn’t be appealing to a bank.
But your in-laws do have a few options. You say they have savings. They could put a larger down payment, which can help the lender feel better about bad or no credit. A large down payment generally isn’t advised when leasing — it lowers the monthly payments, sure, but if you were to get in an accident within the first few months of the lease, you’d risk losing your entire down payment. But in the case of your in-laws, this may be their only leasing option. Unfortunately, it may mean paying the entire lease term upfront.
A better option? They could forget about leasing, and use some of that savings to purchase a good used car. That’s what I would recommend — if they purchase the car outright, they avoid the credit issue altogether. And if that money is just sitting in a low-interest savings account, and they have emergency savings as well, it may make sense to put it to use here.
But if they’re dead set on the lease, it’s going to take some leg work. They should shop around by calling several dealers and explaining their situation. Some dealers may be willing to negotiate with their lender to work it out – they want to lease the car, after all. Your in-laws need to be able to prove residency and provide a valid address.
I am a widow in my 50′s and I have no debt. I have a pension from my husband every month and i just got a part-time job after being on unemployment. My question is I have some savings — should I try and buy a house or continue renting? I live in San Diego, but am originally from the east coast and would like to move closer to family.
A lot of people are suddenly feeling the rush to buy a home, now that interest rates are pretty clearly headed up. But that’s not necessarily the best move, and it doesn’t appear to be the best move in your case — I certainly wouldn’t purchase a home now if you are planning to move to the east coast in the near future.
When your life’s plan is in flux — you’re not sure where you’ll be in a year, or even five years; you’re unemployed or thinking of changing jobs — you’re better off renting. I say this even though research tells us that it is still cheaper to buy than rent in many parts of the country. (San Diego can fall into this bucket, according to this graphic, from Trulia, which may be worth a look.)
However, that data is hinging on you staying in the home for a while. If you’re not prepared to do that — and it sounds like you aren’t — renting is a better fit for your situation. This is particularly true if you’re still looking for full-time work, and flexible about where job opportunities might take you. Renting allows you to maintain that flexibility, so you can move if you land a job in another area or trade up if you land a full-time job and with it, the ability to spend more on housing.
So, for the time being, I would rent something inexpensive and continue to save. That way, if you do decide to move and you want to buy a home in which to live out your retirement, you’ll have a nice fat down payment ready – or even the ability to purchase it outright.