Marketplace

Credit Counseling? Bankruptcy?

Question: My husband and I have been offering budget counseling to friends and family for about 2 years now. It is rewarding to help people find their way back on track. Recently though, I'm afraid we've strayed out of our league and know it. We're trying to come up with a budget for a family with 40,000 in credit card debt that has eaten away at the monthly salary. Their mortgage is 50% their monthly income and they're a large family. I can't send them away empty-handed though, so what are some resources we could share with them and when (as homeowners) is it time to think about filing for bankruptcy? Thanks, Jacqueline, Sacramento, CA.

Answer: It's great that you help out family and friends with their money issues. It's also smart to know when someone needs more expert advice than you can offer.

That said, there are a lot of scams at worst and incompetence at best in the consumer credit counseling and debt management business. The organization that I like is the nonprofit National Foundation for Credit Counseling. NFCC has a search engine at its website for you to find an accredited Consumer Credit Counseling Service near you. (To be sure, the quality of the advice varies across the country with some offices better than others, but the service is legitimate.) I took a quick look and I didn't see a CCCS in Sacramento. I do know that the Consumer Credit Counseling Service of San Francisco (www.cccssf.org) offers credit and bankruptcy advice over the phone and the Internet.

If your friends would like to do some research on their own, one of the best consumer- friendly guides to bankruptcy and credit is offered at Nolo.com (www.nolo.com.) Their books are good. Your friends can profitably spend some time on their website gleaning information.

And they can always consult with a bankruptcy attorney to talk through their options.

06/02/08 by Chris Farrell

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Heloc vs. Student Loans

Question: Is it better to use money remaining in our HELOC, money in our savings account or to take out student loans to pay for our daughter's college tuition ($49,000.00)? Linda, Los Angeles, CA.

Answer: We've been getting many more questions about equity loans recently. When it comes to paying for college my approach is a mix of student loans, work-study, and parental savings.

I am wary of parents taking out home equity loans for college. The reason is that for most of us one of the best financial moves we can make is to enter our retirement years without a mortgage (or at least a minimal mortgage). This way the home is a critical part of our financial safety net.

In sharp contrast, your daughter has a lifetime of earnings ahead of her. It makes more sense for her to borrow for her education, and for you to help her out along the way (perhaps even after she's graduated) so that she doesn't end up with too much debt.

06/03/08 by Chris Farrell

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Move Retirement Money?

Question: I just changed jobs so am trying to figure out what to do with the 403b account that was left behind. It is with an Insurance company (New York Life) so the account fees are higher (generally 2 times as high) than my Vanguard accounts where I would prefer to move it. There is a 7% surrender charge which falls to 6% year 4, and so on. Not until it's hit year 9 (7 years from now) will it be zero% penalty. They charge $30 a year in general fees, plus 1.3% for various annual fees. The account balance is approx $7800 so there is an added fee for being below $10,000. I think it would be worth it to simplify my life for the $500 or so they will charge me vs. letting the account sit there for the next 7 years where they nickel and dime me with fees that would approach that same $500. What do you think?

Thanks for your help. I love the podcasts and enjoy learning so much from you guys there at Marketplace and Marketplace Money. Keep up the good work. Regards, Kevin, San Clemente, CA

Answer: I don't understand why management locks their employees into high cost retirement accounts like this. Worse yet, a major reason behind a defined contribution savings account--like a 401(k) or a 403(B)--is that you take more risk but in return the pension is portable--it can go with you. Pension plans like this don't violate the letter of the law but I do believe they go against the spirit of the law. .

If it were me, I would pay the price and put my money where I want it. Over the long haul, I believe you'd come out ahead.

06/04/08 by Chris Farrell

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Home Equity Loans?

Question: A) Love the show. B) In these uncertain economic times, am I better off getting a Home Equity Loan, or a Home Equity Line of Credit? Oh, and, what the sam-hell is the difference? Joel, Milwaukee, WI

Answer: I'm glad you love the show. Let's do the definitions first. A home equity loan (also called a second mortgage) is a lump sum of money. You pay it back on a regular basis over time, just like a mortgage. A home equity line of credit allows you to write a check (or use a special credit card) whenever you need to borrow against the equity in your home. The interest rate is typically fixed with a home equity loans, and the rate fluctuates (depending on the market environment) with a home equity line of credit. In both cases the equity in your home acts as collateral.

In general, a fixed-rate home equity loan is tailor-made for major remodeling projects, such as a new kitchen or bathroom. The variable-rate home equity line of credit is better for smaller projects that are accomplished over a longer period of time.

Now, I'm in the camp that says the money borrowed against the equity in your home should go toward improving the value of your home and the joy you get from living in it. This isn't money you tap for expensive vacations.

However, one additional advantage of a home equity line of credit is that it can be part of your emergency savings. In case of a financial emergency, say a major medical bill or a lost job, you can use the line of credit to help tide you over.

06/05/08 by Chris Farrell

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Bankruptcy? Credit Counseling? Where to Turn?

Question: Hello Chris, I am a thirty year old male living in Asheville, NC. I currently have over 20,000 debt to a private student loan lender (Loan to Learn) which is a consolidation of a previous loan plus an additional amount from L.T.L. The school I attended did not participate in the Federal student loan program or I would certainly have opted for that instead. I have not been in school for the last year but have filled out the FAFSA for the 08-09 school year and am considering going back. I am in serious default of my private loan right now and in no financial state to 'catch up' in the manner they wish. They allowed me to apply for forebearance, then denied me due to being in default. I have been regularly ignoring their daily phone calls for some time now. I am wondering, if I return to school is it possible to transfer or consolidate my private loan over to a federal loan where I would have drastically better interest rates, lower payments and the possibility of forebearance? Are the re any other options to begin working this matter out? In addition I also have two small credit card debts. They are far more feasible for me to deal with right now and the cards have been destroyed. Should I consider bankruptcy?? I am engaged to be married soon and hope to start a small business with my brother in the next couple years. In other words, I am thirsty for any knowledge about how I can begin to relieve myself of this awful financial dilemma! Thank you for your time! I really hope to hear some feedback! Sincerely, Ryan, Asheville, NC

Answer: A few specific points: Declaring bankruptcy won't get rid of your student loans. You can't "discharge" student loans in either Chapter 7 or Chapter 13 personal bankruptcy. You never want to mix private student loans and federal student loans in a consolidation. The reason is that federal consolidation loans offer far better benefits than private ones, and you don't want to lose those by putting the two very different species of student loans together.

You could also visit with a credit counselor to get advice. In earlier posts, I've recommended the Consumer Credit Counseling Services with the National Foundation for Credit Counseling (www.nfcc.org). There is an office in Asheville, the Consumer Credit Counseling Service of Western North Carolina (www.cccsofwnc.org).

You have a lot going on: A big debt burden, a desire to head back to school, getting married, starting a business with your brother. My advice is to slow down. There is a season for everything, and it seems to me that you need to make some priorities. Right now, the big priority in your life is to sit down with your fiancé and go through all the financial options. The two of you should gather information together (such as both of you visiting with a credit counselor). The two of you need to come up with a mutually agreed upon plan for handling the debt and getting you to school.

06/06/08 by Chris Farrell

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529 Plans

Question: My husband and I had our first child in February. Our budget has us paying off our student loans and credit card debt in the next 16 months. We'd like to put the money we currently spend on our student loans ($500 a month) and place it in a 529 fund for our daughter once both debts are paid off. I've seen a lot references to 529s, but was wondering if you could recommend some sources that provided guidance on how we can review the various states' 529 plans and their pros and cons. By the way, we plan on spending the money we've budgeted monthly on paying off the credit card debt to restore our savings as I stayed home on unpaid FMLA to care for our daughter after utilizing all my paid sick leave from work. We were able to finance the unpaid leave from our savings, which also depleted it (but was well worth it). Jennifer, Spring, TX

Answer: What a good use of savings. You had the money to do something important for your family. Bravo. The reason I'm posting this question is that your approach toward debt-and-savings is one I highly recommend: Pay down the debt, and when it's extinguished keep on setting aside the same amount of money into savings. It's a sound strategy for replenishing and building up savings.

The best resource for learning more about 529 college savings plans is at www.savingforcollege.com. It offers a good overview section for free. You will have to pay a modest price to get access to the detailed information. Check it out.

06/09/08 by Chris Farrell

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How Much Is Enough?

Question: I've yet to find a book or article that can answer this question: How do you know if you're financially okay?

I'm 38. I make $80k a year. I have $250k divided between a Roth IRA, 401k, and a single account. I put 20% down on a condo and the mortgage is the only debt I have. I also have long-term care insurance. Can I stop worrying? C. Houston, TX

Answer: Why is it that dire jeremiads about getting old resonate with so many of us? Why is it that conversations about retirement at work and the neighborhood barbeque so often turn into a litany of woe and dark humor?

Certainly, some segments of society are extremely vulnerable in their old age, such as poorly educated, low skill workers. But for many others, from the worker on the factory floor to the professional with an office--to someone like you--the apprehension largely stems from the realization that there is no way of knowing how much is enough to fund a lifestyle--let alone medical bills.

Yet most people will find themselves in decent financial circumstances with room for maneuver late in life by following some basic savings strategies and taking a broad perspective on investment. And that includes you from what you've told us. Keep doing what you are doing.

As important, take the time to carefully thinking through "What really matters to me?" That way you'll continue to come up with devise sensible answers to the question "How much is enough?"

One book that I like for thinking about a question like yours is Ralph Warner's Get A Life: You Don't Need a Million to Retire Well. Another one is The Number by Lee Eisenberg.

06/10/08 by Chris Farrell

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Questions answered on air for June 7-8

In this edition of Getting Personal, Chris and Tess talk about private mortgage insurance, 457s vs. 403(b)s, removing a co-signer and borrowing from a 401(k).

Listen to this week's segment

Continue reading "Questions answered on air for June 7-8" »

06/07/08 by Richard Core

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Finding A Financial Planner

Oops. I wrote the Q & A yesterday, but I forgot to post it. Sorry about that. I'll put up two Q & As today. Thanks.

Question: We are currently searching for a reliable and honest financial planner, but we don't know how to go about finding such a person? What particular criteria should we use for finding such a person? We would like to know what types of fees we should expect to pay for 1) estate planning, 2) setting up a trust fund and a 3) LLC? If you could provide me with specific fee amounts I would most appreciate it. Are there some Books or Websites that you could recommend for us to gain more practical knowledge about these matters? Thank you very much. Paymaan, Alexandra, VA

Answer: Ross Levin is one of the nation's top financial planners. Several years ago he sent me a tip sheet on finding a good financial planner. I'm passing along his insights:

Understand your needs:

A) What is the triggering event that makes you feel you need a planner? Are you changing jobs, inheriting money, or do you just feel like you want more financial controls in your life?

B) What type of person will you feel most comfortable with discussing issues that are very personal for you? A good financial planner will spend a lot of time trying to understand you; you need to make sure that you are comfortable with the personality of the professional.

C) What would have changed in one year with your financial life if you were working successfully with a planner? Would you have drafted a will? Would you have saved tax dollars? Would you feel more comfortable with your investment philosophy?

Must Have's with a Planner:

A) Your planner needs to have a Certified Financial Planner designation. This indicates that your planner has experience, education, passed an examination, and is required to adhere to a code of ethics.

B) Look for a fee-based planner. While there are good planners that charge commissions for their services, it is usually best to pay the planner a fee directly, rather than have him or her earn their living off of commissions. There simply won't be as many conflicts of interest.

C) Find out if the planner's practice involves many people with situations similar to your own. Ask specifically to talk to some clients who the planner feels were in similar situations.

D) Ask for the SEC form ADV. This tells you about a planner's philosophy, experience, and regulatory history.

E) Have the planner clearly lay out what they expect from the relationship. Be sure to find out what type of planning they do. Some planners give out big books filled with analysis. Other planners are more organic. Neither is better than the other, but you need to know what to expect.

Where to Start:

A) The best place to start is with your friends and colleagues. Try to be specific with the regarding what you are looking for. Ask them to be specific with you about what they like about their planner.

B) If you have advisors who are not in the business of financial planning, ask them for recommendations. This is getting more difficult because more and more people are getting into the field.

C) If all else fails, call the Financial Planning Association. Their phone number is 800-322-4237. They will furnish you a list of planners in your area. It is still better for you to find a planner through a referral, though.

06/12/08 by Chris Farrell

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Co-Signer Rights?

Question: I am trying to negotiate with Sallie Mae to settle the loan amount: to get some principal forgiveness and in return I will pay them off in full on the settled amount. My purpose in this is simply to reduce the loss I have to take on this.

My question to you is, what are my rights as a co-signer? What can I reasonably expect Sallie Mae to do for me. They are not very responsive, it is hard just to find someone who will return my call. So, I just would value your comments on what I should, and should not, expect from them in the way of help. Your response would be very much appreciated, thank you. Jeff. Irvine CA

Answer: You're now responsible for the debt as co-signer. Go ahead and try to negotiate with Sallie Mae. It can't hurt. But since you signed a legal document you're on the hook for the full amount. Maybe they'll cut you a break. But it is under no obligation to make a deal with you.

I know it's too late, but your experience is why everyone needs to think very carefully about the financial risks before co-signing a loan. There are other ways to help someone out with their student debts (or any other debt for that matter) without taking on the obligation imposed by co-signing.

by Chris Farrell

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A Will: A Lawyer or Do-It-Youself Online?

Question: I know that my husband and I need to have a will, especially now that we are the parents of a 20-month old. We have a good referral to a local lawyer from my parents; however, the cost is a bit of concern. How much should we expect to pay for having a general will and living wills written? I did a search on the MarketPlace website and found an article about on-line wills. Are these services reliable and useful in all states? Chandler, Gate City VA.

Answer: Congratulations on pulling together a will. Everyone needs one, especially families with children. A will is also the foundation of all financial planning for families.

There are a number of good "do-it-yourself" products on the market. They are legitimate, and the price range seems to be in the $20 and $120 range. I used one of these products in a pinch. It was a will form created by Nolo Press, a long-time publisher of consumer-oriented self-help legal guides (www.nolo.com). Nolo offers several will writing products. I found the directions comprehensive and easy to follow for the one I used.

I haven't personally spent much time with other well-known do-it-yourself will products, such as legalzoom at www.legalzoom.com and buildawill at www.buildawill.com. But I do believe that all of these products work best for very simple estates.

Still, I remain a fan of hiring a lawyer to do a will. I think its worth the several hundred dollars they'll charge for their services--especially when children are involved. The reason is that a will is a critical foundation for any personal financial plan. You want to make sure you get it right, that you address all contingencies, and that you get any questions you may have answered by a professional.

So, while I have nothing against the do-it yourself wills, in many cases prudence dictates hiring a competent attorney.

06/13/08 by Chris Farrell

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Buy A Home--Or Wait?

Question: My daddy taught me that rent is a waste of money, and my family has been renting for a year after relocating from NC. I'm ready to buy a house by September 1st at the latest. I think I'll be happy with the balance between falling prices and favorable interest rates (before they head up even more) by September. My husband thinks we should wait another year and continue to rent. Our price range is low in this market, between 450,000 and 550,000 and we've seen some homes in which we'd be comfortable with our two boys, 2 and 4 years old. Also, I want to move close to the school I've chosen for my oldest for kindergarten. I'd hate to move to another apartment. Is it too soon to buy? Will I regret jumping into the market in September, possibly before the prices hit rock bottom? One more thing--we can put down between 10 and 20%. Does it matter if we put down 10%? Thanks for any input you can provide. Jeri, North Hollywood, CA

Answer: Here's the safe forecast: You know once you buy a house prices will come down some more. Hitting bottom is a matter of luck. I also don't think you should feel any financial pressure to move. My own guess is that that the downward pressure on home prices isn't over, and there won't be any financial penalty for any potential homeowner that waits. (But that's a guess, of course.)

Lifestyle reasons may push you toward moving sooner. For instance, you already know what neighborhood you want to live in, and the kind of house you'd like to own. So, I would work with a real estate agent to really dig into the neighborhood. I would talk with a banker to see what kind of loan and rate you will get in this environment. I would be choosy and tough in any negotiation. In other words, be willing to walk away. But even if you miss bottom--which is highly likely--that may be okay for lifestyle reasons and assuming this is a long term investment. Put somewhat differently, both you and your husband are right, so use that knowledge in your favor when looking to buy a home.

The 20% vs. the 10% is really a number crunching exercise. You'll get the best rate on a 30-year fixed-rate mortgage with 20% down in the current environment. And, if you can do it, 20% is usually preferable. The reason to put in less than 20% is not to tie up all your savings in one asset. I'd run the numbers, look at the trade-offs, and then decide what works best for your family finances. You will pay PMI or private mortgage insurance with less than a 20% downpayment.

06/16/08 by Chris Farrell

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Merging Finances, Including Debt?

Question: I am 37 and getting married in three months to a gal who is 10 years younger than me. Financially, we're at different places in our lives and I am wondering what I need to do as we merge our lives together to protect my modest wealth and assets in case of a financial disaster on her part.

I've had my hard financial knocks in life, but have gotten to the point where I have a good job, good credit, own a condo, own a car, have money in retirement accounts, and my credit card debts are very low and manageable (and could be paid off quickly if needed). My fiancée has huge student loan obligations ($100k+) and damaged credit because she declared bankruptcy three years ago. Her debt is almost entirely student loan debt, so that does simplify things.

How would you proceed into such a situation? Please do not use my name if you answer this question as I do not want friends/family to be able to identify us should they hear or see the question. Thank you! Washington D.C.

Answer: Ah, romance. Poets, philosophers, and songwriters have long struggled to capture the mysteries of love and marriage.

That key question is this: Are all the financial issues out on the table, discussed, and the approach toward dealing with debts bought into by both of you? Are you on the same page about handling her student loan debt? Your credit cards? How much is each of you going to set aside in retirement accounts? What you need to do is really gain an intimate understanding of each others desires and fears about managing money as you go into this marriage. The rest is financial technicalities.

This is where a prenuptial agreement can help. Now, most people don't like the idea of a prenup. It isn't romantic. It has an aura of preparing for failure in the marriage. But look at it this way: A prenup can be a critical part of your money discussion. The beauty of a prenuptial agreement is that it is a vehicle, an impetus for full financial disclosure. Many couples like to write their own wedding vows. A prenup allows a couple to write their own marriage contract. It should cover all assets, including property and difficult-to-value holdings like stock options, businesses and professional practices, and academic degrees. You should also cover all debts, potential inheritances, and spousal support.

A prenup is a binding legal contract. That means you'll need lawyers to help both of you understand the document and to make sure the prenup does not violate any laws. Another way to handle it is a more informal, do-it-yourself approach. It isn't a legal document and it won't hold up in court, but it's a written understanding between the two of you. It's a way of getting both of you on the same financial page. The value lies not in the contract, but in the process.

Two books that might help your financial relationship: For Richer, Not Poorer: The Money Book For Couples by Ruth Hayden (Health Communications), and Prenups for Lovers by Arlene Dubin (Villard Books).

06/17/08 by Chris Farrell

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Getting Started

Question: I am 22. I have no debt. I currently have 6500.00 in savings & add about 300 a month to this account. I want to make my savings "work for me". What steps should I take ?? I want to start practicing good money habits now...please help. Christina. Conway, MA.

Answer: You're already doing better than many (most?) people. You're saving, and you want to learn more. That's a terrific combination.

What I especially like is your phrase "practicing good money habits." It's so easy to get lost in the technical and financial complexities of managing money when what really counts as sound personal finance is developing a handful of good habits. That means save for retirement in a tax sheltered pension plan with a well-diversified portfolio. Build up with automatic withdrawals from your checking account a nest egg that can be used for everything from surviving a layoff to putting a down payment on a home. Own your own home. Don't take on credit card debt. Keep good financial records. Insure your loved ones. Keep it simple, always.

Of course, managing money easily gets much more intricate. For instance, does it make sense to open up a Roth-IRA (it usually does) to the advisability of purchasing a variable annuity contract (the answer is no for most people). Still, the essence of good money management is good habits.

To learn more, there are two books I've recommended before that offer plenty of insight and wisdom. They also have the virtue of being short. The Only Investment Guide You'll Ever Need, by Andrew Tobias. It came out decades ago--1978. But it has been revised many times since then. Tobias is an entertaining storyteller. I'm also a big fan of Burton Malkiel's The Random Walk Guide to Investing: Ten Rules for Financial Success.

06/18/08 by Chris Farrell

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What Debts to Pay Off

Question: My husband and I will receive about $50,000 inheritance. He wants to use the whole sum to pay down our mortgage. I argue that we should pay down the higher-interest credit cards and car loans (about 6k in the former, 28k in the later). He argues that the sooner we build more home equity, the better. I say that we're losing lots of money on these higher interest products. I'm right? He's right? Split the difference? We're in our 40's, both employed in education, and have (hopefully) good retirement accounts. Nancy, Columbus, OH

Answer: First of all, in this case neither of you is wrong--or right. You'll be better off financially whether you decide to pay down the mortgage, get rid of credit card debts and car loans, or compromise on a mix of the two strategies. The bottom line is that you're getting rid of debt and your household balance sheet will be healthier.

That said, I'm with you on this one: From a financial point of view the best use of the money is to get rid of the credit card debts and car loans. Both have a higher rate.

Now, you'll still have some inheritance money left over if you eliminate the short-term debt. You could put that toward principal on your home. Or, in light of the recession, you might want to consider setting it aside in a safe place just in case you need it. You can always invest it in your home once the economy looks better.

06/19/08 by Chris Farrell

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Adjustable Rate Mortgage

Question: Is there a source to which you can refer me that would state the average interest rate of the One Year T - constant maturity, over the past decade or two? We currently have an adjustable rate mortgage tied to the 12 Month Average of the One Year T, Constant Maturity. At present, the rate is not so bad, but we are all too aware it goes up and down. I am wondering if there may be an advantage to sticking with what we have, knowing that sometimes it will take a bigger bite out of our budget than others. In essence, if you can weather the peak interest rates, is it worth sticking with an adjustable rate for the valleys that are also part of the ride. Thanks. Brian, Pacific Grove, CA

Answer: The data is produced by the Federal Reserve Board. You can find both current and historical data at www.federalreserve.gov/Releases/H15/. Another data source with some nice tables is at www.moneycafe.com/library/cmt.htm.

I don't dislike adjustable rate mortgages. I've had two, and both worked out well. But I now prefer the certainty that comes with a fixed rate mortgage. I think it's a better financial product for most people. But not all.

In essence, the question about an adjustable rate mortgage comes down to 1) how healthy is your cash flow and 2) if the financial world conspires against you and interest rates go up sharply over several years how deeply will the higher mortgage payments affect you? You're weighing the advantages of lower interest rate payments against the risk of higher payments. Is that a reasonable gamble for you to take?

The big advantage of a fixed rate mortgage is that you always know what your payment will be. It doesn't matter if interest rates go up. However, if rates do tumble, you can always refinance at a lower rate.

06/20/08 by Chris Farrell

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Questions answered on air for June 21-22

In this edition of Getting Personal, Chris and Tess talk about buying a house with cash, consolidating student loans, taking on new credit card debt and transfering a Roth IRA.

Listen to this week's segment

Continue reading "Questions answered on air for June 21-22" »

by Jeffrey Long

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Social Security Do-Over?

Question: This morning, rushing my kids to get them ready for school and myself to work, I overheard someone talk about borrowing from his/her own social security account, interest free. Please, Is there such a thing? Is there a website? I don't have a crises, though I lived below Houston and to the west of Christie Street when 911 happened, but I never looked for any help related to that. I'm a person in lots of debt, credit card(divorce) and student loan, single mother with two kids trying to start a new career, possibly start a small non-for-profit cultural center - lounge in my neighborhood. A loan such as this could be the answer. Thank you, Malu. Brooklyn, NY

Answer: What you heard was a report by Bob Moon. He looked into what can be called the Social Security "do-over." But it doesn't involve borrowing from your Social Security account.

When people retire early, say, at age 62, they take a reduced monthly benefit. Well, it turns out that you can change your mind, reapply, and get the bigger payments that go to those who wait to collect benefits. The catch? You must send the government a check covering the benefits you've been paid (But that payment is without interest or adjusting for inflation. That's probably where you heard the word "interest".)

For others that are interested in the Social Security do-over, they can check out the website of Laurence J. Kotlikoff, economics professor at Boston University. He's also the head of the financial-planning software company ESPlanner. (It's at www.esplanner.com.)

For instance, he ran numbers for me a while back for a couple who retire at 62, have $300,000 in savings, and an additional $100,000 each in retirement assets. They want their money to last until they're 100. If they apply for benefits at 62, each gets $17,921 a year. Fast-forward eight years. Had they waited until age 70 to file, they would get $31,005 each, for a total of $62,010 a year. To get those higher payouts now, they'd each write a check for $118,957. That's a hefty sum. But the cost of getting that same payout by buying the cheapest commercial annuity would be 40% higher. When you include earnings from the couple's other assets and factor in their 30-year time horizon, Kotlikoff calculates that their annual aftertax spending can go from $58,765 to $70,420.

Your concerns are far different. I would suggest that you get in touch with the National Foundation for Credit Counseling (NFCC) to deal with your debts. It's the largest national nonprofit credit counseling organization. Their website is www.nfcc.org.

06/23/08 by Chris Farrell

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Book Recommendation on Investing

Question: Do you have a suggestion for a book on basic investing? I'm looking for something that covers the basic investment vehicles: stocks, bonds, CDs, and cash. I want to know how to analyze each type of investment and how best to determine and allocate risk. Thanks! Grant. Anaheim, CA.

Answer: I've swiveled in my chair to look at some choices for you. Of course, I can't just pick one. But here are several choices. I'd go to the library or bookstore and see which one you like:

A Random Walk Down Wall Street by Burton Malkiel. It's a classic. Malkiel translates the quantitative, highly abstract insights of modern finance theory into everyday language. He taps into the colorful vein of financial market history--booms, busts, bubbles, and castles in the air--to bring alive the capital markets. Lots of practical investment advice, too.

Informed Investor by Frank Armstrong. A former pilot, Frank sold insurance, became a broker, and, eventually, independent investment adviser. He detests Wall Streets steep commissions and high fees. He's a strong advocate of indexing. He is wary of Wall Street's insatiable appetite for picking the pocket of the individual investor. Dull, but comprehensive.

Stocks for the Long Run by Jeremy Siegel. First published in 1994 (there have been later editions), it remains one of the best introductions into the pluses and minuses of investing in stocks over long periods of time. He also deals with other investments.

Smart and Simple Financial Strategies for Busy People, by Jane Bryant Quinn. You can't go wrong with the Queen of Money. Written with wit and wisdom..

06/24/08 by Chris Farrell

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Credit Card Debt

Question: I've accumulated some credit card debt (due to a drop in planned income) in the last 6 months. At this point, I have some money in a savings account that could pay off that debt but it would empty the savings account. I've been reluctant to do that because it's my emergency fund (car breaks down, some major home repair) - but since I haven't been able to make a lot of headway on the credit card debt I'm starting to question that choice. Is it worth the risk of emptying the account to pay off this credit card debt? Both the debt and the savings account are less than $2K at this point. Sheri, Rochester, NY

Answer: In theory, there shouldn't be much of a difference between having $2,000 in a savings account and draining that bank account to pay off a $2,000 credit card bill. A credit card without any debt is a form of savings.

That's in theory. Psychologically, most of us like to have cash in the bank even if we are carrying some debt. I think many people find it easier to pay down debt if they can see some improvement in their savings.

How about a compromise? Set up a time period, say, 6 months to a year, and divide your debt by the number of months. This way, you'll pay off the debt within a reasonable period of time with a combination of income and savings. Hopefully, you'll be able to keep something of a savings cushion. And with time frame the interest burden or penalty won't be that high..

06/26/08 by Chris Farrell

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O% interest

Question: Ok Chris Farrell (or associate) I have a question that may give you a monetary migraine. I have approximately $7,000 in credit card debt (yes...shame on me). To top it off (and this requires that you be sitting down) the interest rate is 29%! I missed a payment two years ago on a different card that is now paid off however that one missed payment lead to my interest rate to be changed from 11% to 29%.

My question is this: There are many offers that come in the mail for credit cards that will transfer the balance and not assess interest for 6-12 months (0% interest). Now, after this period the interest rate stated is up to 29% (which is the rate I am at now). My thought is that I have nothing to lose interest-wise and could make some head-way into decreasing this debt during that period. Should I do it? or to sharpen the question... would you (if you were in this situation) do it? Please advise and inform me if my rational is misguided. Thanks. Kris, Pontiac, MI

Answer: There's no need for me to be sitting down or you to be ashamed. Yes, you have a lot of credit card debt, but so do a lot of people. I've seen a lot worse numbers. But I am outraged at credit card companies that boost interest charges to 29%.

Two things: First, shifting to credit cards with 0% interest for 6 to 12 months is a smart financial move in your circumstances. The gap between 0% and 29% is so large that you'll save money. Hopefully, you will qualify for the 0% interest.

Second, the key to this strategy is paying down the debt steadily. Once it is gone don't let it creep up again. The zero rate cards are a tool to make it easier for you to accomplish that goal: No balance on your credit cards.

by Chris Farrell

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July 1, 2008 and Student Loans

Question: I'd like to first start off by saying I love show and could listen to it for 3 hours a day if it were on and I had the time. Honestly, how can someone like Chris know so much about such a wide range of financial topics? I've heard a lot recently about the July 1st deadline to consolidate students loans to a very, very low rate and was wondering: 1) What personal information do I need to gather? and 2) What website should I go to.

I usually am at work when the show is on, so I only get to listen to bits and pieces, but an e-mail or any response would be greatly appreciated. Thank you! Wade. Duluth,MN

Answer: I'm glad you enjoy the show. On the student loan front, there's no need to rush. However, anyone with variable rate student loans should mark July 1 on their calendar. If you consolidate after that date you can lock in interest rates 3 percentage points less than the current 7.22%. That's a huge savings over the life of a loan. So, if you're thinking of consolidating, wait. The student loan consolidation market has shrunk with the credit crunch. Hopefully, it will open up again soon.

What's more, on July 1 the clock starts ticking on the new federal program that forgives remaining federal student loan debt after 10 years if you make all your payments on time and work for the government, non-profit, or other qualifying job.

A nice summary of what will happen on July I, 2008 is on the website Project on Student Debt at www.projectonstudentdebt.org. The specific page is http://projectonstudentdebt.org/july1-2008.vp.html.

06/27/08 by Chris Farrell

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Students & Credit Cards

Comment: I am listening to your answer to the parents who have a son going to Prague for fall semester. I have two daughters who have just graduated from college with no debt and no credit card. Now they are on their own - for real - for the first time in their lives with great grade point averages, but with NO CREDIT HISTORY.

My husband and I thought we were protecting our daughters from lenders by them not having credit cards, but we were actually handcuffing them. Since graduation, they had trouble getting apartments and they found it difficult to establish themselves in their new cities. I hardily endorse the "get a credit card" answer you gave the e-mailer, and don't chicken out with the pre-paid card. As I understand it, they don't really work to help establish your credit record. If I had it to do again, I'd get them a card when they were sophomores or juniors and have the very long talk about not spending more than they can pay, but use the card regularly and pay off immediately. Thanks, Lynn.

Response: Thanks for your comment. I'm posting it because you offer a different--and useful--perspective. A lot of people agree with you.

The advantage of a secured card in this case is that it prevents the novice user from getting into trouble while allowing the parents to rest easy that their student is financially covered in an emergency. (If a secured credit card from one of the dominant card issuers is regularly used the payment history will be reported to at least one of the major reporting bureaus. It's a "safe" way to build a credit history, and usually a secured card can be exchanged for an unsecured one after a period of time. The bigger issue here is to stay away from secured card scams.)

However, since the credit card companies make it so easy, most college students should get an unsecured credit card right before graduation.

On the more general question of students and credit cards, the reason why I lean toward the more conservative side of the equation is that the evidence shows too many college students are taking on too much credit card debt. Yes, students may have a credit history and a credit score. But a number are starting out their work careers with a debt burden that can hamper their financial freedom. I'd rather students graduate with no credit card debt and no credit score. They will have a lifetime of earnings to build up their credit history. I know it isn't fashionable, but I am still troubled with anyone having a credit card (except for emergencies) without earning an income.

Of course, parents know their children. And for some getting a card early and using it often is the right choice. For others, caution is the better course of action.

06/30/08 by Chris Farrell

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