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Budgeting

Question: I will finish my Ph.D. in June 2008 in business. Because my income over the past five years has been variable (from unpredictable teaching assistant and research work), I have not really created a "budget" per se. I'd like to avoid tracking every penny I save, but I also want to start saving for retirement and paying off my $30,000 educational debt. I've saved about $10,000 in the last year in an ING Orange Account. I wanted to put it in an index fund but need access to it in case of medical issues (I have had 7 surgeries during grad school). Also, if I get a job paying a high salary as a visiting professor, I am wondering if it would be stupid to try to pay off all my debt in one year. After all, I'd like some security if the academic job market does not go my way in 2009. Thanks. Susan

Answer: I don't think it would be stupid for you to pay off the debt. But I do agree with your concern that you could end up in a cash flow bind if the academic job market doesn't go your way or if your health deteriorates again. I would plan on spreading out debt repayments over a few years, which is still fairly aggressive.

By the way, for some reason "cash" is often looked down on as an investment. Yet in the current troubled economic environment cash is king. Plus, you only want to put money that you won't need for, say, five years or more in a broad-based equity index fund (like the Standard & Poor's 500, the Russell 3000, or the Wilshire 5000).

On the budgeting side, I wish I could write the line that budgeting is fun. But I can't. However, the chore of creating and sticking to a budget is worth it. I can emphatically state that within a relatively short period of time the result from fashioning a budget is genuinely liberating rather than constraining. For one thing, a household budget is the starting point for taking control of your finances. It's the baseline for all your saving, investing, spending, and giving decisions. For another, a budget is really where values are transformed into reality. The real payoff from budgeting is this: you spend your money where you want it to go and save for what you would like to do with it.

You don't need to spend enormous amounts of time tracking data. For a relatively small investment in time and effort upfront--usually a couple of months--a budget will become a lifetime of good financial habits. At that point, ballpark figures and estimates are fine for most people. One last point: make as much of your savings automatic as possible, from participating in a retirement savings plan at work to having a portion of your checking account automatically siphoned off into a savings account every month.

01/15/08 by Chris Farrell

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Blending Finances

Question: Hi Chris, My girlfriend and I will be graduating from Cal's City and Regional Planning Master's program next month. We will also be moving in together.

Neither of us has lived with a partner before. We're thinking about buying a car. And we're wondering if you have suggestions for any books or resources that will help us have a harmonious financial relationship together. At this point, we're not sure whether we will be getting married but still want to thoughtfully and logically think through our communal finances. Justin, Oakland, CA

Answer: Congratulations on you and your partners thoughtful approach to money. To me, how money is handled defines one of the big differences between living together and being married. Even when married couples strive to keep their finances separate, money mingles over time. And for most newly married couples the decision to set up merged accounts is deliberate. But when you're living together it makes sense to keep money separate most of the time.

Keep the lines of money communication open. Don't let any problems or issues fester. Establish a regular money meeting for paying bills and talking over finances. And whatever system you and your friend decide on for splitting and paying the bills-- keep it simple. Now, on your specific question of a car, it's easy enough to divide insurance, maintenance, and gas bills. But what about ownership? For instance, who gets the car if you split up? And if you buy together you should have a contract that spells out obligations.

Ownership is a legal issue. A good resource for looking into the options for a car contract between unmarried couples is the Nolo.com guide Living Together: A Legal Guide for Unmarried Couples. As you can gather from the title, Nolo's book is written from a legal perspective. For insight on handling the basics of household money as a couple, I like Ruth Hayden's For Richer, Not Poorer: The Money Book for Couples. It's geared toward married couples, but there is practical advice for any couple.

04/28/08 by Chris Farrell

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Opt-Out

Question: Chris: These days all of us receive so much unsolicited mail in our mail boxes, that it is a real headache. It is even more so, with the prescreened credit offers, because we are obliged to shred those papers with our names on it, or else someone will steal our identities. I found this web site that allows you to opt out.

www.dmachoice.org/MPS/proto1.php

What is the catch? Is there a downside to opting out? Thanks, P., Pittsburgh, PA.

Answer: The only downside I can imagine is that you might miss a good deal or an attractive offer. For most people, that's a small price to pay for cutting down on unsolicited offers in the mail and telemarketing calls.

The Direct Marketing Association (DMA), a trade association, allows you to opt out of direct mail marketing solicitations for 5 years. You can register online at www.the-dma.org/consumers/offmailinglist.html. (This is the website you mentioned in your email.)

There's more. The federal government has created a National Do Not Call Registry. It's a free service for reducing telemarketing calls. To sign up go to www.donotcall.gov. Or you can call 1-888-382-1222. You will stay on the list for 5 years, and then you can renew again.

The four credit reporting bureaus (yes, sad to say, there are four of them now) offer an opt-out service, too. Equifax, Experian, Innovis, and TransUnion--the four horsemen of the credit reporting business--have a website with the details at www.optoutprescreen.com. The toll-free number is 1-888-5-OPTOUT. It's a bit disconcerting to realize that you will be asked to provide some very private information, including your home phone, Social Security number, and date of birth.

Last, you can get more details about preserving at least a shred of privacy in the Internet Age at the Federal Trade Commission, at www.ftc.gov.

05/23/08 by Chris Farrell

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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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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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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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