Digging out from debt
With the next shopping season about to begin, now would be a good time to work on your finances before spending money you don’t have for presents.
The standard advice for getting out of debt and living within a budget often fails to yield results because it is based on an outdated 1950s model—one wage earner per household and a family with limited access to credit.
If you have a good income but are still struggling with debt, the editors of the Bottom Line Personal publication suggest you try some new strategies. For example, focus on big recurring expenses, such as the second car you might be able to do without or the private college for your child when there is a much cheaper state-supported university right down the road. (The three million college students who graduated this spring carried more than $40 billion in loans.)
With input from authors Elizabeth Warren and Amelia Warren Tyagi, Bottom Line Personal has other advice for people trying to dig out from under record debt—don’t commit more than 28 percent of your income to a home mortgage. And avoid long-term contracts for such things as satellite TV, cell-phone service, and gym memberships. The reason? Termination fees may cost you more than higher-priced, short-term contracts in case of a job layoff.
Each spouse should accept 100 percent of the responsibility for the expenses, even if only one does the paperwork, because the money and bills legally belong to both of you.
Buy based on need
So why do we find it so tough to save? The big culprits are our two largest expenses: the roof over our head and the cars in our driveway. Houses and transportation accounted for 52 percent of all expenses five years ago, up from about 40 percent in 1950.
“The trend has been to buy the most house you can afford, rather than the amount you need,” says Sophie Beckman, a financial planning specialist with A.G. Edwards & Co. in St. Louis. “It’s the same thing with cars. You see a lot more luxury cars on the road,” and about 20 percent are leased. This means these families will be making hefty monthly payments, but they won’t have an asset to show for it.
“Indeed, if you’re willing to skip the heated car seats and the third bathroom, you would probably still be living better than your parents did—and you will free up money that can be saved,” notes Jonathan Clements, a columnist for The Wall Street Journal.
But few people, apparently, are taking this advice to put some money away for a rainy day, according to results from a survey for Bankrate.com, an online financial service. Only 39 percent of the respondents to the poll of 1,005 adults age 18 and older have emergency savings equal to three months’ living expenses, while 55 percent do not; the others didn’t answer the question.
Teaching your children
So how does a parent of youngsters or an employer of young adults about to start their first job get them to save?
If you are a parent, set up a Roth IRA and fund it with some of the teen’s earned income. This will get them in the habit of saving and thinking decades ahead.
Meanwhile, more companies are automatically enrolling new employees in 401(k)s, withholding and investing a bit of their pay without even asking. Employees can opt out, but considering the 47.5 percent participation in 401(k)s by people in their 20s last year, the paternalism seems warranted.
Help for debt
There’s help for you if stuck in the debt rut. For those who have lost track of what you owe or to see what kind of credit standing you have, order a free credit report at www.annualcreditreport.com, call toll-free (877) 322-8228, or write Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.
To get a handle on your retirement planning, go online to www.Dinkytown.net.
For lower-rate credit card issuers, go online to wwwcardweb.com.
Two books that are helpful are: Everybody Wants Your Money, by David W. Latko, (Collins); and The Two-Income Trap: Why Middle-Class Mothers & Fathers Are Going Broke, by Elizabeth Warren and Amelia Warren Tyagi, (Basic).