Ask The Coach! is a feature of the MoneySteps newsletter where you can pose that nagging question on your mind to our panel of financial coaches. The theme of our August newsletter is debt. So, with that in mind, send your family finance questions here. If your submission is published, your identity will remain private and you’ll be rewarded with a prize!
What are your thoughts on debt consolidation? For instance, taking out a loan with a company like Prosper to pay off credit card debt. What impact would this have on my credit score?
Generally, consolidating loans can be a good thing. First, you may be able to get a lower interest rate, especially when the debt is primarily on credit cards. Secondly, having a single payment can help individuals focus on the debt and organize their payments. There are, however, some potential dangers with debt consolidation. If the underlying reason for incurring the debt isn’t addressed (such as overspending), it’s possible you may end up simply adding more credit card debt in addition to your newly consolidated loans. It’s important to tackle the root cause of the debt so consolidation has the intending impact of making debt more manageable.
In terms of your credit score, consolidating existing debt won’t have much impact since your total debt would remain the same, and consolidation is generally considered a neutral event. When you apply for a consolidation loan, however, the hard inquiry on your credit report may cause a slight drop in your score initially. Your score then may improve over time as your total available credit will go up and your utilization rate will be lower, assuming the root cause of the debt has been addressed. I would encourage you to pursue what you feel best empowers you to pay down the debt as quickly as possible. That proactive behavior will be one of the most powerful factors in improving your credit score.
Is it better to pay off debt or to start a rainy day fund?
Both are great goals to focus on, and, in most cases, you’ll probably want to balance doing both at the same time. Most debts require monthly payments, so, more than likely, you’ll be making progress on paying off your debt on a regular basis. However, finding a way to start an emergency fund can be a big step towards avoiding future debts since that will give you the flexibility to address unexpected expenses as they arise. As a first step, targeting $1,000 for emergency savings can be very achievable, even while you’re making your debt payments.
You might want to start diverting whatever you feel comfortable with into a dedicated savings account (such as $20 a month). One strategy that is an option is to make the minimum monthly payment towards your debt and save the rest of the payment amounts you were making until you reach $1,000 in savings. After the $1,000 savings goal is reached, direct all of your free cash towards the debt to retire it as quickly as possible. Once the debt is paid off, you can redirect the money you were using to make those payments towards your emergency savings account and build it up even faster.
What is the best way to pay down credit card debt? Do you start paying the credit card with the highest interest or start by paying off the credit card with the lowest balance?
Great question and the answer can be “yes” to either – it just depends on what works for you. Paying off debts with the highest interest rate first is mathematically optimal. You’re going to save yourself the most money by eliminating the most interest. However, since many people, including me, love seeing progress, another option is to focus on paying down the smallest debt first. Seeing debts start to disappear sooner helps motivate us. In addition, sometimes small debts can still have relatively large monthly payments. By freeing up the money earmarked for those payments sooner, we can re-target that money into payments towards the larger debts. This strategy is often referred to as the debt snowball method and has worked for many people. Sometimes, our debts with the highest interest rates are also our smallest debts, so both methods would end up being the same anyway. The key is to use whichever method works for you and inspires you to keep going.
What’s the best advice you would give for paying off debt?
That’s a very interesting question! Normally I would address debt questions with a particular payoff strategy or ideas on how to reduce interest rates. But those types of things are just mechanics. Personally, I think one of the most important things about tackling debt is shifting the mindset towards urgency. Debts wrap up our money and delay us from saving for other goals such as a wedding, a home, or retirement. They can preoccupy us with worry or restless nights. I think all of us at some level strive for “freedom” to do what we want to do, and being free of our debt is foundational to that.
So the advice I would give regarding paying off debt is to make it a priority! Put all options on the table. Cut out any spending that you don’t need or doesn’t add value to your life. Imagine what it would be like to make that final payment and finally be debt free. Imagine not being obligated to a lender. Be aggressive and put yourself on a path to financial freedom.
I am wondering if it is more prudent to borrow money from a retirement account to pay off a debt than getting a loan from a lender. I am thinking that repaying the retirement account is really paying yourself back, rather than paying off a loan from a lender who gets 100% of the money you repay. I know I will lose time that money could have accumulated value AND will pay interest, but I still think this may be a smart way to go. What do you think?
Taking a loan from your 401k could be a cheaper choice than going to a traditional lender. You are correct that money withdrawn from your 401k is going to miss out on potential investment returns. Since it’s impossible to predict what the market will do, the real cost to you is just a guess at this point. Another possible downside is that you may have to make repayment arrangements within the grace period of your 401k plan. Loans from your 401k have a distinct advantage of being easy to initiate (because you’re not really applying for credit like a traditional loan) and you’re essentially paying yourself the interest. Comparing the interest rates, the payment amounts, and the time it’ll take to pay off the debt can help determine if it’s worth it for you. Another idea is to call your current lender and see if they can work with you on bringing down the interest rate. You may be able to negotiate more favorable terms with what you already have.
One more option would be to stop contributing into your 401k at the moment and redirect that extra cash flow towards paying off the debt. This would keep all of your current 401k funding in their respective investments and not create a new loan. Once the debt is paid off, you can turn your 401k contributions back on and maybe even increase them since you won’t have those debt payments anymore.
Is it better to put your entire paycheck toward paying off credit card debt over putting some in a savings account?
Determining the right balance is really about addressing what concerns you most. I usually recommend finding a way to start an emergency fund. This can be a big step towards avoiding future debts since you’ll have flexibility to address unexpected expenses as they arise and prevent you from having to add new debt to your credit card.
As a first step, targeting $1,000 for emergency savings can be very achievable, even while you’re making your debt payments. You might want to start diverting whatever you feel comfortable with into a dedicated savings account (such as $20 a month). One strategy is to make the minimum monthly payment towards your debt and save the rest of the money previously earmarked for the debts until you reach $1,000 in savings. After that, direct all of your free cash towards to the debt to retire it as quickly as possible. Once the debt is paid off, you can redirect the money you were using to make those payments towards your savings account and build it up even faster. Paying down debt and saving money are both great goals. I would suggest talking with your coach about developing a strategy that works for you.
How do I prevent my kids from developing my same poor money management habits?
One of the best ways of teaching your kids is to set a good example. No one is perfect, and it’s likely that we can all improve in at least one area of personal finance. Why not share with your kids your financial improvement goals? Finding a realistic, manageable goal to share is something you can work with your financial coach on.
If your kids are a little older, you could involve them in helping to manage one aspect of your family budget. For example, with school starting in a little over a month or two, setting a budget for school supplies and having your kids weigh in on how that money is spent, without going over budget, can teach them about choices, trade-offs, and priorities.
You can even use the budget tool on www.financialwellbeing.com to set up a budget dedicated to school supplies. The budget tool will allow you to track progress along the way, and you’ll even be able to access it from your mobile device, making it easy to share with your kids. Your financial coach can help you set up the budget and familiarize you with the different tracking features offered.
What’s the best way to get the kids started in savings? Piggy banks? Savings accounts? Savings bonds? What advice do you have on making topics like “budget” fun for kids?
Making the art of saving money fun goes a long way in getting your kids started in savings. Finding the method that works best for your child will also go a long way. Are they more hands-on? Or do they learn by reading and/or listening? This can then help determine which activities you use.
For example, if your child is a hands-on learner, a clear piggy bank with Save, Spend, and Give categories can be a good way to go. If they are a little older, opening a savings or investment account for them can also be a helpful way to show them their own savings/investments and how they can build over time.
You might also consider creating the “Bank of Mom and Dad” where you would keep track of their account balance and then either match their savings (like a 401(k)) or pay them interest on their balance so they can see the value of savings growth over time.
I think the more you can teach your kids as you work on your own finances the better. Use opportunities of financial successes and disappointments to start a conversation with your child and show them what you have learned. Also, you could consider having family budget discussions with your children (if they are old enough) and let them weigh in a bit as you decide where money should go. If your child is a reader, you could read a personal finance book or article with them and have discussions along the way.
One of the challenges we have as parents is paying for a good education for our kids through their lifespan. Which steps can we make in order to cope with or handle the increasing costs of a good quality education?
One of the great tools at your disposal is the Goals section of www.financialwellbeing.com. In this section, you can establish a College Saving Goal for each of your children and begin to model out a savings goal based on their age, the type of institution you’ll think they’ll attend (public or private) and the percentage of tuition you hope to save for. This “college tuition calculator” assumes an annual tuition inflation rate and the rate of return on your savings/investments, which can both be adjusted.
Through your exercise with the college tuition calculator you may find that you’ll need to adjust your goal based on your budget and other financial priorities. Once you’ve settled on a goal, here are two common vehicles specifically designed for education savings to consider:
If your child(ren) is/are going to be entering college within the next few years, it may also be helpful to familiarize yourself with the Free Application for Federal Student Aid (FAFSA) resources and rules (www.fafsa.gov). It can also be good to look for scholarship opportunities throughout your kid’s education life, which can really help to defray the costs.
Coming up with a solid plan that determines how much of a savings goal you have and how you’ll get there can be daunting. This is where reaching out to your financial coach to brainstorm a game plan, discuss strategies, and explore other resources will help set a plan that works for your family.
Do I have to elect Medicare if I plan on working past age 65?
Today, more and more people are working past age 65 — not only for the income, but also to maintain their social and emotional wellbeing. And with increases in life expectancy, working past age 65 doesn’t mean you can’t also enjoy many years of retirement. But the rules for Medicare eligibility have been around for a while and date back to when an age 65 retirement was the norm (and life expectancy a lot less).
The quick answer to your question is no, you don’t have to elect Medicare at age 65 if you’re still working and have access to employer-sponsored coverage. But, as always, it’s important to consider all your options and your own personal healthcare needs and financial situation. Medicare.gov provides useful information that can help you determine potential Medicare costs, choices and eligibility dates.
Medicare coverage typically begins at age 65. At that time, you’ll automatically be covered under Part A unless you defer that coverage. So, if you want to keep on working past your 65th birthday, and want to stay covered by your Trustmark Companies medical plan, you can, with the same level of benefits and contribution rate. Your Trustmark plan would remain as the primary coverage. And Medicare would act as secondary coverage.
If you choose to defer enrollment in all parts of Medicare, you’ll continue to receive employer contributions and may contribute to your HSA. But once you receive Medicare Part A coverage, you can no longer make or receive contributions to an HSA. So, you’ll need to notify the benefits team to avoid possible excess contributions in the account. Excess contributions are taxed and penalized if not removed.
Also, Medicare will not enact a late enrollment penalty for enrolling after your normal entitlement period as long as you enroll during a ‘Special Enrollment Period.’ This typically begins once your employer-sponsored coverage ceases, as would be the case once you retire.
Special rules apply to individuals eligible for Medicare due to End Stage Renal Disease (ESRD) or total disability, as defined by the Social Security Administration.
Your financial coach can help you evaluate your personal situation, including options for deploying HSA account balances after enrolling in Medicare.
My question is about affording childcare. My husband and I are expecting a baby in July and have enough saved to cover hospital expenses through the birth and into maternity. We just started researching the cost of childcare and it’s basically equal to one of our salaries. Do you have suggestions of how to make that work and still have a life?
I’ll address the last four words of your question first: “still have a life.” You may think I’m kidding, but there’s no way to imagine beforehand how much life will change when Baby arrives. People often try to do comparisons to life after and before (less sleep, less going out, no alone time, balanced by the joy of the new addition to the family). But really it’s just completely different. Life without Baby will become Life with Baby. Your priorities and expectations will shift daily.
In all seriousness, there are options to make childcare more affordable – or to streamline other parts of your life so you still have adequate cash flow. It’s good you and your husband are talking about this now so you can set some priorities together and keep the conversation going as things change. This would be a great time to set up a session with your financial coach. You and your husband can be on the call together, and your coach can help you set priorities and explore options.
Assuming you both want to keep working full time and that your careers are a priority, here are some quick ideas about making sure childcare expenses don’t overwhelm you:
Note: It is a violation of your company’s contract to share this information with individuals who are not eligible for this service.
Some other major questions to consider:
Some young families decide having both partners working full time isn’t, in fact, worth it. This is a major decision, obviously, and not one to be taken without fully considering the long-term implications. A few points to think about:
A lot to consider, I know. But it doesn’t have to be overwhelming. You are far from alone in facing this challenge. Your financial coach and other families in your situation can help you talk through your priorities, point you to helpful resources, and offer meaningful guidance.
How should I begin to save for a honeymoon?
You’ve taken an important first step towards successful saving by having a goal in mind. It’s a lot easier to save when you know you have something to save for. You also have a time frame in mind, another plus to start with. Having a defined amount of time to reach your goal is a great motivating factor. It also helps you determine how much you need to regularly set aside to reach your savings goal. And if your goal is reasonable and achievable for the kind of honeymoon you have in mind.
To begin saving, review your monthly budget. If you don’t have one yet, now’s a good time to start one. And, your financial wellbeing coach can help you with that if you need it. The point is, your budget helps you determine how much you can save. We all have bills to pay. So, what are they? And then how much is left to work with, for saving? Once you determine how much you want to save and can save, pay yourself first. Just like a regular monthly bill. Your honeymoon bill, right? And then stick to it. The easiest way to save money is to never have the chance to spend it in the first place.
If you have direct deposit of your paycheck through work, see if you can have part of it go directly into another account — your honeymoon savings account — as well. If not, deposit that amount manually each month.
At first, saving can seem difficult, discouraging, daunting. But no matter what your financial situation is, it’s always possible to begin saving. Then, when you see your savings grow and keep growing, it feels awesome, empowering. Like something you’ll likely want to keep doing and doing more of.
And remember, you don’t have to be alone in this process. As a MoneySteps Financial Wellbeing Coach I’m here and my colleagues are here to help you achieve your money goals, no matter what they are. Congratulations on your wedding! And good luck saving!
I currently rent my home with my spouse. We are nearing retirement age in about 5 years. Is it a bad idea to consider purchasing a home at this stage of our lives?
It’s exciting, and perhaps even a little scary, to see the dream of retirement just a short five years away. You ask a great question about owning or renting, regardless of your life stage!
Nearing retirement age means being able to visualize what your lifestyle may look like with greater certainty than doing so earlier in life. Maybe your dreams of long walks on the beach and daily rounds of golf from earlier years have been replaced by the joy of spending more time with grandkids or volunteering for a local organization. With a clearer sense of your retirement lifestyle, it’s easier to understand what your needed living expenses will be.
But it’s important to understand the income side of the retirement equation first. Here, you want to estimate your household income from a variety of sources including: social security, 401K plans, pension plans, IRAs/Roth IRAs, and other investments. You’ll receive monthly income from social security, the amount of which will vary by the age at which you decide to start collecting (the longer you wait the more you’ll get). A pension plan will also typically distribute benefits on a monthly basis.
However, your “investment accounts” represent lump sums that you will draw down with a frequency you’re comfortable with (annually, monthly, etc.). Once you make a withdrawal, your remaining principal will be impacted by how the money is invested, assuming it’s not all in a cash account. There are many tools at your disposal, both on the financialwellbeing.com and Fidelity websites that will help you model out different scenarios for what your income may be from all sources.
On the expense side of the equation, it’s really helpful to project your retirement expenses if you have a really good handle on your current expenses. If you don’t, perhaps it’s something you may want to consider. When your spending plan or budget is organized by category, it’s easy to ask yourself “will this expense be less, more, or the same in retirement”? Perhaps you and your spouse both have cars you use to drive to work. If you will be driving less in retirement, then your gas, insurance, and maintenance costs will all go down. You may even decide that you no longer need two cars.
So once you’ve isolated your expenses today, and made some assumptions about what they will look like in the future, I think it’s logical to delve into the housing question. Here are some things to consider: where do you want to live? Downtown condo lifestyle with many attractions in walking distance? Or a cottage in the woods to enjoy nature? What does it cost in your dream scenario to buy a residence? How much money will you have for a down payment? Perhaps you may even have enough to but the property outright, without a mortgage. But if there is a mortgage, how does the cost of your current rent compare with your mortgage payment, taxes, and insurance? Will you have enough income in retirement for this expense after estimating how your other expenses may change?
Yes, there are many questions to consider — but the good news is you don’t have to decide today on owning or renting. Take your time to consider all your possibilities and think about getting the assistance of your financial coach in thinking through your options, and taking these big life decisions and turning them into smaller, more manageable decisions that get you closer to the plans the work best for you and your spouse.