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Color of Money Live

Michelle Singletary
Washington Post Business Columnist
Thursday, April 14, 2005; 1:00 PM

Need advice about how to handle your personal finances? Whether the struggle is saving for retirement, organizing your bank files, talking about money responsibility with your spouse or loved one, Post personal finance columnist Michelle Singletary offers her advice and answers your tough questions.

Michelle hosted a free-for-all discussion on money matters. A transcript follows.

_____Michelle's Column_____
The Color of Money

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.

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Michelle Singletary: Well hello everybody. There are loads of questions today so let's get started.

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Alexandria, VA: Submitting early to hopefully get in for advice. My fiance and I are trying to buy a home but he has had some things to deal with on his credit report. The last thing is a delinquent credit card charge that popped up only a few months ago and he doesn't think it is his but he can't get anyone at the credit card company (capital one) to give him documentation that it is his. Recently, they finally told him that they bought the account from Citibank. He contacted Citibank and found out it is an account from 1999 but he still doesn't recognize it and they are telling him that once they sell such an old account, they don't keep documentation on it. What should he do?

Michelle Singletary: He should definitely dispute the charge if he's not sure it is legit. If they credit card company can't produce documentation that the account balance belongs to him, I think he has a good case to get the item removed. Also keep in mind that if this is an account from 1999 in one more year it has to be removed from his credit report anyway by law. Go to the FTC website (www.ftc.gov) for more information on disputing credit report errors.

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Youngstown, Ohio: How does it effect your credit report to voluntarily close an account that has been paid in full?

Michelle Singletary: Oddly, you might experience a slight drop in your credit score especially if the account was in good standing and it was an account the you held for a long time. One of the big factors in your credit score is how long you have held a credit account. Having a long standing credit account (again that is in good standing) is great for your credit score. So if you are about to get a car loan or house loan I wouldn't advise that you close that account.

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Alexandria, Va.: What is your opinion of the new bankruptcy legislation that is up for a vote today? My congressman Jim Moran says he intends to vote for it.

Will this legislation harm consumers?

washingtonpost.com: The Color of Money: Mandatory Counseling, A Good Idea in Theory (March 20, 2005)

Michelle Singletary: I think the legislation stinks and will unnecessarily harm regular folk who have hit hard times.

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Baltimore: What is the difference between Roth and Traditional IRA? I'm 30, married, and am able to put in the max.

Michelle Singletary: I just wrote about this today. Check out the column in the business section. Here is a basic breakdown of the differences

With a traditional IRA

• Depending on your income, contributions may be deductible

• Taxes are paid on any earnings when you withdraw the funds

• Traditional IRAs are available to everyone with no income restrictions

Roth IRA

• Contributions are not tax deductible

• All earnings are 100 percent tax free since contributions are made with after-tax dollars.

• There are income restrictions. Eligibility for a Roth IRA is phased out if your gross income is between $150,000 and $160,000 for joint filers ($95,000 and $110,000 for single filers)

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Rockville, MD: Hi Michelle!; Love the column and chats. Would you have any advice for me? My husband and I are looking to buy our first home. Our problems isn't credit or debt, but just that we don't have a lot of money.

We both paid off all our student loans and cars, have an emergency fund saved, are saving for retirement. We don't live extravagantly, and watch what we buy. Even so, we are able only to save about $500 a month for our home. I'm just frustrated because even as we save, the prices are getting higher. We make average salaries in our careers. Is there some secret to this that I'm missing? How is everyone else doing it?

Michelle Singletary: Everyone else is going into debt up to their eyeballs. And you are right it's tough to find an affordable home in Md, Va. DC as it is in other major metropolitan areas. But hang tough and keep saving as much as you can and buy the home when you are ready. Don't rush into buying a home because of rising prices. You don't want to put yourself in a situation where you get in over your head.

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washingtonpost.com: Today's Column: Ways to Make Sure You Can Pay for the Golden Years

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Washington, DC: Hi Michelle,

This is a family matter. I share an apartment with my adult daughter, she is 26. The problem that I'm experiencing, is watching my daughter make plans to move out, however, she is absolutely terrified to move out on her own. While away at college, after her freshman year, she shared an apartment with other students, and then one by herself, but I was footing the bill. Now at the age of 26, she and I both know its time she flew the nest, but she keeps making excuses. In a few months, she will require surgery and will need time to recuperate (who will be there for her…me). Another issue she has is that she hasn't finished school, and she is depressed about the fact that she hasn't. I don't know what to do. I believe it is wrong to MAKE her leave, but if I don't, she will never grow up. I actually don't enjoy her living with me, only because we don't share the same domestic habits. I'm Felix, and she is Oscar. So whenever we fight, it's mostly about that. She has a job, and is in the process for saving money in order to move out. What do you see going on here…I'm open for any suggestion or blame.

Michelle Singletary: No blame. Sounds like you are a good parent with an adult child that is getting a late start. Have you suggested she line up a roommate rather than get an apartment on her own. But one thing to consider. Talk about the mess she leaves. See if there is compromise to be had. And if there is, there is no need to push her out the door just yet (that is if she's paying what she should pay to help out with expenses.) She's still just 26 and she has a long time to live on her own. There are plenty of young adults living with their parents or a parent who are ALL GROWN UP.

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Mt. Rainier MD: Let me brag a little. I retired at 52 from a government position that I no longer enjoyed. Yes, I needed a buyout ($25,000) to do that, but I was able to when many of my co-workers could not. Here's what I didn't do: I didn't buy a big house in a posh neighborhood, I didn't buy a fancy TV, I didn't keep the cable company when I decided they were ripping me off, I didn't indulge my love for fine clothes more than a couple times a year, and I didn't spend money just because my friends were. I did pay my credit card off every month and I used direct deposit and thrift savings plans to tuck my money away before I even saw it. I was able to buy a nice little house in low-rent PG and fix it up, tithe to my church, support a refugee for a few years - and yes, retire early. I buy books, rent movies, go traveling once a year, and generally have a really nice debt-free life. And I am still putting money into my IRA account, because when I get old I still want to have a nice life. A lot of this is possible when you decide what you really want, and then have some good luck.

Michelle Singletary: Amen to that! This is what I preach about all the time folks!

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Annandale, VA: Michelle,

There is an ugly financial situation for a good friend of mine, and I'd like some advice I could forward to him. His father passed away last year, and because of this the annuity his mother receives was reduced substantially. She has substantial outstanding debt against her house, but wants to stay there. Her daughter wants to buy the mother's house for an amount equal to her mother's outstanding debt, which is over $300k less than market value, but needs the mother to pay over $1k/month because she cannot qualify for the mortgage amount. This would wipe out the mother's equity and reduce her remaining monthly annuity to under $100. QUESTION: Is there ANYTHING good about this deal for the mother, or the son who is not buying the house? He guesses his sister will have to sell in a year because they won't be able to keep up the payments. Sorry for the long question - I hope you can answer it.

Michelle Singletary: You're right COMPLICATED. But tell your friend that his mother should do what is BEST for her. If selling the home to her GROWN daughter is going to put her in a bad financial situation DON'T DO IT. But the mom may need a strong push to sell the house and move to something she can afford. Or if she had substantial equity and not a big mortgage she might want to consider a reverse mortgage. Go to www.aarp.org for more information on reverse mortgages.

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Washington, D.C.: Hi Michelle,

I know that you always tell people to have 6 months of expenses saved up. The question I have is that does it have to just be sitting in a savings, checking or money market account. It seems to me that if you have investments (stocks, bonds, mutual funds) that aren't a part of your retirement you could use those if an emergency arose. You can sell the stock and have the money electronically deposited overnight. Other than real estate, I cannot foresee an emergency that would require having $30,000 or whatever sitting in a savings account. Was I reading you incorrectly?

Michelle Singletary: Sorry wrong. Your emergency money needs to be put in something that won't put the principle at risk. I know that hurts you to your heart considering the pitiful interest rates being paid on deposit accounts, CDs and money markets. But let's say you put the $30,000 money in stocks, bonds or mutuals funds). You do know that the very nature of investing means you could lose EVERY DIME at ANYTIME. Of course if you're smart and diversified it's not likely that will happen all at once but it could. Or that pot of money could be hit by say a $10,000 drop. Always play it safe with your emergency money.

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New York, NY: Dear Michelle:
After losing half my shirt in a Strong High yield Muni Bond Fund I remain quite shy in what to do. I placed my funds into a more secure tax free municipal money market fund (2.4% federally tax free), but I'm not sure that's the right place for my maximum security and income goals. i am semi retired and in the 12.5-25% federal tax bracket. Does it make more sense for me to go with one of these taxable on-line money funds (like ING)which pay at least 3% and then put the rest in CDs for funds I can tie up for a while? What to do?

Thank you much, bob knapp

Michelle Singletary: You are asking too much of me in this forum. Besides I'm not a financial adviser. Honestly, if you're not sure what to do ask a professional. Now having said all that go with your gut. If you can't stand a lot of risk because it will keep you up at night then don't take the risk. Just remember whatever you do make sure your investment funds are somewhere where at least it keeps up with inflation.

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Rochester, N.Y.: I have always been fairly financially fortunate and responsible. I did 6 years and two degrees with no student loans at State Universities. I have a good, relatively well-paying job. But I am dissatisfied. I will be 32 next month and realized I have 40 more years of work (according to the SSA).

After my niece's recent death from cancer, I decided I really want to be a pediatric nurse. As a single homeowner fully self sufficient going back to school is daunting. It could mean taking loans of close to $45K. My financially responsible side recoils, but I really want to make a difference not just shuffle papers. How do you reconcile these things? Can you?

Michelle Singletary: I think you can. You're right life is too short and you should love what you do for a living (or at least not want to slap people when you walk in the door. So how about a compromise. Spend a few years saving up to go back to school to reduce the amount of debt you have to take on. Or search aggressively for programs that will pay for you to go to school in exchange for working in an inner city hospital or rural area for a couple of years. Or take the basic courses at a community college and then transfer to a four-year university to finish up your studies. Try to think outside of the box.

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Washington, D.C.: I am a first time home buyer and I will be applying for a mortgage within the next few days. I pulled my credit reports and requested my FICO scores from the 3 credit reporting agencies in December, so I know that I have an excellent credit score (meaning over 700). I am hoping with my excellent credit score and low debt that I will obtain a low interest rate on the mortgage. I plan to live in my home(in Northern Virginia) for at least five years, if not longer. I am thinking of applying for a 30-year fixed jumbo or something that is fixed for 5 to 7 years and then adjustable.

Question: I understand that mortgage lenders pull your credit reports before offering you a mortgage. I want to seek offers from multiple lenders to obtain the best interest rate. But I hear that too many credit inquiries lower your FICO score. How may I obtain the best mortgage offer without lowering my FICO score from mortgage lenders pulling my credit report?

Nicki

Michelle Singletary: Not to worry the credit scoring system has changed so that when you shop around for a home mortgage within a short period of time (I think it's 30 to 60 days) the multiple pulling of your credit report by the lenders does not lower your credit score.

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Chapel Hill, N.C.: My husband and I both work with 2 kids. Last year we didn't contribute to our 401K plan at work (we were trying to save more cash for the downpayment of our first house, and our employers don't offer match-up contributions). I just realized how costly that mistake is at TAX time. The elevated AGI boosted us to a much higher TAX bracket, and we barely missed the AGI cutoff point to be able to take child credit. Is there anything we can do at this time to lower our AGI for 2004 and what is your advice for 2005? Thank you!

Michelle Singletary: Contribute to your retirement fund. Seriously. You must. I know it's hard to save for a home and save for retirement but try. Also, keep in mind with rates so low you may not need as much for a downpayment on a home as you think. Go talk to a lender and get an idea of how much you need to get in the door. Gone are the days when you need 20 percent to get a home.

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Arlington, VA: I pulled my credit report from all 3 bureau's in the last week. Two of them listed either unemployed or a company I have never worked for. I disputed the one that said I had worked somewhere I had not, and got a response stating that was deleted from the report and that I am "unemployed". What does one do about this? The 3rd report I pulled had my correct employment information. My other question is I have a few store (Macy's, Hecht's, that type of thing) credit cards that I haven't used in at least 5 years. Should I keep those accounts or close them out, and how does either option affect my FICO score?

Michelle Singletary: Perhaps this will ease your mind. It comes from www.myfico.com:

FICO scores consider a wide range of information on your credit report. However, they do not consider:

-- Your race, color, religion, national origin, sex and marital status.

-- Your age.

-- Your salary, occupation, title, employer, date employed or employment history.

While lenders may consider this information the score used by most lenders (FICO) doesn't factor in your employment situation so having that wrong information on your file won't affect your credit score. Doesn't mean you shouldn't clear it up but don't worry about it when it comes to your credit score.

Now as far as closing the old accounts. See my earlier answer about that.

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Charleston, S.C.: Before marring my husband, I knew he had personal issues...but almost five years into the marriage all the financial issues are coming to light. He has over $50,000.00 in student loans(he is still in school)and rears for child support totaling $15,000.00.

I came into this marriage with about $15,000.00 in credit card debt. Am I legally responsible for his baggage? What can I do to keep and eliminate my debt?

Michelle Singletary: You are not responsible for debt your husband has in his own name. But the truth is (as I'm sure you are finding out) his debt does have an impact on your family unit. That's why I always tell folks that before you marry someone with a ton of debt really think about what that will do to your family life. The two of you should sit down and come up with a plan (as in cut every possible non essential expense) to get a handle on the debt that is both your problem.

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Laurel: Among my retirement-age relatives (my and my wife's parents, aunts and uncles) there's a pretty obvious disparity between those enjoying prosperous retirements (like taking four cruises a year) and those just squeaking by on Social Security.

The pattern too obvious to ignore is this -- the successful ones retired from the same entity by whom they were employed at age 35. The squeakers suffered mid-life career set-backs and spend the last 15-20 years of their working lives taking whatever jobs they could get.

No matter what plans anyone makes -- whether you have a happy financial retirement or not depends on whether you make top or bottom dollar in your fifties.

Michelle Singletary: I totally disagree. I think folks who have moved around from job to job but kept close watch on their expenses and saved like there would be many tomorrows in retirement can also live richly in retirement. My grandmother, Big Mama, did work 25 years for the same employer but she didn't retire making big bucks. But knowing she wouldn't have a lot of income in retirement she paid off her home before she retired. She didn't use a lot of credit. She put away money from every paycheck she ever got. She lived below her means. Look I know people making six figure salaries that had better get used to eating off brand canned tuna in retirement and will only be able to buy a toy cruise boat from the dollar store cuz they live WAY above their means.

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Washington DC: Hello: Do I need to file an extension even if I am getting a refund?

Thank you.

Michelle Singletary: I would just in case something is wrong with your return and the IRS comes back and says you owe money. It's an easy form to file so just do it for protection. Got to www.irs.gov to download the form 4868. The IRS also has a special toll-free phone line for extensions — 1-888-796-1074

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Key Largo, Fla.: This question has to do with Credit Reporting companies. The big three companies Transunion, Experian and Equifax all seem to make many errors on there credit reports. That has been my experience. I am planning to sue the next time errors show up. I am going to use small claims court. What do you think? Jeff

Michelle Singletary: Sue baby, sue!

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washingtonpost.com: Special Report: Tax Time 2005

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West Virginia: I hate, hate, hate my job. I'm looking into other possibilities, including self-employment. I've figured that to maintain my current standard of living, I could take my weekly take home pay, add what self-insurance would cost, then add 30% for taxes, etc., and could come up with a reasonable number as to what I need to gross a week. Am I being naive?

Michelle Singletary: Not if you really work the numbers and come up with a workable budget. Like I said why spend most of your life in a job that you hate, hate, hate.

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Washington, D.C.: Michelle:

I am a 26 year old single mother of one. I am currently in the process of cleaning up my past bad credit issues. I would like to buy a house. My problem is I am having a hard time paying off past and present debt and saving money for the down payment. I have cut out as many unnecessary expenses as possible. I even sold my car, because the payment and insurance were to much. Do you have any suggestions for me?

Michelle Singletary: Is it possible for you to get a roommate? Whenever I suggest this to single moms (or couples) they look at me as if I told them to kill a cat. But if you can't increase your income or don't want to take on a second job because it will take you away from your kid AND you have cut all that you can cut something else has got to give. Since most people's biggest expense is housing consider getting a roommate to trim that major expense.

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Fairfax, Va.: My son in currently on my auto policy and I need advice on how I should switch him to his own policy. He has several speeding violations and I need to know which companies would be suitable.

Michelle Singletary: Call around and get quotes. And if your son is an adult (which I'm assuming he is) then why are you even sweating this? He's the one being irresponsible by speeding. Don't take time to switch him. Dump him and let him figure out what to do. This shouldn't be your issue.

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Washington, DC: Hi Michelle,

I have a question about saving for retirement, but I'm young! I'm 27 and my fiance is 29. Together we have about 90K saved, about 1/2 in cash, 1/2 in 401K. Is it insane that we are worried about our own retirement? We also think about the likelihood that we will have to support at least one set of parents in their old age, plus eventually we want to have children. What should we do to feel confident about our future? Thanks so much for your sane advice....

Michelle Singletary: You are not insane. The best thing you have going for you is time. And have you seen the news reports about Social Security? Who knows what will happen to that social insurance benefit. So yes, save as much as you can for retirement. You're also smart to consider the fact that you may end up caring for children and elderly parents at the same time. That's called being in the sandwich generation (as in your the meat and one slice of bread is your kids and the other is your parents.) Think of yourself as a HERO sandwich and you will need a lot of dough to handle it all.

If you want to feel comfortable about how much you will need in retirement go to www.choosetosave.org and use the retirement savings calculator to see how you will need.

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McLean, Va.: Hi Michelle,

Three years ago, our apartment was robbed while we were stationed overseas. My laptop was stolen. Medical files for both of my young children -including their social security numbers - were stored on my harddrive. With the rise in identity theft, I'm worried that their information could have been compromised. Can I run any kind of a credit report on a child who obviously has no credit? Is there anyway to find out of their social security number is being used illegally? I'm so worried about this. Thank you so much.

Michelle Singletary: Why don't you call the three credit bureaus and check to see if in fact your kids have a credit file. It might take you awhile to get to a real person but keep trying.

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Washington, DC: Michelle, thanks for taking our questions.

I have a tax-related question for you. I'm getting married in a month and want to know what preparations in tax withholding we need to make and suggestions on how to file next year. We have a mortgage deduction and our combined income is around $200,000, with each of us earning about half of it.

Should I reduce the number of exemptions I currently claim? Should we file jointly or separately? And are there any other considerations?

Thanks!;

Michelle Singletary: To answer your question work through the W-4 form. Go to www.irs.gov and search for "withholding calculator." Using your tax returns from 2003 you should be able to figure out for next year how many allowances to take or not take.

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Herndon, VA: Submitting early because of a meeting...

My husband and I make 250K combined a year and save just upwards of 50k a year for retirement. When I use retirement calculators they suggest that we save enough to maintain 100 percent of our income to have the lifestyle that we hope for in retirement. But, I'm confused, is it 100 percent of 250K or 100 percent of 200K (250-50)? Since we save the 50K each year now, I don't "experience" that money so it isn't really part of our "lifestyle". What do you think?

Michelle Singletary: I think you are doing just fine. Whether it's 100 percent of $250 or 100 percent of $200 if you're saving $50,000 a year even if your money was under your mattress you are doing 100 percent better than most folks. But to answer your question generally the figure means gross (just to make it easier on folks)

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Alexandria, Va.: Financially there are so many things I should do with my money. Realistically, there is not that much money to go around. It's difficult to know how to prioritize. What's most important: Paying off debt, saving for retirement, saving for an emergency fund, or buying a home? Thanks.

Michelle Singletary: What's most important. Paying off debt. Saving for retirement. Saving for an emergency fund. Buying a home.

Honestly I'm not trying to be smart. Here's how it works. If you pay off consumer debt you have more money to put in your retirement fund. If you save for emergencies you won't be tempted to rob your retirement fund to pay for emergencies. If you buy a home you will likely increase your financial well being since most of the wealth in America is created by being a home owner. It all works together. So if you are in debt pay as much as you can but not too much that you don't put something in your retirement account. AND put something/anything way for a rainy day fund because it always rains. AND do the best you can to save so you can buy a home, which will increase the chances that you will live a comfortable retirement.

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Falls Church, VA: Hello from NoVa,

We are in a dilemma and I hope both of you can help us out. My husband and I are 28 and planning on having a family very soon (1-2 years). In addition, we have benefited from the housing boom in the NoVa area and we have approx. $250K in equity in our home plus $40K in retirement savings. Currently, we are planning to move out of the state to a lower cost community and planning on buying a home between $150-$200K in our new community. The community where we are moving too has an almost stagnant growth rate in housing. Should we buy the home outright since we may be moving from a two-income household to a one-income household or should we put the only 20% down and save the rest for retirement/our kid's college education/safety net?

Michelle Singletary: If you can handle the monthly housing payments on one salary I wouldn't pile all your equity into the new house. As you point out you will need it for retirement, kid's college fund and a safety net. If you plow all the money into the house you have to do what to get it out?

Sell or borrow.

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Michelle Singletary: Well folks I have got to run. Great questions. I'm sorry if I didn't get to yours but I'll try to answer what's left over in my column on in my weekly newsletter (which I do hope you all subscribe to. If not go to my page on the Post web site and subscribe.)

Thanks again for joining me today and see you back in two weeks April 28. My guest will be Ellen Hoffman, author of "The Retirement Catch-up Guide," which is the April pick for the Color of Money Book Club.

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