This month's Color of Money Book Club selection is "Quick & Easy Budget Kit" by Jennifer Openshaw, chief executive of the Family Financial Network.
According to Post personal finance columnist Michelle Singletary's column, "No-Fuss Budgets," Openshaw believes planning a personal budget should be easy -- as long as you're willing to plan your spending in advance.
Singletary and Openshaw were online Wednesday, Jan. 19, at 1 p.m. ET. A transcript of the discussion is below:
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.
Michelle Singletary: Good afternoon everyone. Well are you ready to talk about budgets? I hope so because it's such an important part of your financial life (or should be). There are a lots of questions waiting so let's get started.
I had a $36K home equity LOC that I transferred to a no interest credit card for one year that is about to expire. By doing this, I saved about $1,200 in interest (I pay $1K a month and will continue until my loan is paid off), however, my one year is about to expire and I am faced with the following options:
1. I can transfer the $24K balance to another cc that is offering no interest for one year which would save me an additional $750 (yes I can get approved).
2. Pay off the $24K loan now, but reduce my emergency cash to about $20K (4 months of spending).
3. Transfer the balance back to my original home equity loc at about 4.25% and pay off over the next 24 months.
Obviously I prefer option number 1 (which I would repeat again after the end of year 2), however, I am concerned how this might impact my credit rating. Making the payments and getting approved by the cc is not a problem.
Michelle Singletary: I have just one question for you. Why are you playing this debt game if you have the money to pay off the loan? Then you can pocket all that interest. Sure you will reduce your emergency cash but having 4 months worth is very, very good. I say chose option No. 2
How do you balance your child's interests with the family budget? We pay for private school, tutoring, music, sports, etc. We are saving for retirement and college. We donate to our favorite charities. We are pretty frugal in other aspects of our life like no cable, eating at home, driving old paid for cars, free or cheap entertainment, minimal clothes buying, no revolving credit card debt, 3 day holiday vs. week vacation, etc. I ask because the annual cost of kid activities can add up before you know it.
Jennifer Openshaw: Great question! Does your retirement or your kid's college come first? Well, I do think that you cannot ignore your own retirement because the fact is we live longer and health care costs are skyrocketing. One piece of advice is to teach your child the value of money. I would suggest that you might, for instance, match the amount of money they save. I'd also like to see you involve your child in household money decisions - so they can learn the trade-offs. You might also suggest grandma/grandpa give back to your kid's while they're alive by contributing to a college fund for them - the grandparents will reduce their taxable estate, too. So those are some ideas to bring more balance!
Michele, I been a long time fan of yours. I agree (and practice) many of the things that you suggest in regards to handling money.
My question: I would like to update my kitchen for around $20K. I have about $100,000 in equity in my house. I also have more than enough in savings to cover the expense. However, if I use my money in savings that would leave just enough to cover 3 months of unemployment or other emergency. We have excellent credit. Should we go ahead and take out a home equity loan to cover the expense of remodeling.
Jennifer Openshaw: Boy, we're seeing lots of ads about home equity loans, aren't we? And, yes, Michele has lots of fans! Good news - your kitchen is one of the best remodeling moves you can make to increase the value of your home. I would take a look at the home equity because the interest is usually tax deductible, making the cost very low. And, with great credit, you should get a great rate (around 4%). This will allow you to have more than 3 months of expenses, at a time when really six is recommended. Just be careful of the possible increase in the interest rates of a home equity loan.
Michelle Singletary: By the way, I totally agree with Jennifer on the last question on using your home's equity for a home improvement. Go for it. In this case I think it's a good use of your equity. And send me some home baked cookies when you're done (I like chocolate chip) :)
I've always handled our finances in the past and am pretty comfortable doing our taxes and tracking finances and retirement accounts with Quicken. However, this year, my husband and I are going through major financial changes and I'd like to talk to someone about how to best handle our situation. How do I go about finding a good financial planner?
Jennifer Openshaw: There are good, bad and horrible planners. Your planner is like your dentist or doctor, right? You need to trust them. You want one, I believe, who is objective and is not recommending products based on commissions. You should therefore ask: a) how they are paid b) if they have any areas of expertise c) what their 'minimums' are (for instance, many advisors want you to have $1 million before they'll talk to you). You can go to www.napfa.org to find a planner. We at FamilyFN also offer objective advice at a fraction of the price without minimums.
Michelle Singletary: I've written a number of columns on how to find a financial planner. Go to my archives page on the Post site to find one of the columns.
College Park, Maryland:
Where can I get the Quick & Easy Budget Kit by Jennifer Openshaw?
Check out Familyfn.com.
Jennifer Openshaw: Hi Rachel! So, you're ready to get off to a great start in 2005? Go to www.freebudgetkit.com. If you have any questions, call us toll-free at 877-273-2244 to assist with your order. But you should be fine.
Oh, we've also added the electronic version of the workbook to the CD - so that's an added bonus.
One of the techniques that some experts promote as beneficial in a person's quest to change a bad habit (say, repeatedly ignoring a budget and spending more than comes in) is to develop a reward system for when smaller goals are met. But, for the life of me, I can't come up with a list of rewards that don't involve spending more money. Do you, or your readers, have any suggestions for ways to pat oneself on the back when financial goals are met? Thank you!;
Jennifer Openshaw: Such a great question. It seems it's all about spending, doesn't it? How to reward yourself without spending? How about a little time out for you? How about a drive for the day to a beautiful place to reflect on what we should be thankful for? How about a coaching session with someone to help hone some skills, speaking perhaps? How about creating your own at-home spa experience? Or a day with a friend who you haven't seen for a while. Those are just a few.
I am a 50 years old female with an income of 40,000 annually. I have a 2nd home currently being renovated. I am thinking about selling this home which is valued at 350,000. How will the sale of this property affect me come time to report the money I make from the sale on my income taxes?
Jennifer Openshaw: Ahh, yes, Uncle Sam does come knocking when it's time to sell. Congrats on your success! Now if the home was your primary residence for 2 of the past 5 years, you can avoid taxes on profits up to $250,000 if you're single ($500k if married). If it's an investment property, you will get hit with capital gains taxes. Buutttt... you can avoid them if you take that profit and then reinvest it in another investment property. That's called a 1031 exchange (lovely tax laws). Check with your accountant as it could be well worth the savings and further boost your net worth!
My husband and I are 54 years old. How do we go about getting a financial adviser or is interested folks our age. It seems as thought advisers are interested in one thing--buying and selling so they make money themselves. We also need help with estate planning.
Jennifer Openshaw: Ahhh... you are right. As I mentioned earlier, advisors are often interested in selling products that might not be right for you. See earlier that you can go to www.napfa.org or visit us as we offer objective advice. An advisor should be able to assist you in the estate planning area and/or give you a good referral.
My husband and I are expecting our first child in July. We don't carry any credit card debt and are pretty frugal but we have never budgeted, which makes me a bit nervous. In light of the fact that our expenses will go up with the new addition to our family and I will go from full-time to part-time work, thereby reducing our income, do you have any advice on how to help us prepare for these financial changes?
Jennifer Openshaw: Hello Mother to Be! Congrats on thinking now about those added costs. I would recommend you use the Budget Kit to list those new additional expenses and see if it takes you over your income. You'll have food, clothes, perhaps even insurance. Don't forget about the life insurance (term should probably do and cost you less). Remember that, often times, when we see a reason to spend, we think there's no other way out but to spend. But there are ways to reduce these costs: clothes and baby items from a relative. I would suggest you look at the new added monthly costs related to your baby and make that a new line item in your budget. Remember to focus on the necessities... and avoid getting caught up on all the extra things that will just rob your wallet. Let grandma buy those!
How much cash savings should a person have on hand at any one time, and what's a good amount to contribute monthly to savings -- i.e. how much should I budget for pure non-retirement savings?
Jennifer Openshaw: Thinking of saving? Good for you! Many people - as Michele will tell you - suggest 3-6 months of living expenses. But, remember that in today's economy, it can take longer to find a job. That's really the question to ask yourself. The rule of thumb on saving has been 10% of your income. But, the earlier bird gets the worm... the more you save now, the more ahead you'll be later. You'll be more ahead than the person who starts later, by thousands! So, I always feel better when people save as much as they can and leave a little for their own pleasure. Saving can also be in the form of real estate investing, where you can build your wealth and maybe even enjoy it as a vacation home!
Michelle Singletary: I agree with Jennifer the rule of thumb is 3 to 6 months of living expenses but that comes with a big BUT. Think about your field. How long does it take for people in your field to find work? For example, I've heard from folks in the tech field that it can take 6 months to as much as a year to find a job. So you want to have enough saved to pay ALL your expense while you look for a job.
Hi Ladies. I'm relatively debt free - about $3k in credit card debt I'm working to pay off. My question though, is how can your Budget Kit help me foresee, plan, and increase my savings? I've tried MS Money and was left wanting.
Jennifer Openshaw: Hi Reston, VA! Good for you on your generally debt-free life (although we will teach you how to use good debt to build wealth...). The Budget Kit will help you identify ways to creatively cut back on expenses and therefore "Free-up" money which you can use to pay off debt or put into savings. In the workbook, you'll see a nice simple chart that will help you quickly determine how much you need to save monthly to meet your savings goals, whatever they are.
Michelle Singletary: And doing a budget will help you really see where your money is going. Often people say they are cutting back as much as they can but when they actually do a budget they see that they don't really have a handle on what's coming in and what's going out.
I have a beginner question. I'm in my early 30s and just began my first 'real' job last year earning about $60,000 a year. I feel overwhelmed with getting my finances in order. I need to pay off about $9,000 in credit card debt and $24,000 in student loans, in addition to housing and car payments. I'm also interested in looking for a house in next year. Can you recommend a financial planner or a good beginner's finance book on how take control of my finances?
Michelle Singletary: Whew, you got a lot going on -- mostly a lot of debt you should be concentrating on. Really, I would put off the house thing until you pay down that credit card debt. Trust me, if you don't that debt will balloon with a house. Did I mention I have a book out "Spend Well, Live Rich?"
But check out my book club page on the Post Web site. Every month I recommend various financial books people should read. One of my most recent picks was "Pay it Down," which will help put you on the track to save more so you can pay down that debt.
I have a 6.5% first mortgage loan and a 15% second mortgage loan (don't ask how I go into this mess) my credit score is pretty low and It has been difficult to get refinancing to combine the two. One
lender will but at around 9%. Would you take that for a while? It's more for one and
less for the other.
Jennifer Openshaw: We need to get your credit cleaned-up because you can then bring that down lower. Are you paying your bills on time? If you have too much debt, that will do it, too. And, too many credit cards with high balances will kill you. In order to answer your specific question, I would ask the lender to tell you the a) new monthly payment b) the total interest to be paid over the life of the loan. I would then compare this to your two current mortgages (monthly and total interest costs, which the lender should be able to help you with). Don't forget that both mortgages are tax deductible, so it's still better than a credit card!
I have what may seem like a cynical question: what do you do when your "3-6 months" worth of emergency funds is gone because of emergency/layoff/etc.? I'm sure it's great to have it, but once it's gone you're still in a sinking ship.
Jennifer Openshaw: I agree. And the problem is when a ship is sinking, most people don't do what it takes to prevent it from sinking. I recommend drastic steps in those cases so you can avoid just flushing your hard-earned savings down the toilet. I'd move in with a relative (which I did putting myself through college, by the way...), I'd bring in a renter, I'd open myself to moving to new locations where there are more jobs. These are not easy choices but they'll put you in a better financial footing later.
I have about $7,000 remaining from my end-of-the-year bonus. I'm trying to save for a down payment on a house--hoping to have enough in 2 years or so. Any suggestions on how to invest it? Intermediate bonds maybe?
Jennifer Openshaw: Nice bonus. Terrific. If you want to have that money in two years or so, then you should consider a short-term bond fund (intermediate is usually 5-7 years) or maybe a CD (just watch the penalty for early withdrawal).
Please clarify: when you say that you should save 10% of your income, does that include retirement, education, and regular/emergency savings, or just regular savings?
Jennifer Openshaw: Oh, I'm sorry! 10% means 10% of your gross earnings. So, for every $1,000 in income per month, $100 should go straight to savings. Does that help?
How do I stick to my budget when it seems that there are so many variables each month, and we are on a single income with my staying home with the kids right now?
Jennifer Openshaw: If you want to do it the old fashioned way, you can even create envelopes with cash! That'll keep you from going over your spending limits and creating debt. Alternatively, you can track your spending monthly. Use one credit card for purchases to make it much easier. You can then either download this info from your bank and credit card company's website and/or use the tracking worksheet in the Budget Kit workbook (on the CD).
Falls Church, VA:
Will the free software include the workbooks and all I need to generate a complete budget? I'm anxious to get started now!;
Jennifer Openshaw: Yes, the new version (as of today, actually!) will include an electronic copy of the workbook. Very easy to follow. You can print it out if you want. And you can use the workbook or the software together or totally on their own. I hope it helps.
I currently pay about $200 extra on my mortgage each month -- to pay down the principal a little early and save on interest over the long-term. But to do that, I sacrifice contributing pre-tax dollars to my 401(k) -- I currently fall several thousand dollars a year short of the annual $13K cap.
So my question is -- what makes more sense? Should I be putting the extra $200/month toward the mortgage principal, or should I be putting that away in the 401(k)? Thanks.
Jennifer Openshaw: I love this question because we've been hearing a lot of people suggest you pay down your mortgage. Here's the bottom line (at least in my book). It only makes sense if a) you plan to die in that house and not move before then b) the comfort of having your home paid off is worth more some additional investment returns. Here's why: your money will actually (for the most part) generate a higher return than what you get by paying off your mortgage. It's a little difficult to explain here. But the pre-tax nature of the 401k (i.e., for every dollar outside your 401k you save in an account, you only need about 70% in your 401k) makes it the way to go based on what I know.
Michelle Singletary: So many people ask this same questions. Just to add to what Jennifer just consider this when and if you need all that money you are putting into your home you will have to BORROW it to pull it out. But having said that I think if you're near retirement not having a mortgage will greatly help.
Fairfax Station, Va:
This question has to do with matching income and expenses for a monthly budget. In setting up a budget for a month is there a preferable way to account for expenses that are due in one month that has to be paid with income that is received in another month due to timing? Or, do due dates matter and you simply set up your budget to pay for whatever expenses you allocate to a paycheck?
Jennifer Openshaw: This is really a cash flow question, isn't it? In running a business, there are some issues like this but the difference is that sometimes the business gets financing to help it through these cash-flow crunches. Not so for us individuals, huh? We cannot ignore due dates, so I think it's best to work within the income you are receiving in a month and the expenses due that month.
I have been working with a girlfriend trying to get my budget in order for a couple of years. I know what I am not doing -- I just need to stop and stick to the budget.
I cannot afford the kit that you talked about last Thursday and was so bogged down at work that I forgot to go online for the info. I want to get a budget in place from my family of 4 and stick to it, we have no savings, and no college fund I need to know how to get started and if this is a cold turkey thing, HELP!!!
Jennifer Openshaw: The kit is free, just a 4.95 shipping and handling fee to cover our mailing costs. Remember that you can create multiple budgets using the same CD.... so your kids or friends could use it.
I think Woodbridge was asking if 10% savings is -enough-, considering retirement, education, etc., all the potential demands on that savings.
Personally, I got to the point where I was saving 12% for retirement and another 10% for "regular" savings, plus a dedicated amount that was intended to eventually be spent - $300 a month to myself in lieu of car payments, so I could buy my cars for cash when I got to my goal. My living standard was more modest than it might otherwise have been, but I got to retire at age 54 (yay!;) with no debt except the mortgage, and a substantial amount in my retirement account. And I'm halfway to my next new car.
Michelle Singletary: Great plan. And really good points. By the time you do save for everything (retirement, school) there doesn't seem to be much left. Except don't think that way. Instead embrace saving as a way to get what you really want like this reader (an early retirement, a kid who won't graduate with a ton of student loan debt, peace of mind etc.
Hi...got a question...how do you make a budget, when you're self employed and you don't get the PAYCHECK, so your income is always different? All the budgets I've ever seen say, how much to you bring home a month? Well, we never know and it can fluctuate a lot!; Some months we're fine, and others we low and of course, when we do have good months, we're always catching up from the slow months. Any guidance would be greatly appreciated!;...Thanks
Jennifer Openshaw: Oh, income that goes up and down like a mountain range! My view is that you either a) need to operate as if it's always in the valley (the low range of income) or b) you need to make some realistic estimation of what your annual income is and work off of that. The problem, though, is that you will probably end up taking on credit card debt to carry you through the low points. I always prefer to prepare for the lower income and focus on necessities and if more comes in, then it's gravy and can go towards savings and perhaps some reward to you.
I think the question was wether or not the amount put into retirement, etc counts toward the 10% savings. I.e. if I put in 5% of my salary to retirement, do I then only need to put 5% into a general savings account? Or do I do 10% of gross on top of the retirement? Thanks!;
Jennifer Openshaw: Yes, if you put 5% into retirement, then another 5% to a different account would total 10%. But let me share the power of doing more... the power of earlier.
Say you want to get to $1 million by the age of 65. And let's say, for our purposes here, that you were going to put the required savings away in one lump sum (all in one day). A 30 year old would need to put away $67,000 whereas a 50 year old would need to put away over $300,000! See the difference?!
Michelle/Jennifer, I have a question regarding car lease payments. Do you know if you can prepay the total amount of payments? Would you still have to pay interest on the payments, or only the principal amount? We have about 1.5 years left on the lease, but they are charging us 20% interest (it was a 48-month lease originally).
Jennifer Openshaw: I think it would be unlikely or there will be a penalty. The reason is that the lease company makes their money this way and they make certain assumptions knowing you're on a 48-month lease. I would still ask, though. Different companies have different parameters.
Michelle Singletary: And this folks is why I'm so totally, utterly AGAINST leasing. Let this be a lesson. Don't lease. Don't even think about it. If money is an issue, buy a USED car. You can get a great used car these days (because of all the folks leasing). Please I beg of you -- don't lease. And I'm willing to bet this couple will not be able to get out of that lease without paying the full amount. But as Jennifer said it never hurts to ask.
I am a 41 year old single female who recently purchased my first home. I currently earn a six-figure salary, but have always been a little fearful of doing a budget of any sort. I've tried over the years to make sound financial decisions, but have always had a weakness for shoes, clothes and books. I invest in my company's 401(K)plan, have a Roth IRA, mutual fund and am a member of an investment club. But now that I have this mortgage payment, I feel a much greater need to prepare a budget or spending plan of some sort to get a better idea of where my money is going. What is the best way to start?
Jennifer Openshaw: WOW! Go girl! The quickest and easiest - if you want to do it manually - would be first to list all of your expenses each month. Include the amounts going into savings. Then subtract that from your income and see what's left over. That -- or a portion of that -- you could put toward those fun things. Oh, remember that some companies will offer you an additional savings -- sometimes of 0.5% off - your mortgage rate if you set up automatic payments from your checking. Little less worry, just make sure the dough is there to cover it each month.
Michelle Singletary: Well my people, Jennifer and I have to go. So sorry if we didn't get to your question. But Jennifer has agreed to answer some more that I'll put in a future column. Thanks to all who joined me today and remember a budget isn't a bad thing. It's a way to free yourself financially. So go BUDGET! See you in two weeks. And don't forget (if you haven't already) to sign up for my weekly electronic newsletter.