| The Color of Money Book Club: Don't Spend Your Raise And 59 Other Money Rules|
Post Business Columnist
Wednesday, June 11, 2003; Noon ET
What's summer without some light reading, right?
I bet you never thought light and fun reading would go with a personal finance book? But it can. For the summer months I've selected three easy to read, pint-size financial books starting with "Don't Spend Your Raise And 59 Other Money Rules You Can't Afford to Break" by Dara Duguay.
June's selection for the Color of Money Book Club is full of common sense financial advice you probably heard from your mama. But did you follow her advice? If not, join me on line to find out some of the many money rules that will help prevent you from making money mistakes.
Join personal finance columnist Michelle Singletary and her guest author, Dara Duguay, on Wednesday, June 11 at Noon ET.
Submit your questions or comments before or during the discussion.
Duguay is the executive director of the non-profit Jump$tart Coalition for Personal Financial Literacy based in Washington, D.C. She is also the author of "Please Send Money: A Financial Survival Guide for Young Adults on Their Own." She is the past director of Education at the Consumer Credit Counseling Service (CCCS), and was a professor at the University of Phoenix (1996-1997) and California State University (1993-1997).
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: Welcome. I'm so excited about the Color of Money book club selections for the summer. As you may know I've selected three light financial books for you all to read. They are real easy and I think you will have fun reading them. While you are soaking up sun get a little financial education in as well. So, let's get started.
Washington, D.C.: I get paid tonight at midnight. What is the first thing I should do with that check?
Dara Duguay: Pay yourself first. Most people pay themselves last and often times, after they've paid all their bills, they have nothing left for themselves. It is very important to save some of your paycheck. Even if it is just a small amount. Trust me- it will add up in time.
Virginia: My dad told me, "Buy a fancy car and then get a small apartment" or "Buy a cheap car and then get a big house".
Dara Duguay: Your dad is wise. There is only so much money to go around. Budgeting is just a matter of making choices. Usually if you choose to buy something expensive, you will have to compromise in other areas by getting something less pricey.
Pittsburgh, Pa.: I am a college student that has a 40 hr/week job this summer. I have a few grand in the bank and was wondering how much more should I make before I make investments - such as stock and mutual funds etc? I am studying abroad in Europe next semester and will need access to some of that money. Thanks.
Dara Duguay: If you need access to that money while you are in Europe, you should probably choose a savings instrument such as a short term certificate of deposit (CD). This way you can earn more interest than a regular savings account but still have access to your money.
Hollywood, Md.: I filed bankrupty in 1998 and got credit card offers afterwards that I am now late on. The credit card company is filing suit in the local court. What can I do?
Dara Duguay: A high percentage of people who file bankruptcy end up filing another in several years. It is very important to understand what got you into trouble in the first place. Obviously it appears you have followed the same pattern to have found yourself in the same situation just a few years later.
You should not waste any time in contacting a local non-profit credit counseling agency (such as Consumer Credit Counseling Service) and set up an appointment. You need to seek professional advice at this point.
Michelle Singletary: I was curious about the rule in which you state "Get Married and Stay Married." With divorce so high and so many abusive relationships (not to mention the relationships where there are cheating dogs -- men and women) is it realistic to tell people to stay married because it's cheaper?
Dara Duguay: I am definitely not advocating staying in an abusive relationship but studies have shown that marriages that are long term equal more financial wealth than those that marry multiple times. Everytime a divorce occurs, there is almost always financial strain that arises as a consequence.
Seattle, Wash.: As a rule, how much (in terms of percentage of income) should a family spend on a vacation?
Dara Duguay: The percentage of discretionary spending on items such as a vacation depends on your overall budget. If you have many other expense commitments, you should probably keep your vacation expenses to a minimum. As a general rule, you should try to save in advance for any expense purchase and if you do use your credit cards to pay for your trip, try not to take more than 3 months at a maximum to pay off your trip. This will hopefully give you some guidelines.
Washington, D.C.: If I didn't spend my raise, I'd still be trying to live on $20,000 per year and not $50,000...
Dara Duguay: Obviously as you make more money, you can afford to expand your lifestyle. But if you spend every dime of your raise, without saving any percentage, you will never allow your savings to grow. The point is that you are not used to getting the extra money from your raise so try to use this money to pay off debts or save instead of finding more ways to spend it.
Michelle Singletary: The first rule you begin with is "Don't Treat Money as a Taboo Subject." Do you think in this day and time when there is so much economic news that people still don't talk about money?
Dara Duguay: People definitely still treat money as a taboo subject. Parents don't discuss it freely for a variety of reasons- it is considered impolite, they don't want to worry their kids with their financial burdens and many parents don't understand finances themselves.
But if they don't talk about money with their kids, they are doing their children a disservice. They will leave the nest totally unprepared to face the complex financial world that they are entering.
Silver Spring, Md.: Everyone says you should buy a home for the tax breaks and you can pay what you pay in rent for a mortgage.
I think differently. Owning a home is very costly, dealing with contractors for everything that goes wrong and the up keep. What are your thoughts on the matter for a single person not anxious to deal with those headaches?
Michelle Singletary: I think you are a very smart single person. I own a home and trust me anything we get in the way of a tax break is eaten up right away with housing upkeep.
Dara Duguay: I agree with Michelle that a house is costly. I just had to meet with a repairman yesterday for mine. But you may want to consider a condo instead of a house. There are usually less things that you will be responsible for in terms of upkeep.
Washington, D.C.: Hi Michelle and Dara! I haven't read Dara's book, but my experience is that the advice in the title works. When I got a raise last summer, I increased my monthly saving proportionally, which resulted in enough savings for a (small) down payment on a place of my own. Now I'm trying to prioritize my saving for other things I want (car, house, increased retirement savings). Any advice on how to balance out short term pleasures with long term needs?
Dara Duguay: Good for you! It is always difficult to delay gratification. One thing that I think works is the concept that, "if you don't carry around a lot of money with you, you can't spend it." The concept works the same with your credit cards. I know some people who go as far as leaving their credit card frozen in their ice cube tray. It is frozen assets, in a way, but difficult to take along to the mall with you.
Silver Spring, Md.: Cash reserve question: I've heard advice to have on hand 3-6 months worth of cash, in case of a lay off, emergency, whatever. Is that 3-6 months of salary, take home pay, or 3-6 months worth of typical expenses?
Dara Duguay: Yes- 3-6 months is a good amount to have in a cash reserve. Keep in mind that it normally takes about a month to find a job for every $10,000 you want to make. So if you are looking for a job paying you $50,000 a year, it could take you up to 5 months to find a job. If your industry is not a stable one, you should probably build up your reserve.
Michelle Singletary: In the book, you advise people not to get a car loan for more than 3 years. Is that really realistic when people are taking out 7 year car loans these days (personally, I agree with you, but you know this is a chat and I gotta ask some questions :))?
Dara Duguay: My advice is that if you need to stretch a car loan out for longer than 3 years just so you can afford the monthly payment, you definitely can't afford the car. Get a car within your budget.
Michelle Singletary: What inspired you to write your book?
Dara Duguay: I was inspired to write my book because so many people I meet don't understand even the very basics about money management. For them, many of the complex books on investing are intimidating. I thought that the "rules" approach was an effective one since rules govern our behavior. If you can learn to live by smart money rules, you can make wiser financial decisions.
Virginia: I finished high school this year and plan to start college this fall. Problem: my parents are not helpful or supportive in any way (they are taking the position that it is best if I work my way through school on my own).
So, I have already talked with financial aid. I qualify for a loan package, but will have to work too. I figure I can work 50-60 hours a week and keep the total debt low, but it will take about 7 years to graduate.
Or I could work about 25 hours a week and graduate in 4-5 years, but my debt will be about $40,000.
I worked during high school and have saved some money that will pay almost all the up-front costs (books, the computer, software, some clothes).
Any advice? Insight?
Michelle Singletary: I like to say I love your attitude. You didn't say if your parents could afford to help you out but won't, but at least it seems you are taking the position that I have to do it on my own (with little resentment--at least in your question). Good for you! Now for your question what do you think Dara?
Dara Duguay: I had to pay my own way through college also. I am very averse to debt but I think that in the case of student loan debt or mortgage debt- these are the exceptions. Student loans have very low interest rates so even if $40,000 seems like a lot of money, you will be paying it off over a long period at a low interest rate. I'm for getting your degree faster, people that drag out their education sometimes decide to quit.
Bethesda, Md.: It's hard enough to be a single (never married, not gay) adult these days without hearing "get married". Why is being single a bad thing that needs to be corrected? Why are you perpetuating the negative stereotypes against being single? By the way, I own a house, have a 401K, pay my credit cards off each month. Seems like the married folks are the ones who have to have all the "toys" and get themselves in trouble.
Michelle Singletary: Now where did Dara or I say you HAD to get married. It's a personal choice. If you are doing fine by yourself -- good for you -- stay single. There are some days I wish I were still single (I don't think I've gone to the bathroom by myself for the last eight years). I think what Dara was saying is if you are going to get married stay married because it costs a heck of a lot of money to break up.
Dara Duguay: Yes- I totally agree with Michelle.
Michelle Singletary: So, in a follow up to get married and stay married what advice would you give couples to make sure they are financially compatible so that they can stay married? Because as many studies show one of the number one reasons people get divorce is over financial issues.
Dara Duguay: It is very important to communicate about money frequently, not just when their is a financial crisis. It is probably also a good idea to check your future spouse's credit report before you get married. Now you can't legally check their report yourself without their consent, but what I mean is that you should know their debt situation, also their thoughts on saving/investing and their spending tendencies (are they more of a saver than a spender)?
Washington, D.C.: Can my 3-6 month cash reserve include an untapped home equity line of credit?
Dara Duguay: It could but keep in mind that any home equity loan is a SECURED loan. Therefore it is linked to your house. If you default on this loan, you could end up in foreclosure. I would suggest to try and build up additional savings and not just rely on the equity in your home.
Maryland: If you have debt (credit cards, car loan etc.) should you pay off the debt first before saving or investing?
Dara Duguay: I always say it is smarter to earn interest than to pay interest. If you are paying 18% interest on your credit cards, you are losing a lot of money. Work on lowering your debt as a first priority. But also put some money away in savings at the same time, even if it is just a small amount. You should always try to have an emergency savings account for those life events that can and do come up.
Washington, D.C.: I am a college student. Everywhere I turn I have the opportunity to fill out a credit card application and receive a free t-shirt or other offer. What effect would it have on my credit report to fill out the application, and then cancel the card when I receive it?
Dara Duguay: It is a misconception that you must have lots of credit cards to build a credit history, you only need a few. I say no more than two. Resist the temptation to fill out many applications. This can show up very negatively on your credit report. Your debt to income ratio will be very high and this may affect your ability to get a car loan or mortgage loan in the future.
Washington, D.C.: I am desperately trying to reduce my credit card debt, but it's difficult to do. What is the first step I should take? Thanks!
Dara Duguay: The first step is to cut up your credit cards (except for 1 or 2) and then close your accounts. Without closing your accounts, you may be tempted to charge over the phone or on-line where you don't need the actual card. Then do everything in your power to pay more than the minimum per month. Even paying an additional $20 can take years off the lifetime of paying off your debt.
For Virginia: I'm an instructor at a college, and have a few comments. First, many students who go part time either never finish, or take so long that they don't get much value out of the classes. Second, students working more than 15 hours or so and attending full-time often can't put the effort into the classes that they require. These students frequently fail and have to retake classes. Money IS important, but if you're going to go to college, please don't sabotage your own education by not putting in the time and effort it requires. If you're going to pay for schooling, make sure you get your money's worth.
Dara Duguay: Good comments.
Des Moines, Iowa: I couldn't agree more with you about saving. However, I've been cut back in my job and it's all I can do now to get by and not go into my savings. I am, however, continuing to contribute 3% to my 401(k). Is that enough from your perspective?
Dara Duguay: I understand how difficult it is to save if your hours have been cut back. You should be concentrating on how you can make up this reduction. Are there expenses that you can cut back on to equal the reduction in income? Or are there ways that you can add to your income? For example can you replace this lost income- do you have any hobbies that you can convert to cash? Typing skills, tutoring, childcare?
Arlington, Va.: We want to buy our first house or condo in 2004. Our credit ratings are good, but we have revolving debt. Is it better for us to focus on paying off the debt to improve our score, or saving for a down payment? With the low down payment mortgages, it seems like amassing savings is less important.
Dara Duguay: It would be a good idea to order a copy of your credit report. You can do this from either Equifax, Trans Union or Experian. They should all have roughly the same information reported to them. Check and see what your credit score is? If it is high, then I would concentrate on trying to build up your down payment.
P.G. County, Md.: I have two kids ages 3 and 1. God willing, my spouse and I will have another child next year. I DO love children, but I'm also assuming that the more kids we have, the more we'll save on taxes. ....RIGHT?
How DOES that work?
Michelle Singletary: Save on taxes? I hope that's not the only financial consideration you are taking into account when it comes to having a third child. There is a saying that it's cheaper by the dozen but don't believe it when it comes to kids. Each and every one you have costs you more money. Any savings you will get on your taxes will be more than offset (and set you back) by the time you buy diapers, clothes, food and anything else the child might need. I encourage you to go over your budget and make sure you can afford the additional child. What do you think Dara?
Dara Duguay: I agree Michelle. Any money you will save on taxes will be far outweighed by the costs of college for example. But if you really want another child, don't let financial considerations stop you from a decision that is an important personal one for you. But do remember that you WILL have more expenses, there is no way around it!
Silver Spring, Md.: re: Michelle's car loan question - I just got a 5 year loan at 0% interest - Isn't it better to stretch payment over a longer stretch of time - if it doesn't cost you anymore in the long run?
Dara Duguay: Very good point that many of the auto companies have no interest loans. Another statistic for you- many Americans keep their cars for no more than 3 years before they trade in for another car. If you still have an outstanding loan when you want to replace your car, you will have to pay off that loan first versus having already paid off your car and having no outstanding debt going into your next car purchase.
Financing Education: Not sure who told the high school student that four years of college costs $40,000, but that is news to me.
First of all, you do not have to go to a "name" school to get a good education. If short on funds, you would be smart to do the first 2 years at a community college then transfer to a 4 year school-- don't overlook small colleges with more incentive to help students, and state schools are often very good and very economical.
And for the college professor who doesn't think students should go part time - that's great, but then there is the little thing we all like to call reality. Life isn't fair, and many people have to compromise. Better part time than no education at all.
Michelle Singletary: Preach brother or sister!
Dara Duguay: Very good point that an education can start at a community college and then transfer to receive the diploma from a university. That is definitely the cheaper way to go.
I used to teach for the University of Phoenix where all my students were working professionals taking classes part-time at night. I understand and appreciate the need to go to school part-time. But I also agree that the longer you stretch out your completion, the greater chance that you will drop out of your pursuit for higher education. Other things sometimes get in the way.
Washington, D.C.: What is your opinion on paying off a mortgage early by sending in one to two extra payments a year? I currently have a 30 year fixed at 5.8%
Dara Duguay: I believe in paying down your mortgage quicker to reduce the total amount of interest you are paying in the long run. Some experts will disagree with me since they say the tax savings from your mortgage interest are worth stretching out your repayment. But I believe that if you can be mortgage free sooner, you will free up so much money to add to your retirement or pay down debts that it is worth it.
Washington, D.C.: My boyfriend lives in another state, and is planning to move here in a year or so. He is carrying a lot of credit card debt and has been open and honest about it and trying to pay it off. When he moves here, I'd like to pay all or most of it off. I have the cash and no debt except a small mortgage and car payment. Any ideas about the best way to do this? Credit counselor? BTW we are both in our 50's, not kids.
Michelle Singletary: You are a good person. But if I were you I would let him take care of his own debts. You could help perhaps by paying for your dates out so he can use that money and pay down his debts. Dara?
Dara Duguay: I don't think paying off his debt is a good idea. When others pay off someone else's debt, the person who racked up the debt in the first place has no accountability. How do you know that he won't incur more debt in the future and you have set up a model for him that he can just come to you for help. It may sound cruel but it's really not, the best thing you can do for him is to provide moral support but not assist him by turning your relationship into one of financial dependency.
My credit isn't great, but I am working on improving it. My salary is good, though, and it makes sense for me to look at buying. I know that I will not qualify for a good interest rate on my own. I have someone willing to co-sign who has perfect credit. Can I still be on the loan in order to get the positive credit benefit of making the payments (I will be making them solely), or will my being on the loan at all cause the interest rate to be higher, even with the co-signer?
Michelle Singletary: I wish I had the name and number for that co-signer because I would say "DON'T DO IT." If that person co-signs they are on the hook for the mortgage as equally as you. So if you don't pay, they have to pay (all of it). If that person isn't going to share the home with you, it's a very bad idea for them. Your being on the loan could still cause the rate to be higher. I think the better avenue is for you to work on improving your credit so you can afford the home on your own. Don't drag someone else in on this. If God forbid you should lose your job that person would be stuck with that mortgage. If you miss even one payment or pay late that information will be recorded on their credit report.
Dara Duguay: You need to be very clear to the person agreeing to co-sign for you that they will be solely responsible for your loan if you default. Many co-signers only realize that they are REALLY responsible once the creditors come after them. If they are willing to take that risk, at least they were warned.
California: I have been out of graduate school and working for about a year now. I bought a home and I currently pay down my student loans (about $100,000) in the amount of $1,900 per month in addition to the minimum payment. I want to take part of that $1,900 and contribute to my company's 401(K) instead. My question is should I max out my 401(K) contribution and pay the rest on my student loans, or divide up that extra $1900 hundred some other way between the 401(k) and the student loan repayment?
Dara Duguay: If you have multiple student loans, which I assume you do with that amount of debt, you should look into consolidating your student loans into one. Contact Nellie Mae, they can give you information on this. You may find that your monthly payments are lowered substantially.
For Silver Spring 3-6 month reserve salary question: Did you answer whether one should save 3-6 months worth of salary or 3-6 months of your total expenses each month?
Dara Duguay: It should be 3-6 months of your living expenses per month. At a minimum, you need to be able to pay your bills if you lost your job.
Southern Maryland: We have a joint annual income of over $120,000 with about $8,000 in credit card debt, a $1600 a month mortgage, dental expenses of about $100. We have no other debt with the exception of utilities, and about $150 expense for after school activities, and occasional car repairs. We put away $300 a month in savings, but we usually have to dip into it before the next bi-weekly pay day. We are living pay check to pay check. What are we doing wrong?
Michelle Singletary: If I were you I would aggressively pay down that credit card debt. That's sucking a lot of your money right there. Also, if you are dipping into your "Pay Yourself First" fund then you should also look at other expenses (eating out, cable, cell phones, entertainment etc.) What do you think Dara?
Dara Duguay: You have relatively low expenses with your income, therefore it seems like you are sending a lot of money on the FUN things in life. Going out to eat, entertainment, your children's hobbies, etc. Look at those expenses and see if you can reduce your discretionary spending. Ask yourself, what is a want and what is a need- this is an important question.
Bethesda, Md.: I'm thinking about getting a new car this summer (or newly used) and trying to decide how to finance it. Car price range is 25-28k. I'm thinking of putting up to 10K in cash into it. The balance could be financed by a credit union loan at around 3-4% or by sale of some stock. The stock hasn't moved much recently and stopped paying a dividend (it's a REIT). If I sell the stock there may be 1,000-1,500 capital gains tax to pay on the profit. Any suggestions on which way to go?
Michelle Singletary: I just have one thing to say-- You have $10,000 in cash for a down payment on a car?? So, why not just buy a used car in that price range. My goodness I know you can get a really nice newly used car for that amount of money. Sorry, that's the cheapo in me.
Dara Duguay: I'm going to answer differently than Michelle since I'm not as cheap as she is. I unfortunately have spending tendencies that I fight against everyday. I think you are on the right track, you have a substantial down payment and a relatively low interest rate. Go ahead and get the loan if you believe you can afford it. But look closely at your budget and make sure you can really afford it.
Washington, D.C.: Why are we supposed to play fair and save carefully when the current government sets an example of spending money they don't have? I'm supposed to hang on to my raise (that I didn't get) for a rainy day, but our leaders can fund concentration camps in Cuba, give money to their pal's companies to rebuild everything they spend money to destroy.
Wouldn't the tax-cut argument work here... those who spend the most have the most responsibility to set good financial examples? Why don't they? Why should we?
Michelle Singletary: Everything you just said is absolutely right on the money. But remember what your mama probably said, "If Joey jumps off a cliff would you do the same?" Clearly, the government isn't practicing what they preach, but as an individual you can't be as dumb as the folks that run our government. They can borrow to continue running a deficit, you can't! Or at least if you do you will be in far bigger trouble.
Dara Duguay: Yes, we all don't have the luxury to owe as much as the Federal government. If we owe money, believe me, the creditors will come calling.
Michelle Singletary: Well that's it for today. Great chat. You guys sent in some really good questions. I'm so proud. Listen, pick up Dara Duguay's book. It's easy to read, and if you don't need the advice pass it along to someone else who does. Again, thanks for joining me today.
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