In its March 2010 cover story, Kiplinger’s Personal Finance tackled real-life questions on the minds of many of our readers these days. Extending our mission of personal service, we invited readers to send us more questions to be answered in this exclusive online companion package.
How to Start Saving
I am a recent college grad (go Gators!) and currently working in the profession I will be attending grad school for in the future. Since I'm not earning the big bucks (or really even small bucks) yet, I haven't put too much thought into saving, even though I know this is the prime time to begin doing so. How would you advise me to be able to save while still keeping enough in my bank account to make those necessary purchases (a Macbook Pro!)? What savings vehicle is most prudent for someone at my stage in life? Thank you for your help.
You are so smart to start thinking about saving now! Because you're so young now, any money you set aside for retirement will have decades to grow for the future. If your employer offers a 401(k), that's the easiest way to get started. If your employer matches your contributions, you just can’t pass it up. That's free money.
If you don't get an employer match, it can pay to start with a Roth IRA instead. As long as you have earned income for the year, you can invest up to $5,000 in a Roth in 2009 and 2010 (you have until April 15, 2010, to make your 2009 contribution). If you're single, your adjusted gross income for the year must be $120,000 or less to qualify for a Roth ($176,000 or less for couples). You won't get a tax break for your contribution, but you'll be able to withdraw the contribution at any time tax- and penalty-free, then can withdraw the earnings tax-free after age 59 1/2. This can give you a huge head start on retirement.
If you don't plan to touch the money until you retire, you can afford to put all of the money into stocks. Until you have enough money to build a diversified portfolio, you should start with a global stock fund -- one that invests in both U.S. and foreign stocks. Two good choices, both with a bent toward undervalued stocks, are Oakmark Global 1 (symbol OAKGX) and Dodge & Cox Global (DODWX). Neither levies a sales charge. If you want to tamp down risk further, a global balanced fund -- one that owns stocks and bonds from both U.S. and foreign markets -- may be appropriate. One of the few no-load funds in this category is Fidelity Global Balanced (FGBLX).
If I pay off my mortgage, could that hurt my credit score, since I will have less total debt?
It might, but not by much. A small portion -- about 10% -- of your FICO score is calculated based on the different types of credit you have. If you pay off your mortgage and eliminate one type of credit, that could have a negative effect. For more details, go to www.myfico.com and click on the Education tab; then click on "What's in your FICO score."
Emergency Funds in Retirement
I am a retiree with a pension and Social Security. How many months of emergency money do I need?
Those who are still working should have at least six months’ worth of expenses socked away. Retirees are a different story. If you’re retired, you should have at least two or three years’ worth of expenses on hand. To get started, tally up your monthly bills. Then, subtract out what your Social Security and pension payments will cover. What’s left are your “uncovered expenses.” Figure out what two or three years’ worth of your uncovered expenses comes to, and build up your savings to that level. Having a big buffer will protect you in a bear market. Why? If you have a stash of cash and the market tanks, you won’t have to sell deflated assets to pay your bills.
Help Paying Student Loans
My daughter has $60,000 in student loans through Sallie Mae. What can she do to make these payments reasonable?
If she borrowed the federal student loans known as Staffords or GradPLUS loans, she may be able to take advantage of a new program called income-based repayment. That program reduces monthly payments for borrowers with very high debt relative to their income and forgives any remaining debt after 25 years. (See www.ibrinfo.org.) The federal government offers several other programs that ease the burden on student borrowers. Find out more about federal loans and repayment programs at www.studentaid.ed.gov.
If the loans are not federally backed, your daughter has fewer options. We suggest she call Sallie Mae and try to work out an arrangement to make the payments more manageable until her income goes up.
Best Source of Fast Cash
I want to do about $10,000 in landscaping. I have a good emergency cash cushion and quite a bit of equity in my home. Am I better off paying cash or taking out a home-equity loan?
There is no one-size-fits-all answer to this question. But if you have a good credit score and lots of equity, you should be able to establish a home equity line of credit at an interest rate of about 6%. That would provide a bit extra cushion should you want to do more extensive work on the home or need other cash in a flash. Then you can decide whether to tap the credit line for the home improvements and repay the debt on your own schedule or if interest rates start rising.