Color of Money Live With Michelle Singletary

Julyette Jacobs
Investor education director at the Financial Literacy Center

Tuesday, January 4, 2000 at 2 p.m.

Let's start the New Year off with a financial free-for-all. Let's talk. Do you have debt problems? Can't figure out where to start investing. Are you undecided about co-signing for a friend or relative? And, just what should you do to save more. The investor education director of the Financial Literacy Center will be on hand to help answer these and other basic financial questions. She'll also share some financial wit and wisdom from the center's "Loose Change" 2000 calendar, which is filled with 12 months of money-saving tips that can help you prepare for a financially fit century!


Michelle Singletary: Welcome again to a discussion about money. Already I've heard from a number of readers who like the idea of having a year-long guide to get started on becoming financially fit. So, bring on your questions but please remember we are not allowed to give specific investment advice ---just general stuff to start you on your way.

Arlington, Va.: Michelle, I think your column is so great! With your help, last year I set two financial goals: pay off credit cards and start a mutual fund IRA for retirement. Goals accomplished. This year: my goals are to pay off my car -by April- and pay off my student loan -by Dec-. As the car loan is not set to be paid until 2 more years, and the student loan is set to be paid off in like 15 years, I think these will be major accomplishments. I just cannot STAND living with debt so that's why I want to massively pick up the payments. I also feel my life will be so much more free after paying off these things. Thank you for such a superb column. Keep up the GREAT WORK!

Julyette Jacobs: Congratulations! You are providing a great example of how people need to list their debts, and set goals for paying them off! Once you get your debts behind you, you'll be able to determine what savings goals are important to you.

Bethesda, Md.: I understand that 401-k-'s are good way to dollar cost average. I contribute the maximum percentage allowed of each paycheck, and as a result, my 401-k- reaches the total dollar limit around September. My theory for doing this is that I get my money in the market earlier, but I was wondering if this defeats the advantages of dollar cost averaging -since I'm putting nothing in for the last three months of the year?

Julyette Jacobs: In the world of finance there are always various strategies that can be used. We think getting your $ in the market as soon as possible is to your advantage,even though this means you might not be using dollar cost averaging throughout the entire 12 months of the year.

Hyattsville, Md.: We have a ninth grader in high school and we've been saving primarily through savings bonds. We hope that there will be sufficient funds -including scholarships and partial or full scholarships- available to help pay for our child's college education but there are no guarantees we'll have it in four years. We want to try other ways to save other than savings bonds.

What's the best way to save the maximum possible for our child's college education? Another factor in the mix here is that we will be searching for another house -our last house before retiring in the next 5-10 years- this year. Should we hold off on buying another house -with a larger mortgage payment- and use that money to save more for college?

Thank you for your assistance.

Julyette Jacobs: Part one-because there is only 4 yrs. left until the child heads off to college, Year 1 college money needs to stay in something safe like a savings bond. $ for years 3 and 4 could go into a stock mutual fund. We suggest you talk to a qualified personal financial professional about your specific situation, and what mutual funds to use.

Part 2-Set your own personal priorities on when is the best time to buy a house. You need to talk to that qualified financial professional.

Silver Spring, Md.: Recently, I opened a 24 month Retirement account CD for $2500.00 Should I have opened a ROTH IRA instead?

Julyette Jacobs: The Roth IRA is a great way to save for retirement, depending upon your age,tax bracket,income level, and what other retirement savings you have. It is not possible for us to tell you that your choice was better or worse than a Roth, w/o knowing a lot more about your personal financial situation. The Roth allows you the ability to accumulate earnings tax-free, if left in the account for at least 5 years.

Washington: Good afternoon Ladies,

I am sick of debt, so I have devised a plan to pay off one bill at a time and put more funds into my 401K account since our company is matching it this year. In addition, I plan to invest in muni funds and the stock market in a small way, but it beats nothing.

I bring my breakfast, lunch and snacks to work and I will definately be cutting back on unecessary expenses -dinners, etc.- Are all the above a good idea? Thanks for this opportunity

Julyette Jacobs: I bring my lunch too- and my coworker keeps feeding me snacks! First, to pay off the debt most efficiently list each credit card, the interest rate, and the amount owed. Start paying any extra $ you have, on the credit card with the highest interest rate, while you continue paying the minimum on the other cards. Continue this procedure until all debt is paid off.

At the same time,contributing to your 401(k) so you get your employer's entire match is the key to accumulating $ for your future.

For additional information on paying off debt go to www.slashyourdebt.com

Michelle Singletary: Many people want to know how to get started in the New Year with getting their financial house in order. What are the first steps people should take in developing good, keepable financial goals?

Julyette Jacobs:
1. Write down your financial goals.
2. List any credit card debt, interest rate of each card,and how much you owe. Then devise a plan to start paying it off.
3. Review last year's budget. Determine where you can make adjustments, so you can move toward your goals.
4. Review your will or estate plan.
5. Gather documents for tax season.
6. Establish a clean budget from all this information for 2000.

Determine how you want to increase your financial knowledge, like reading Michelle's column, using financial websites,and going to the library.

Bethesda, Md.: Hello,
I'm a first-time investor looking to invest in the stock market. I do not want to put money into companies that exploit workers-others or the environment but I do want to earn money on my investment. Can you point me to some successful and socially-responsible groups that specialize in this area? -If you can't give names, perhaps you could tell me where I could find them myself.- Also, how do these types of investments-mutual funds stack up against typical blue chip-'coporate' investments? Thanks.

Julyette Jacobs: There are specific mutual fund companies that specialize in socially responsible funds. Also, some mutual fund companies have one or more funds that meet socially responsible criteria. Michelle can provide more specific information on such funds.

Michelle Singletary: For more information on socially responsible investing you might want to check out a column I wrote on this very topic. You can find the column on this web site by going to the business section, then list of finanical columns. Go to the archive for The Color of Money. I wrote the column Jan. 10,1999. You should also check with the nonprofit group, Social Investment Forum. The group is based in Washington and tracks the performance of socially responsible mutual funds. Fortunately, these funds are doing much better and are producing some great returns. You might also want to check out funds by the Calvert Group and Citizens.

Upper Marlboro, Md.: I currently make allot of money but find myself in 25,000 worth of credit card debt. Most of my debt has come from personal travel. I currently have a 401k, a roth IRA and several mutual funds. I also have a conslidation loan. After I received my consolidation loan I closed all credit cards later to reopen them and max them out in less than a year after receiving the loan. I can say I have truly learned my lesson. My question is should I borrow from the 401K to get my debt managable or should I pay the monthly amount plus a little more to re-establish a payment history. Right now, all my payments are late and all credit cards are over the limit because of interest. I am as far as 90 days behind of 2 credit cards. HELP!!

Julyette Jacobs: Withdrawing $ from your 401(k) is generally not a good solution because you will have to pay federal and state income taxes, plus a 10% penalty (there are some exceptions, depending on your age). This could amount to an almost 40% loss of the $ you withdraw.

If your plan offers a loan, you should explore the terms with a debt counselor or personal financial professional.

Truly, we think your first step is to get some debt counseling from a qualified professional who can understand all aspects of your current situation.

Michelle Singletary: If someone is in a lot of debt should they still try to invest and save? We are told so often the importance of investing soon and consistently but if you are loaded down with debt how can you do that and pay off the debt? And, if you choose to pay off the debt aren't you wasting time your money could be in the market?

Julyette Jacobs: When you have debt, the first thing you need to do is to list all the debt, and pay off the highest interest rate credit cards first.

The main place you need to look at saving, prior to paying off your debt is in a qualified retirement plan, like a 401(k), 403(b), especially if the plan has an employer match.

So work at paying off that debt then take the money you were using to pay debt and start putting that into your mutual funds.

Alexandria, Va.: I'm afraid I'm paying too much to my financial planner, about $2,500 a year above stock-fund loads and fees on a $300,000 portfolio. Is this too much and how do I go about finding another planner.

Julyette Jacobs: First, I would talk to your current planner about your concern with the fees to see if he/she is willing to reduce the $2,500 annual amount. You should also find out how much of a load you are paying on the funds in which you are invested.

After that, if you stil feel that you are not getting service = to this expenditure you should talk to family and friends and find recommendations of other financial professionals to interview.

Washington: It's been said that those who forget history are condemned to repeat it. Now that it is the conventional wisdom, dispensed by Washington Post Guru's like Michelle and James Glassman -now departed- that stocks held for the long run are "safe" investents, aren't people getting a bit too complacent, as they did in 1929. Like bubbles of the past, I can see this all ending very badly for a lot of people, maybe the majority. Shouldn't the advice of you and your colleuagues carry a mandatory "may be hazardous to your wealth" warning.

Julyette Jacobs: Each person needs to look at their own goals and comfort with investment risk to determine how they will invest their money. There is definately risk in investing in the stock market. There is also inflation risk if you invest too conservatively and do not have enough money to reach your goals. Again, we suggest that each individual meet with a personal financial professional who can best give you assistance on your own situation.

Washington: I was wondering where I should go to get financial counseling. I know that some stock brokers and mutual fund groups have advisors, but how much are they biased by their employers? My bank has financial advisors, I think. Would that be a good choice? Thanks for your help.

Julyette Jacobs: People should search for a good financial professional like they would for a good doctor. Ask family and friends for recommendations. Check professional associations to obtain ideas and leads. Interview carefully 2-3 of your choices until you find someone that you are comfortable with and can trust. A key trait is someone who is most concered with you and your personal needs.

Michelle Singletary: How do you make the decision between trying to pay your debts or filing for bankruptcy? Is there a benchmark? And, for some people isn't bankruptcy the best option if they are overwhelmed with debt and no end in sight to pay it off?

Julyette Jacobs: You really need to talk to a debt councelor so you can truly understand the long term ramifications of declaring bankruptcy. They can assist you in looking at your overall circumstances and set a plan of action.

Arlington, Va.: How can you become debt free when one spouse is cautious and the other is not?

How long does bankrutcy affect your credit?

Julyette Jacobs: You and your spouse need to honestly sit down with each other and perhaps engage a third party to define your combined financial goals. You will need to put these down on paper and then start toward paying off any debt. One successful couple we know meets once a week to discuss their budget and review their goals. If you do not get your joint financial life under control it will continue to affect your overall relationship.

Washington: I am 37 years and single and would like to buy a house this year. My credit card debt is about $10,000 and am trying to pay those off, in addition I know I have to restore my credit worthiness. I do not have the cash for a down payment but can get it from my 401-k- savings plan. I understand this is not the best decision for me to make, do you have any suggestions?

Julyette Jacobs: Before you purchase a house get your debt under control-paid off. Houses have a lot more cost than just the original purchase and the mortgage payment. There is property taxes, utilities, repairs, etc... You need to understand all of these before embarking on home owership. Personally, I believe strongly in owing your own home, but withdrawing money from a 401(k) is not recommended as you will generally end up paying 40% of what you withdraw to taxes and penalties. So, set Step 1: Debt reduction. Step 2: Start saving for that downpayment. Step 3: start looking for that house. GOOD LUCK!

Michelle Singletary: Where can people go to find a reliable debt counselor? Should people stay away from firms that promise to "repair" consumers credit?

Julyette Jacobs: Look at the website of Debt Counselors of America (dca.org) and National Foundation for Consumer Credit (nfcc.org). There is also Debtors Anonymous (debtorsanonymous.org). DCA has warnings on their site about these credit related scams.

McLean, Va.: To the person maxing their 401k contributions around September--if your employer is matching your contributions, you're missing out on some free money.

Typically an employer will match the first five percent or so. It's better to stretch you payments over the whole twelve months so you get your employer match every month. It shouldn't take too much fiddling--maybe lowering your contribution from twenty percent a month to fifteen or so. Your Human Resources department can advise you best on how much the company matches and how to adjust your contributions accordingly.

Julyette Jacobs: Thanks for your reply, and pointing out that the person wants to do what is needed to receive the full company match. We were thinking mainly about getting the $ invested.

Arlington, Va.: What is a mutual fund and where can I start one?

Julyette Jacobs: A mutual is a group of investments managed by professionals, according to stated investment objectives. When you buy shares in a mutual fund, you are buying a slice of the fund's total investments. Contact a financial professional for a good recommedation, that fits your needs. We continue to recommend financial professionals, because each person has a very unique situation (age, income, goals, debt, etc.)

Columbia Md.: I'm not in debt -- always pay off monthly credit card bill, am working first permanent job after grad school, no school loans, only have monthly car loan payments that are easily covered assuming that I continue to work. No rent because I'm still living with family. This leaves me a relatively large fraction of my paycheck available.

Yet I feel hesitant to put money in seemingly unaccessible places -- eg I know I should start investing -- or to change my situation to where less is available or to take loans, eg. perhaps renting-buying a new place. I think it is from being very unfamiliar with the financial world and taking risks, I think.

Do you have any suggestions on how to gauge whether a given amount of debt or spending is reasonable or not? Suggestions on an approach to becoming more comfortable with finances and risk?

Julyette Jacobs: Increase your knowledge and education. There are many books, websites (hitflc.com) newspapers (Michelle's and other columns)classes and seminars, newsletters and tv programs. We've found from our experience the more they learn about finance the more comfortable they become in taking steps to enhance their own financial future.

You may also want to sit down with a qualified financial professional to discuss your needs. A pat on the back to you, for staying out of debt!

Michelle Singletary: Man, so many questions, so little time. So sorry if we didn't get to all your question but I'll be back in two weeks. Mostly, thanks to Ms. Jacobs and the folks at Financial Literacy Center for taking the time to answer some very good and thoughtful questions. Now don't forget that there is an archive of my column on this web site. I've dealt with many of the issues raised today and hope to do more in the future. Also feel free to e-mail me with suggestions for future columns. I'm always looking for ideas and people to profile. Take care and I wish you good financial health!!!