Watch mortgage rates
They have already come down into the 5.5 percent range, which may or may not represent a savings to you in the form of a refinance. There is talk that Washington would like to see rates pushed down to 4.5 percent, and they may put initiatives into place to see that happen. We are not sure yet whether those rates would be available to current homeowners or just new home buyers — personally, I don't think only making them available to new home buyers solves the problem of getting more consumers to spend more money. But there may come a window in the near future where you could save some money in this way.
Keep debt down
The best thing you can do for your credit score right now is to keep the amount you owe on your credit cards to a minimum. We are in an era where credit limits are being slashed, even for people with good credit. This will have a harmful impact on your credit score ... unless you're not carrying much debt on those cards in the first place.
Watch the outflow
Every time you go to buy something, ask yourself: Would I be buying this if I thought I might lose my job? The reality is very few people are secure these days. Very few. And so, every purchasing decision should be run through that filter. The more money you have in the bank, the more secure you're going to feel. As one source said to me recently: The very act of saving money is healing.
Q: My husband's job is very uncertain. He just turned 61 and will have a hard time finding a job. He wants to take money out of the 401(k) to pay off our mortgage. We owe about 8-9 more years. Should we do this? — Monica
A: No, no, and how should I say this — no! I know the 401(k) assets look like an attractive target because your husband is over 59 1/2 and therefore he can pull money out of his 401(k) penalty free. But what you have to realize is that money in your 401(k) can continue to grow income tax free — and you want to maintain that tax deferral as long as you possibly can.
Here's what I'd do instead: Look into refinancing your mortgage. Mortgage rates have fallen to their lowest in a year — a 30-year fixed rate loan is at 5.5 percent. If your interest rate is higher than that, you may want to look into refinancing the loan (though I wouldn't refinance into a new 30-year term, I'd refinance into a 10- or 15-year term, which should net you an interest rate that's even lower). That may save you some money out of pocket every month. Also, in this time of uncertainty, you should look at cutting your living expenses in other ways. Take a detailed look at your budget to try to give yourself some breathing room. That way you keep your savings intact. They have to last you many, many years.
Q: I am looking to buy a car that's not too expensive. Should I buy or lease one? This would be my first car. — Catherine
A: The answer depends on how long you're planning to keep the car and how you're going to use it. The major benefit of leasing is that you're getting a car that's under warranty, so you don't have to deal with routine maintenance costs. Leasing makes the most sense for people who insist on getting a new car every two to three years and don't drive more than 15,000 miles a year.
Since this is your first car and you're looking to keep your costs down, I would advise you not only to buy, but to buy used. Look for a car that has come out of one of the certification programs that manufacturers offer these days. They tend to have terrific warranties, often for up to 100,000 miles. Then negotiate hard, using information about the value of a car that age and with that many miles, which is accessible on a Web site like edmunds.com or kbb.com. Anyone buying a car is in the driver's (pun intended) seat because there are many more sellers than buyers these days, particularly if you decide what type of car you want (four-door mid-size sedan) but are willing to go for any brand in the category. It makes it much easier to play off one dealer against another.
Your turn! |
Q: I was given a layoff notice on Oct. 13. I was offered a position with the same company in Los Angeles. It's a lateral position with no increase in salary. My home, in Palm Bay, Fla., has been for sale for 18 months ... I have a three-month emergency fund to make the mortgage while in L.A. What if the house doesn't short sale and my emergency fund is exhausted? — Linda
A: Linda, I would try to rent the house. Even if you can't cover the entire mortgage payment, whatever you can bring in would allow you to stretch that three-month emergency cushion for many more months. That would allow you to move to L.A. and rent something small and within your budget and at least get you on your feet. The other thing I would do is to start looking for another job. There may be a reason to try to stay with your current company — a pension would be the most compelling — but it sounds to me as if your life would be substantially easier if you could come close to replicating your income in or near your current home base.
Q: If you are retired and no longer contributing to your 401(k), should your fund be diversified, or totally in a fixed fund? My husband's 401(k) is 100 percent in a fixed fund. We are afraid to move any portion for fear of losing what we already have. Are we wrong? — Donna
A: That really depends on your income needs. There's a reason that people put money into stocks — which are risky — rather than money market funds or CDs — which are not. They NEED the return that money is likely to generate in order to live either today or down the road. You need to use a retirement calculator to figure out a) what your needs are going to be during retirement, b) how much of that need is filled by Social Security and any other income you might have, say, from a pension and c) what's the gap? The gap is what you need your 401(k) to fill.
If the money in your 401(k) at the fixed return at which you have it invested now is sufficient, then you have answered the question; you don't need to take any additional risk. But if not, then you do need to take some additional risk. In general, people your age should have about 35 percent of their assets in a diversified stock portfolio. One note: The retirement calculators will all ask you how long you need the money to last — essentially they are asking you how old you expect you will live to be. Put at least 95 if not 100 into that blank. Research shows that at least one of you will very likely get there.
Q: I received a call from a debt collector saying I owed money for a debt from five years ago on a credit card. I never received a bill ... Now they want the money and I don't even know what the debt is for. What rights do I have? I don't want my credit ruined. — Kim
A: This falls under the fair debt collection practices act. Within five days after you are first contacted, the act requires the collector to send a written notice telling you the amount of the debt, the name of the creditor, and what action you should take if you believe you don't owe the money. You should then send a letter via certified mail disputing the amount and asking the debt collector to verify it. The collection agency will then have to get verification of the original debt or a copy of the judgment against you, including the name and address of the original creditor. Until you receive this, the collector is not allowed to contact you. In the meantime, you should research the statute of limitations in your state — even if the debt is yours, it may be too late for the debt collector to take any action.
A few other things, too. If you have proof that you paid the debt, send the collection agency a copy of that along with a letter asking them to stop contacting you.
If you do owe the debt, and the statute of limitations isn't up, you can negotiate with the collector to pay it off. Debt collectors buy the debt for pennies on the dollar, so you can start your negotiations on a debt this old at about 20% of the amount. If they reach an agreement, you should get it in writing.
Other things to know: Never say or write anything that indicates you are taking responsibility for the debt. If you don't believe you owe the debt, letters should be sent via certified mail that requires a signature, so you have proof that they were received.
Lastly, are you sure about that excellent credit? Because in most cases, this would have already been reported to the credit bureaus and over the years that would have dragged down your score. Check your credit report and score at myfico.com to be sure.
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