This is part of a special series of exclusive Brad's Deals interviews with personal finance experts.
Money management is an important topic especially to those thrifty enough to utilize Brad's Deals. Recently I had a fantastic conversation with Liz Weston, the most-read personal finance columnist on the Internet and author of a new book The 10 Commandments of Money, about several top-of-mind issues.
This is what Liz had to say:
“Your whole financial life really hinges on what you’re spending on your overhead - things like shelter and transportation, food, utilities, basic insurance payments, minimum loan payments, child care. Stuff that you really can’t put off. If that is eating up too much of your budget you can cut all the lattes in Starbucks and you still won’t have enough money to do what you want.”
Liz went on to suggest the 50-30-20 budget, created by Elizabeth Warren, a Harvard Bankruptcy expert. The 50-30-20 budget designates 50 percent of your monthly net income towards needs (insurance, child care, rent or house payments), 30 percent towards wants (new clothes, electronics, lattes) and 20 percent towards savings. Your personal finance is centered around how much you spend on your must haves. If your needs do not fit with your income, no matter what you cut down on, you will not get your budget under control.
Good vs. Bad Debt
“There is such a thing as debt that can help you get ahead and that is debt that is low rate, typically fixed rate sometimes tax deductible, but in any case it’s meant to be an investment in your future. A moderate amount of mortgage debt, a moderate amount of federal student loan debt can be considered good debt. In any case, it’s not the first debt that you want to go pay down because most people have better things to do with their money than to pay down a low rate, tax deductible debt.”
The quickest way to get out of debt is to focus on your toxic debt first. Liz refers to this as anything that has a high or variable rate like credit card debt, pay day loans or bounce fees from banks. Focus your efforts on eliminating the highest rate debt first, then apply that payment to the second highest rate debt until eventually you are debt free.
“There’s a huge difference between federal and privatized student loans. Federal student loans have fixed, relatively low rates, consumer protection and a bunch of ways to pay them back - and there is forgiveness. Private student loans are variable rates, do not have consumer protections and cannot get discharged in bankruptcy. ”
Continuing education is extremely important, but not to the point of taking on a lifetime of debt. We go to school to make more money not pay debt for the rest of our lives. Liz’s rule of thumb for education is not to borrow more in total than you expect to make your first year out of school. If your dream school is going to leave you paying a lifetime of debt, it’s best to consider a less expensive university.
“Some debts aren’t payable. Sometimes you have so much debt that you could spend the rest of your life throwing money at it and you would never get it paid off. So I think there has to be as sense that you are taking a realistic look at your debt. Can you get this paid off in five years with a reasonable budget and reasonable discipline?
If it will take longer than five years to pay off debt, Liz suggests considering bankruptcy. Some debts aren’t payable and some situations, like medical bills, aren’t avoidable. Liz recommends that people consider filing for bankruptcy if they are in way over their heads. The United States has laws that did away with debtor’s prison and the idea that one should spend a lifetime paying off debt.
“What we need to keep in mind is that the most important thing – the highest priority for everybody should be saving for retirement. Retirement is going to be expensive. You have to save a lot because you are going to be without a paycheck for 10, 15, 20 or more years. The cold reality is if you don’t get started saving for retirement by the time you are 35 it is really difficult to catch up."
Liz emphasized the importance of taking full advantage of a 401K whether or not there is a match. Start saving for retirement early and stay consistent. While many are focused on getting out of debt, Liz urged for people to consider the sacrifice they are making by not contributing to a retirement plan. By focusing solely on debt rather than saving for retirement you could lose a lot more than if you prolonged the paying down debt just a little longer.