Tam­ing your fi­nances

How to do more with less, in plain and sim­ple terms

The Washington Post Sunday - - FRONT PAGE - BY HAROLD POL­LACK

Four years ago, in a blog con­ver­sa­tion with fi­nance writer Helaine Olen, I joked that the best fi­nan­cial ad­vice for most peo­ple is avail­able for free in the li­brary and would fit on an in­dex card. ¶ Peo­ple started ask­ing: “Where is the in­dex card?” So I grabbed one of my daugh­ter’s 4­by­6 in­dex cards and wrote out some ba­sic rules. I snapped an iPhone pic­ture and posted it on­line. The whole ex­er­cise took maybe two min­utes. In that weird In­ter­net way, the card went vi­ral. Helaine and I went on to ex­pand the card into a lit­tle book, “The In­dex Card: Why Per­sonal Fi­nance Doesn’t Have to Be Com­pli­cated.” ¶ The ad­vice was good, but it had one key lim­i­ta­tion: The card has a de­cid­edly mid­dle­class shad­ing. If you’re a cashier earn­ing min­i­mum wage or a se­nior cit­i­zen on a low fixed in­come, you’re not ob­sess­ing over the proper in­vest­ment mix in your 401(k) ac­count.

I re­ceived many col­or­ful emails of the sort: “Dear Prof. Pol­lack, I am a 28-year-old sin­gle mom. You just told me to save 20 per­cent of my in­come. If I could do that, I wouldn’t need your card.”

The crit­ics were right. I have been try­ing since then to pro­vide bet­ter ad­vice for peo­ple of mod­est means. This is my best shot. Chunks of my first card are based on con­ver­sa­tions with staff at the Fi­nan­cial Clinic, a group that helps to build fi­nan­cial se­cu­rity for peo­ple of mod­est means. They fo­cus on how to get the ba­sics right:

(Thanks to the Fi­nan­cial Clinic’s Sasha Os­to­jic and Vi­viana Stein­berg for shar­ing their in­sights. Also, thanks to Sa­tori Bai­ley at the Cen­ter for Eco­nomic Progress.)

Most of this sim­ple ad­vice is use­ful at any in­come. But some items are more spe­cific, too. Fi­nan­cial coaches ex­plained to me that un­doc­u­mented im­mi­grants with em­ployer iden­ti­fi­ca­tion num­bers don’t have to rely on check-cash­ing ser­vices, un­re­li­able rel­a­tives or friends, or oth­er­wise go un­banked. They can open ac­counts at many credit unions. It’s also es­pe­cially im­por­tant to make the best use of the earned-in­come tax credit and other pub­lic pro­grams, such as the low-in­come as­sis­tance pro­grams 15 per­cent. There’s no bet­ter in­vest­ment than to pay that down. What­ever you pay, pay on time — al­ways. Late pay­ments trig­ger big penal­ties and fees. They also dam­age your credit score.

Be­ware the psy­chol­ogy of credit cards. There’s a rea­son casi­nos take chips rather than cash at the poker ta­bles. Most of us are more re­strained when we use old-fash­ioned cash rather than credit for lux­u­ries and binge pur­chases.

Pay­ing cash means pay­ing in full up­front. When a seller of­fers to help smooth your cash flow, she’s re­ally of­fer­ing you a loan. Th­ese can be sur­pris­ingly pricey. Sup­pose, for ex­am­ple, your gym gives you a choice of pay­ing $1,000 up­front for an an­nual mem­ber­ship or 12 monthly pay­ments of $99 start­ing now. You’re only pay­ing $188 ex­tra. But the equiv­a­lent in­ter­est rate ex­ceeds 40 per­cent. It’s prob­a­bly worse than your credit card, es­pe­cially if some other bar­gain is un­avail­able with the pay­ment plan.

Also be­ware of the money sinks that dis­pro­por­tion­ately af­fect low-in­come peo­ple: Aside from their other ob­vi­ous prob­lems, smok­ing and heavy drink­ing are sur­pris­ingly costly.

Par­tic­u­larly when I talk with se­niors, some of the tough­est is­sues con­cern the need to avoid over­priced fi­nan­cial prod­ucts and scams. “Affin­ity food or home en­ergy. The EITC is es­pe­cially im­por­tant as a strate­gic re­serve and source of sav­ings to be used wisely.

I added a second card with bud­get­ing tips. Fi­nan­cial coaches em­pha­size the value of sav­ing some­thing, even though it gen­er­ally won’t be a whole lot. And fol­low what­ever strat­egy gives you the mojo to save. Maybe that’s an ac­count you’ve men­tally ear­marked for your 4-year-old daugh­ter’s col­lege or next year’s va­ca­tion. What­ever moves you.

Once you have a strate­gic cash re­serve (ide­ally, two months of liv­ing ex­penses), you have the breath­ing room to re­ally plan.

If you have ac­cess to a 401(k), take ad­van­tage of that. It’s eas­ier to save when it’s au­to­matic. You can often get a match from your em­ployer. Buy the cheap­est in­dex fund your em­ployer of­fers. A tar­get­date fund based on your 65th birth­day is also a good op­tion.

A Roth IRA is a fur­ther op­tion if you can swing it. There are no im­me­di­ate tax sav­ings. But if your in­come is mod­est, this is no ob­sta­cle. The long-term in­vest­ment gains are un­taxed, and you have ac­cess to your con­tri­bu­tions if you re­ally need them with­out penalty for an emer­gency or a child’s col­lege.

As for bud­get­ing, your goal is not a fi­nan­cial frauds” are de­press­ingly com­mon in ev­ery eth­nic, re­li­gious and po­lit­i­cal group. Be wary.

It’s a red flag when any­one asks you to in­vest your money through a church or com­mu­nity group, or through any prod­uct ad­ver­tised on your fa­vorite po­lit­i­cal TV. Vanilla in­vest­ments such as tar­get-date funds of­fered through Van­guard, Fidelity or other na­tional firms are much bet­ter and safer places to put your money.

Then there are more straight­for­ward scams. When some­one calls or emails, you re­ally don’t know who is com­mu­ni­cat­ing with you. Don’t give that stranger your credit card num­ber, bank ac­count num­ber, or a pass­word to any­thing over the phone or email. If an email says that it’s from your bank and that a check just bounced or your ac­count was hacked, don’t re­ply di­rectly or click any link in that email. Go to your bank’s web­site or to the bank it­self to in­ves­ti­gate the al­leged prob­lem. The same ap­plies when a char­ity or po­lit­i­cal cause con­tacts you.

Be smart about com­puter se­cu­rity and pass­words, too. Don’t use your birth­day, your ad­dress or some lame com­bi­na­tion like 1234. Some fur­ther tips: Have your pay­check or pub­lic ben­e­fits direct-de­posited. This re­duces the temp­ta­tion for binge­ex­ceeds star­va­tion diet, but to find a re­al­is­tic and sus­tain­able spend­ing path. Keep a diary of ev­ery­thing you spend, in­clud­ing on your credit card state­ment. It’s often sur­pris­ing what you find.

You want to tar­get your spend­ing on the things that mat­ter most to you, not on ephemera. If you love cof­fee or go­ing to baseball games, there’s noth­ing wrong with the oc­ca­sional skinny mocha latte or Cubs ticket.

Check out your phone and ca­ble bills, too. And seek cheap thrills. Out­side Chicago where I live, great tick­ets to the Windy City Thun­der­bolts cost $9. Bad tick­ets to a Cubs game often cost $100. Chicagoland also has great high school basketball with fu­ture NBA stars.

Be most strate­gic about the big pur­chases, such as your hous­ing and car. (Health in­surance de­serves its own col­umn. All I will say here is: Don’t go with­out.) The big things ac­count for most of your spend­ing. And you can al­ways stop go­ing to Star­bucks if you hit money trou­ble. You can’t stop pay­ing your rent or for your car.

Don’t rush into home­own­er­ship. Buy when you know you’ll stay in an area for at least five to seven years, and when you have a 20 per­cent down pay­ment with­out hav­ing to dip into your strate­gic re­serves. A house is the most lever­aged and un­di­ver­for spend­ing. It’s also more se­cure. Pay at­ten­tion to the phys­i­cal se­cu­rity of your key doc­u­ments. Don’t leave bank state­ments, credit cards and state­ments where strangers can ac­cess them. A locked fire­proof box is a good in­vest­ment. Shred such doc­u­ments when you no longer need them, too.

You may face more com­pli­cated fi­nan­cial chal­lenges. Don’t be em­bar­rassed to seek ex­pert help if you are hav­ing fi­nan­cial dif­fi­cul­ties or are con­sid­er­ing some in­tim­i­dat­ing trans­ac­tion such as a home­e­quity loan.

It’s a huge red flag when any­one pres­sures you to sign some­thing or to rush be­fore you are ready. It’s al­ways okay to slow down, and to dis­cuss things with a neu­tral trusted party who has your best in­ter­ests in mind.

If you ex­pe­ri­ence se­ri­ous money dif­fi­cul­ties, or you need more in­for­ma­tion about some fi­nan­cial con­cern, the fed­eral gov­ern­ment’s Con­sumer Pro­tec­tion Fi­nance Bu­reau is an ex­cel­lent source of help. You can call them at 855-411-CFPB. They have an ex­cel­lent web­site, Con­sumer­Fi­nance.gov. CFPB staff de­vel­oped an acro­nym SAVED, which has some use­ful tips. I mod­i­fied and con­densed their ad­vice in the card above.

Fi­nally, free fi­nan­cial coaches can be a big help. They help you me­thod­i­cally stay on a bud­get, work si­fied in­vest­ment you’ll ever make. Don’t get cute on fi­nanc­ing, ei­ther. If you can’t af­ford pay­ments on a bor­ing 30-year fixed-rate mort­gage, you can’t af­ford the house.

It’s un­for­tu­nate that car buy­ing is a ridicu­lous has­sle. A late-model used car is a bet­ter deal than a new one. Con­sumer Re­ports is an ex­cel­lent source of in­for­ma­tion. You can get quotes there from mul­ti­ple deal­ers. If you know a lo­cal me­chanic, ask him to eval­u­ate a car you’re in­ter­ested in buy­ing. Fi­nance your pur­chase at a bank rather than at the car dealer if you can. Deal­ers of­fer a bet­ter price to cash buy­ers. Ne­go­ti­ate your trade-in separately, too.

Shop around for your auto in­surance. Get the largest de­ductible you can. This saves money in two ways. It’s in­ef­fi­cient for in­sur­ers to process small claims. More im­por­tant, peo­ple who buy high-de­ductible in­surance tend to be safer drivers, and thus are charged lower pre­mi­ums. The same goes for your home­own­ers or rental in­surance. You need in­surance for the $25,000 prob­lem. You don’t need it for the $250 prob­lem. That’s what your strate­gic re­serve is for.

As for the rest of your bud­get, a few in­sights can help. Credit cards are ob­vi­ously a huge is­sue. Pay your credit card bill in full — or as much as you can — ev­ery time. Your credit card in­ter­est rate prob­a­bly to­ward your fi­nan­cial goals, pay your bills on time and do other ba­sic things right.

The Work­ing Fam­i­lies Suc­cess Net­work is one way to find such ser­vices. You can also call your lo­cal United Way. The Fi­nan­cial Clinic is an im­pres­sive or­ga­ni­za­tion that of­fers th­ese ser­vices. The Cen­ter for Eco­nomic Progress’s Project Money is an­other.

Fi­nan­cial coaches are often linked with non­profit so­cial-ser­vice agencies and can often help you with other needs you might have, such as job as­sis­tance, le­gal aid or free tax prepa­ra­tion. They can set you up with other help — for ex­am­ple, if you’re con­sid­er­ing bank­ruptcy or must rene­go­ti­ate heavy debt from credit cards.

None of th­ese in­dex cards is the po­lio vac­cine. They cer­tainly don’t re­place the so­cial safety net if you hit real trou­ble. If you have a mod­est in­come, you will prob­a­bly face fi­nan­cial chal­lenges. But fol­low­ing a solid plan can help.

By me­thod­i­cally at­tend­ing to the ba­sics of per­sonal fi­nance, mil­lions of peo­ple im­prove their lives.

MIRKO CRESTA FOR THE WASH­ING­TON POST

Harold Pol­lack’s ba­sic rules in­clude the time­less “fol­low a bud­get, and track your spend­ing.”

PHOTOS BY HAROLD POL­LACK

One of Pol­lack’s bud­get­ing tips is to “avoid us­ing credit cards for lux­u­ries and treats.”

To pro­tect your­self from fraud and abuse, “never click on any link in an email on any fi­nan­cial mat­ter.”

On dif­fi­cult fi­nan­cial de­ci­sions, “ask ques­tions about costs, risks, or any­thing you don’t un­der­stand.”

Harold Pol­lack

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