Financial Expert, Laura Hendrix, answers your financial questions.

What is the difference between Roth IRA and a Traditional IRA?

Both are retirement savings accounts.  You can deduct your contributions to a Traditional IRA if you qualify. Any deductible contributions and earnings you withdraw or that are distributed from your Traditional IRA are taxable.  You are required to take minimum distributions at age 70 ½. You must have a certain qualifying income level to contribute to a Roth IRA.  Your contributions to a Roth IRA aren’t deductible. Distributions and withdrawals from a Roth IRA are not taxable under most circumstances. For more details, visit https://www.irs.gov/

How does doubling up on house payments allow you to pay off your home quicker?

Bi-weekly: Paying every two weeks makes 26 payments in a year instead of 12 payments if you pay once a month or 24 payments if you pay twice a month.  The additional payment can help to pay off the mortgage sooner.

Twice-monthly: When you pay two times per month you are actually splitting the total you would pay each month. .However, you can decrease the amount of the balance that accrues interest each month because you are paying some on the principal a little earlier each month.

Paying additional principal – You can pay off a home sooner and save money on interest by paying an additional amount toward the principal of the loan every month. 

There are free calculators online that help you see how varying payments and amounts can impact the amortization schedule, total amount of interest paid, and length of the loan. 

https://www.bankrate.com/calculators/mortgages/amortization-calculator.aspx

I am wanting to move out of my parent’s house. Should I suck it up and save money for an eventual down payment or pay rent now?

Rule of thumb is if you are going to live somewhere for 5 years or longer, it pays to purchase instead of renting a home.  How long do you intend to live in the area after you move out?

How’s your quality of life at Mom and Dad’s?  Are you happy staying long enough to save up enough for a down-payment?  Home loans usually require 20% down plus closing costs.  You might qualify for a lower down payment under certain first-time home buyer programs.  You should also plan to still have some money in an emergency fund.

Check your credit score.  In addition to a down payment, you will need to be able to qualify for a home loan. Higher credit scores qualify for lower interest rates – saving you thousands of dollars over the life of the loan.

How much money do you need to comfortably retire at age 65?

Many financial planners recommend that people have enough to cover at least 80% of pre-retirement income.  You will need to estimate your life expectancy to know how many years of income you will need. Think about your health as you age. Will you need to plan for additional living or health care expenses in your later retirement years? What types of things do you plan to do during retirement?  Will you need money to travel?  Estimate your income including social security, employer provided retirement funds, IRA, and any other income streams you have. Visit the Social Security website to see an estimate of your retirement amount.

Should you only buy a used car?

Carefully research any major purchase.  Consumer Reports is a great resource for information about reliability, safety, and resale value of vehicles. Local libraries often have a copy of the Car Buying Guide that can be checked out for free. Comparison shop.  Find the best rate.  Save up for a big down payment or the full amount.  If you must finance, shop around for the best financing.  Interest rates may be lower for new vehicles and some dealers occasionally offer 0% financing specials. Consider how much you would pay in interest during the life of the loan. Yes, new cars appreciate as soon as you drive them off the lot but there are smart strategies that can offset some of that loss. I tend to keep vehicles for 10 years or longer. I negotiate the purchase price, make a big down-payment and have had low or 0% financing; so it’s a smart transportation strategy for me. I’ve also purchased a couple of great used cars. New or used – research the vehicle, comparison shop, negotiate the price, and find the best financing.

Is it better to refinance your home, or just make extra payments to pay your home debt off quicker?

Oftentimes, there are finance charges associated with refinancing a loan. This can add to the overall cost of your home mortgage.  The old rule of thumb was that mortgage interest rates had to be 2% lower and you needed to be staying in your home for another 5 years to make it worth the cost of re-financing. So, you would have to take into account not only the new interest rate but the additional cost of financing charges, maybe an appraisal, and other associated fees. 

Do you have any tips on paying off student loan debt?

Student loans can be federal or private.  The standard repayment plan is 10 years of equal monthly payments.  This will usually save on interest and have a faster payoff than income-based repayment plans.  Graduates who are having trouble meeting monthly expenses sometimes opt for an income based plan.  Income-based plans may also be a better option for those who are in public service loan forgiveness programs.  Use the online calculator to determine which type of income-based repayment plan is best for you. https://studentloans.gov/myDirectLoan/repaymentEstimator.action

• Auto-draft all of your student loan payments.  This is convenient and ensures that your payments won’t be late.
• Avoid consolidation unless absolutely necessary to avoid default.  Consolidation can eliminate some other repayment options and eligibility for loan forgiveness.  Missing payments can harm your credit score.
• The best advice on the front end for students is to borrow as little as possible. Scholarships, grants, work, living arrangements, and college choice can help lessen the need for loans. 

What percent for each part of the budget be delegated to house, car, groceries, etc.? 

There are no hard and fast rules.  Housing is usually the largest expense and most financial planners recommend around 20-30% of the budget for rent or mortgage (including taxes, insurance, and maintenance).  Some financial planners designate a percentage for most of the basic categories of household expenses. However, it can be difficult to specify because consumers have varying preferences, goals, and income limits. 

The best plan is for the individual consumer to complete income and expense statements. 

• List all sources of income and determine how much you have each month. 
• Make a list of monthly expenses and be include a monthly amount for periodic expenses like holidays and vacations. Cover all needs (those necessary for survival) before spending on wants (designer shoes, concert tickets, a new game system).
• Determine life goals. 
• Use resources (money and time) to live a life that is meaningful to you. 
• Design your personalized spending plan to meet your needs and attain your goals. 

If you really want a template – look up several and use them as a starting point for your own plan.

How much debt is too much?

One rule of thumb is the debt to income ratio. 

A debt to income ratio is the total amount of monthly debt (NOT including mortgage or rent) divided by the total amount of monthly income.  Add up all of your monthly debt payments including car payments, student loans, credit card payments and any other.  Determine your average monthly income from all sources.  Divide monthly debt payments by monthly income to determine your debt to income ration. 

A ratio or 10% or less probably means that you are managing debt okay.  If your ratio is around 15% you may want to be cautious about adding any new debt.  A ratio of 20% or greater could mean you are already in trouble.  Take a close look at your situation.  Don’t take on any more new debt.  Make a plan to pay off balances as soon as possible. It’s important to remember that the debt to income ratio is just a guideline.  There can be other signs that you are in credit trouble.  For example, you might be in trouble if:

• You frequently make late payments and/or have late payment fees
• You can only afford to pay the minimum amount due on monthly credit card payments
• You frequently receive past due notices
• Your credit cards are near the limit or they are “maxed out”
• You frequently have overdraft fees
• Your debt payments make it difficult to pay regular household expenses such as utilities and food.

What would be better to have, an IRA or a 401K? What’s the difference?

A 401K (or 403b) is an employer-provided retirement program.  An IRA is an Individual Retirement Account.  Some employers offer to match a certain percentage that the employee puts into the 401k or 403b – that’s free money and will usually be the priority place for retirement saving. If your employer offers a retirement program, opt-in.  If there is a match, work toward contributing the full amount that your employer will match.  If you do not have an employer provided retirement program, start an Individual Retirement Account.  You may find that there are some extra tax benefits.  Traditional IRA contributions are deductible for some tax filers.

Final Words from Laura Hendrix

Remember that your best money management practices flow from your visions of the future. Write down your goals to use money and other resources to attain the life you envision.  Thank you for sharing your thoughts and questions with us.  Oftentimes, other consumers have similar concerns and your questions help to inspire others.  Best wishes for a secure financial future.

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