How should a family with a special-needs child plan for the future? How should a married couple with two young children handle their student loan debt? What's the best way to tackle an exceptionally high amount of credit card debt? TODAY financial editor Jean Chatzky, CNBC’s Carmen Wong Ulrich and “Start Late, Finish Rich” author David Bach answer questions and provide helpful advice on these and other matters.
Q: We're a middle-income family and we have a 9-year-old daughter who has Down syndrome. We'd like to know your recommendations for us as we try to save for a rainy day, save for our own retirement and save for our daughter's future so that she isn't dependent on disability welfare as an adult. — Jawanda, Olathe, Kan.
Jean Chatzky: You're right to look ahead. The trick to special-needs planning is that you have to leave money to your child in a way that won't hurt her eligibility for government programs such as Medicaid and Social Security Income. Rules for these programs vary a bit by state, but many require candidates to have assets of less than $2,000, not including a home or car.
As you can see, that bar is low, and because of that most parents opt to set up a special-needs trust. You can fund this account with any assets you'd like to pass on to your daughter, including big-ticket items such as real estate and investments. Anything in this trust will not be counted against her for Medicaid or SSI purposes. You'll choose someone to serve as a trustee, and that person will be in charge of spending the money on behalf of your daughter.There is an entire contingency of financial planners and estate-planning attorneys who specialize in special-needs trusts. The best way to find one is through the Special Needs Alliance or the Academy of Special Needs Planners.
Q: My husband and I have been trying to refinance our home mortgage. We currently have 100 percent of our home financed; 80 percent is a five-year adjustable rate mortgage (ARM) that will begin adjusting in a year; 20 percent is a 15-year loan with a balloon payment at the end of the loan term. Our credit is excellent, but because our home has lost $25,000 in value, no one is willing to help us refinance.
We have enough saved up to put down 10 percent of our original loan value ... and are making more than we did four years ago when we bought the house. A mortgage broker in our area tried to get our 80 percent refinanced, but the lender with our 20 percent loan will not subordinate the loan. Do you have any suggestions? We are trying to be proactive before our loan starts to adjust, but we have not found anyone who can or will help. We do not qualify for the HUD (U.S. Department of Housing and Urban Development) assistance as our loan is not through Fannie Mae or Freddie Mac. PLEASE help. We are starting a family and need to get this taken care of before the baby arrives! — Natalie, Shakopee, Minn.
David Bach: First of all, congratulations on starting a family and having a baby on the way. It's great that you are being proactive on the refinancing issue. It's hard to give you a specific answer without the exact dollar amount of the loans and the value of the home, but I can tell you that this is a classic "no-simple-solution" situation.
I would start by looking first at what your five-year ARM will adjust to. Check the loan paperwork, find the due date, and look to see what the "reset" of the loans rate is based on. Ask the bank to calculate now for you what the rate would look like today if it were to reset. As rates are at historic lows, it's possible that your rate may not actually increase. It's even possible that it could reset lower. Your reset rate will more than likely be based on an annual formula, meaning the rate resets for a year, then resets again. If the rate isn't resetting for a few years, the challenge, obviously, is that rates could be higher in a few years.
The problem you have now with refinancing the first loan (the 80 percent) is the bank would be in a second position unless the second loan (the 20 percent) subordinated. As you said, they won't subordinate the loan. I would go back to whoever holds the second loan and ask them, "Why won't you work with me to subordinate my loan?" If it is a loan-to-value issue, then ask them how much you would need to reduce the first loan in order for them to subordinate the second so you can refinance the first.
If the lender on the second loan won't work with you, the real truth here is that you probably will need to save (as you have been) and pay the second mortgage off completely. Once the second is paid off, then you should be in an excellent position to refinance the first mortgage.
Q: I am currently an unemployed information-technology professional with more than 25 years of experience. Because of my experience, I feel that every dollar that I have been paid I have earned. I am aware of "salary calculator"-type applications; however, the job descriptions for the positions that I am applying for rarely match up to the job descriptions within these (calculator) applications. How do I know if I am pricing myself out of a job? — Drew, Milwaukee, Wis.
Carmen Wong Ulrich: Drew, in this job market you may have earned every penny you made in the past, but that doesn't mean that you shouldn't consider making less. Apply for the job, the position, the opportunity — not only the salary.
Note that many companies are no longer offering benefits of any kind and are hiring people as independent contractors. Those benefits are worth as much as a 20 percent raise. So if there's a job out there that you just love and you see lots of room for growth and it pays 20 percent less — but it comes WITH benefits and it's full time — you come out nearly even or ahead. Outside of straight salary, you can negotiate a better job title, perks such as an office, extra vacation, reimbursement of continuing-education costs ... many things! Keep your job search about the job, not the price tag. Good luck!
Q: I am 30 years old, a full-time undergrad student, and a wife and mother of two young children. My husband is also a full-time student, and we live off of our student loans and grants. I will be graduating next May, and want very badly to go on to grad school for a master's in architecture, but am not sure if I will be "dooming" my family because of the amount of debt we already have from school loans. I have somewhere around $50,000 in school loans, and my husband has around $20,000. Should I hold off on going to grad school and just enter the work force with my bachelor's, or is it better in this economy to stay in school? Please help! — Mary Esther, Davis, Calif.
David Bach: Investing wisely in higher education is one of the best financial decisions you can make. And now is a great time to go to school because of the difficult job market (hence the reason graduate schools have record applications). More education means higher earnings for life, and if you treat student loans like the investment they're meant to be, you'll reap rich rewards. It's been quoted that a higher education can be worth up to an additional million dollars during your lifetime.
With that said, what concerns me is that you say that you and your family "live off of your student loans and grants."
If you are borrowing money for school to live off, then you really are borrowing money for living expenses, not for education purposes. With the responsibility of raising a young family — you didn't mention whether you have credit card debt, any savings, health insurance, etc. — and the fact that your husband isn't yet earning an income either, I'd really like to see you make plans to start working at least part time. You can continue going to school to get your advanced degree, but I'd recommend doing it on a part-time basis. Once you start bringing in some income, I'd like to see you completely stop living off your loans and instead use them solely for paying tuition.
If you are fortunate enough to get a job in your chosen career field, you may even be able to get tuition benefits from your employer. This would allow you to go for your master's part time, while getting your tuition paid for in full or in part.Q: I am a self-employed contractor. I was working in North Dakota but was let go at the end of 2008. I have not been able to find any work in my area and cannot collect unemployment. I have managed to keep the house and car payments current by doing side work. However, I am three months behind on $40,000 of credit card debt, the phone is ringing off the hook and I have been turned over to collection. Is there anything I can do other than filing bankruptcy? — Rodger, Mishawaka, Ind.Carmen Wong Ulrich: You can head to a nonprofit credit counselor to help with managing your debts. However, they will not be able to negotiate what you have in collections, which is something you should consider.
Since your credit score is low already, right now the priority is keeping yourself from going into bankruptcy and your creditors from suing you. So, closer to the end of the month, when folks who work in collections have quotas to fill, call the collection companies and try to negotiate settlements for a portion of what you owe.
Once a debt is fully in collections and no longer the property of the original lender, you can try to settle your debt for less than the total you owe — down to as low as 30 percent to 40 percent, all with the knowledge that the collection company purchases the debt for much less, usually only 10 percent of what you owe. You've just got to get the ball rolling in terms of speaking with them and working out a plan.
Arm yourself with this: Be very pleasant and patient — they are used to being yelled at all day long! And, if you settle for less than you owe, they may ask for the full amount right away, which is something you may be unable to do. Try this before heading to bankruptcy, and should you need to file for bankruptcy, make sure you make that appointment with a nonprofit credit counselor first to take another look at your situation.Q: My 25-year-old grandson is locked into several Sallie Mae and Direct Loan student loans ranging in interest rates from 7 percent to 10 percent. He has been informed by Sallie Mae that his monthly payment is $450 to satisfy the loans. Is there any way to get these loans refinanced to a lower overall rate that will allow him to better afford his monthly payment? He is getting married next year and this payment is killing his budget. — Larry, Crete, Ill.
Jean Chatzky: It sounds like your grandson has a combination of private and federal loans. Unfortunately, you can't consolidate those loans together. For the private loans, Sallie Mae does not offer consolidation, but there are ways to lower your grandson's monthly payment.
If he owes more than $20,000, he may be able to extend his loan term. The typical repayment term is 15 years, but he may be able to spread it out to 20, 25 or 30 years. That means he'll pay more over the life of the loan, because he'll accrue more interest, but his monthly payments will be lower.
The second option is switching to an interest-only payment plan for a while, something I'd only recommend in extreme circumstances, because with this option, he's not paying down the principle. Sallie Mae allows you to do this for a maximum of four years, and there isn't a minimum loan amount.
With both options, your grandson can always opt to pay more if he has more money in any given month, or change his payment plan at any time. So if he wants to lower his payments just to save up for his wedding, one of these may fit the bill.
For the federal loans, he can look into consolidating through the Department of Education. However, if his loans are already fixed-rate loans, there isn't really a reason to do this. There is also a new payment plan beginning on July 1 for federal loans. It's income-based repayment, and it's an option for people who might qualify for partial financial hardship — if he meets that criteria, his payment would be calculated as a percentage of his discretionary income. Q: I am a 23-year-old small business owner wanting to invest fairly aggressively. I have maxed out my Roth IRA for several years. In addition, I have about $4,000 in stocks and index funds along with $3,000 in various term CDs. Should I take that money and simply create a Roth IRA for my wife? I hesitate doing this as I don't want to tie up all of that money until our 60s. Also, do you recommend only buying mutual funds and index funds? I recently read that only 25 percent of stocks have a positive return, so it is better just to invest in the broader market. — Justin, Chicago
David Bach: Congratulations on being 23 years old, running your own business and being so smart financially. I promise you many people reading this wish they had started "paying themselves first" in their early 20s.
I suggest that you consider funding a SEP IRA. Over the long run the amount of money you can save being self-employed is incredible with a Self Employed Pension IRA account. In 2009 you can save up to $49,000 (2008 was $46,000) in a SEP IRA and contributions are generally 100 percent tax-deductible. For incorporated businesses, annual contributions can be made up to 25 percent of W-2 income. And for those taxed as sole proprietors, SEP IRA contributions of 20 percent of adjusted earned income can be made annually. Annual compensation of more than $245,000 in 2009 cannot be taken into consideration for determining contributions.
Generally a SEP IRA must be established and funded by your tax filing deadline (April 15 for a sole proprietor). Filing extensions extend the period for establishing and funding the SEP plan (Oct. 15 for a sole proprietor).
With that said, I also want you to focus on saving for emergency purposes, and my goal, especially for self-employed people, is to work to have a year's worth of expenses in savings. So rather then completely max out your retirement accounts, I also want you to build an emergency account and use an FDIC-insured savings account at a national bank.
As for the question of whether you should invest in mutual funds vs. individual stocks, it really depends on what you are investing in. In small plans like yours, especially when you are starting out and investing monthly or even every few weeks, it makes more sense in my opinion to dollar-cost average into mutual funds (index funds) or exchange-traded mutual funds because of their broad-based diversification. I recommend you start by investing in the Dow Jones Industrial Average and the Standard & Poor's 500. You can buy both indexes by investing in the exchange-traded fund symbol (DIA) and the S&P 500 exchange-traded fund (SPY). I personally own both and I own the Nasdaq exchange-traded fund symbol (QQQQ). For more information on exchange-traded funds, visit this iShares Web site.
Q: We have a lot of credit card debt (approximately $25,000 spread over seven cards). We stopped using the cards at the beginning of the year. We also have approximately $2,000 in miscellaneous doctor and hospital bills. Even though we make our monthly payments, it seems like nothing is getting paid off.
My question is: Should we focus on the credit cards with the lowest balances or the ones with the highest interest rates? Or should we try and pay off the other debt that has minimal fees? — Mary, Mechanicsville, Va.
Carmen Wong Ulrich: I love this question! Digging out of deep credit card debt, something I've done twice in my life, is all about creating a system. First, know that credit card-company math is set up to cost you — big! Your minimum payments keep the debt "alive and kicking" as long as possible to earn them as much in interest as possible. So, it's tremendously powerful to pay more than the minimum and can knock years and thousands of dollars off your debt.
BUT! In order for the system to work most efficiently — read: quickly/easily — you need to put the most effort to the debt with the highest interest rate. It's your fastest growing "weed!" For example, you have $25,000 over seven cards. Let's say your average interest rate is 14 percent. If you only make minimum payments, it will take you 15 YEARS AND 10 MONTHS to pay it off! And you'll pay more than $10,000 in interest!
However, if you add just another $200 a month to the card with the highest interest rate first, pay that off and move the full amount, say, that $200 plus the minimum, to the next card and the next, you will be out of debt in TWO YEARS AND ONE MONTH! And you will save $6,400 in interest payments!
Of course, all this works only if you don't take on any more debt!
Q: I want to refinance my wife's car and her current interest rate is 7.4 percent. I am the co-signer for her. If we refinance her car, will that lower our credit score? We only owe $15,000, which is less than the car is worth. The reason I am asking is that we plan to purchase our first new home this year. — JP, Odessa, Texas
Jean Chatzky: Typically, refinancing a car loan won't impact your credit score. You do want to make sure that if you're shopping around to find the best interest rate, you do all of that shopping within a 30-day period. That way, each time a lender checks, your credit score will only be counted as one inquiry in the eyes of the credit-scoring system. This is important because having multiple inquiries on your file indicates to creditors that you're shopping for credit — in other words, you need money.
Other than that, as long as you're refinancing for the same amount you already owe, you should be fine. All you're doing is taking that balance and refinancing to a lower interest rate, which will lower your monthly payment, but not impact your ability to purchase a home down the road.