March 9th, 2009, by

Q: I have had to change jobs three times in as many years, and not completely by choice. In this time, I have been passed over for promotion, had my position eliminated and, most recently, replaced while on (unpaid) paternity leave. I was, by the accounts of coworkers, supervisors and clients, more than competent at all three of these positions. Yet, I was still viewed as expendable.

I’m wondering if this lack of employee loyalty is a byproduct of the current economic situation, or is this a new trend that will continue? And what should workers under 35, such as myself, do in the short and longer term under these conditions?

A: I’m not sure it will help you, but you are not alone in feeling you have no job security.

A study conducted for financial services firm Edward Jones found that 38% of Americans rank unemployment as their biggest concern, topping the list for both men and women. In fact, according to the survey, people worried about their job security more than the economic downturn, stock market performance, healthcare costs and saving for retirement.

Fear of unemployment was also higher among Blacks, with 55% of African Americans more concerned about job security compared with 37% for whites and 31% for Hispanics.

It used to be that certain jobs carried almost lifetime employment, and people felt if they were good at their job, they could have job security.

But alas, times change. Employers began to employ the strategy of quickly trimming their payrolls to get a boost in their stock prices. Now they are cutting jobs to simply stay afloat.

My grandmother, Big Mama, worked for the same employer for 25 years and was never late, even one day, during that time. In fact, after working eight years for one newspaper, when I got an offer to work for The Washington Post, she was outraged that I was going to take the job. She believed in loyalty to your employer. Like many workers, I chose to pursue the better opportunity.

Employees are quick to switch jobs if a better offer comes along. Many people feel loyalty to a company is a sucker’s bet.

So what can you do to hold onto your job?

In some cases, there isn’t anything you can do. The unemployed face a miserable March, with employment expectations plunging in the manufacturing sector and weak in the service sector, according to the Society for Human Resource Management. The economy is bad, and companies are trimming their workforce, firing good and bad employees.

But here’s what you can control:

  • Have an attitude of gratitude. Seriously, when my supervisor asks me to do something, I don’t grouse. I do it, if I can, because frankly I’m grateful to have a job. When employers are looking to cut, they may search around for the complainers or those who fuss about every added job. The fact is a lot of people will have to double up on their duties because of a leaner staff. I’m not saying be a doormat. But don’t be the person in the office who’s always complaining.
  • Show your employer how valuable you are to the company. Speak up about your triumphs.
  • Work with your supervisor to create realistic goals and then show that you’ve met those goals. The key is to make sure you are doing the job your boss wants you to do and values. And don’t wait for your year-end evaluation to ask for a checkup of how you are doing.
  • Create allies in the company. Don’t just hang around your peer co-workers. Find higher-ups to mentor you and who may defend your service or work if layoffs are coming.
  • Don’t just do the minimum required. Look for opportunities to show you can do more than asked.

Finally, prepare for the worst, expect the best. In this economy, with unemployment still rising, put aside as much money as you can in the event you are still laid off, even after being a stellar employee.

February 26th, 2009, by

Q: What happens if you buy 100 shares of a stock at $4, then the stock goes down to $2.50? Do you lose the stock or the dollar difference between $4 and $2.50?

A: Well, I’m a little worried about you buying stock shares without knowing the basics, which is clear from your questions. But it’s good that you are asking questions.

When you buy stock in a company, you become a shareholder, essentially an owner albeit with limited power. What you get back in relation to what you paid for the shares depends on the success or failure of the company.

You do not “lose” your stock shares, as you put it. The stock shares are always yours until you sell. What you lose—at least on paper—is the difference between the current share value and what you paid for the shares. You only lock in your losses when you sell. So for example, if you sold your stock shares for $2.50 after paying $4, your loss is $1.50.

However, if you hold on to the shares, they could go down further or go up, in which case you can realize the upside gain if you sell at that point.

I like that you are interested in investing, even considering the crazy gyrations of the stock market. But, for the average investor, many experts recommend you invest by buying shares in a mutual fund. Mutual funds have allowed millions of people to invest and enjoy the stock market without having to spend time picking stocks and without having to worry themselves gray tracking the daily ups and downs of their stock shares.

During normal market conditions (when we aren’t seeing heartbreaking drops every day), investment advisers generally recommend investing no more than 10% to 20% of an investment portfolio in any single stock. And, given the current state of the stock market, I would err on the lower side of that percentage rule.

When investing, it’s important to remember this one word: Diversification. What you don’t want to do is put all your money in one particular investment.

Diversification is an investment strategy for spreading your principal among different markets, sectors, industries and securities, explains the Financial Industry Regulatory Authority (FINRA), the largest non-governmental regulator for all securities firms doing business in the United States.

As FINRA points out, the goal is to protect the value of your overall portfolio, in case a single security or market sector takes a serious downturn and drops in price. In short, diversification means not putting all your eggs in one basket or one stock.

So, before you invest, I want you to go to FINRA’s Web site and do some research. Pay particular attention to the “Choosing Investments” section.

February 12th, 2009, by

Q: Thank you for providing the great resources, especially the budget planning and expense tracking information. Reading your column has helped me plan better for my future. I am saving and can see a brighter future, including being debt free. Keep up the great work.

–Michele Earney, Minnesota, mother of 4

A: I didn’t post this note because it was a pat on my back (even though it’s nice to know my advice is helping). I wanted to share this message because, in this recession and global economic crisis, it helps to see that some people are doing well. Not perfect, but well.

This mother of four mentioned two little words that always warm my heart, “debt free.”

Becoming debt free is a goal that you too can go for.

I know we are a debtor’s nation. Our government is in debt. Corporate America is limping along in debt. And far too many individuals are mired in debt. It becomes easy to think debt is, and always has to be, part of your past and future.

But it doesn’t have to be.

You can buy a car for cash and not get into auto debt.

You can use a credit card and pay it off the next month without rolling over debt for things you probably can’t even recall you purchased a month later.

You can go to college without student loans. It will be tough. You may have to live at home and stay in state, but it can be done.

And you can pay off your home before they bury you six feet under.

The good news from this current recession is Americans are saving again. The U.S. personal savings rate trended upwards in the last few months in 2008. The savings rate rose to 3.6% in December, according to the Commerce Department.

Americans’ personal savings rate fell into negative territory in 2005, something that hadn’t happened since the Great Depression.

So, as hard as financial times are right now, don’t give up hope. Keep that goal of getting out of debt front and center.

February 5th, 2009, by

Q: HELP! I have one credit card, and they have raised the interest rate. It went from 12.9% to 30%, and now they are turning it over to a collection department. I am living paycheck to paycheck and sometimes not making it then. What can I do? I am married and my husband is only working one job. When I try to suggest something, I get no response. I am trying to find something, but no success so far. I also have an 8-month-old to think about. Can you help me?

A: If misery loves company, then you should take heart in knowing you are not alone. Late payments on credit cards reached record levels and defaults rose sharply as consumers struggled to pay their bills in a “deteriorating economic environment,” according to the latest Credit Card Index results from Fitch Ratings.

Credit card debt delinquent at least 60 days reached 3.75% in December 2008, up from a high of 3.73% recorded in February 1998, according to Fitch Ratings.

In December bank credit card charge-offs increased to 7.5%, the highest level since 2005. Fitch anticipates charge-offs will reach 8% in the coming months and go as high as 9% during second half of 2009.

Part of the reason there are more people falling behind is illustrated in your case. You get in trouble and the credit card company raises your interest rate, which makes your minimum monthly payments higher, which in turn makes it even more difficult for you to pay your bill.

Somehow the companies don’t seem to get that if you beat a dead horse, he doesn’t jump up and come alive. He’s just stays dead.

But here you are in a pickle. First, I don’t want you to beat up on your husband. I mean the man has a job. These days, that’s saying something. You shouldn’t nag him about not having a “second” job. Now that’s not to say you two shouldn’t be looking for ways to bring in additional income. However, the tendency is for couples to lash out at each other when things get tight. Don’t do that. You are in this together with a baby. And I suspect he didn’t run those credit card bills up all by himself.

Second, do whatever you can to cut back on your expenses. I mean cut everything, including cable, your cell phone bills, etc. Everything has to be on the chopping block so that you can eek out whatever savings you can to pay down your credit card bill.

Also, I certainly hope you are not using this one card anymore. Cut up the card. Freeze it or whatever it takes to make it harder for you to use it. But you can’t use it anymore.

You are on the right track as far as trying to increase your income. The way to get out of debt is to cut back on expenses or get another job or both.

In your note there was no indication that you’ve tried to call the credit card company to negotiate down that 30% interest rate. If you haven’t called, call today! The companies are dealing with a lot of people in debt, so they know the drill. If you get nowhere with the first person you get, ask to speak to a supervisor. Keep asking up the corporate chain until you get somebody who will help you. In addition to asking that the interest rate be dropped, ask for a payment plan to help take some of the pressure off. Only promise to pay what you realistically can afford.

If you are not getting any help with the company, go to DebtAdvice.org. There, you can find a non-profit credit counseling agency near you that may help in negotiating with your creditor to come up with a payment plan you can afford. When you contact the agency, get an appointment for you and your husband to sit down with someone who can help you budget better going forward.

I want to say one more thing to you. You should do everything in your power to honor your word and pay back this debt. However, you should take care of your necessities first—food, housing, utilities, etc. This debt can wait. And do not let it take your marriage down. That baby needs a mommy and a daddy working together to get out of this mess.

January 29th, 2009, by

Q: I was wondering if mortgage lenders would help adjust or refinance loans even if the borrower hasn’t missed any payments yet. We have two monthly mortgage payments totaling $2,100. For the past year, I’ve been a stay-at-home mom and, of course, have no paycheck coming in. While we haven’t missed a mortgage payment or even been late paying, we often have to dip into savings to cover the monthly bills. And we’ve cut back about as much as we can. Because our main loan is interest-only, we have very little equity built in our home. Therefore, I don’t think we can refinance.

If I call the lenders and explain the financial hardship we’re in, do you think they’d be willing to work with me even though I haven’t missed payments?

A: You are right to be concerned because you are dangerously close to falling behind on your mortgage. But of course you know that.

So, yes, call your lender and join the long queue of people in the same situation. You are right that, ironically, you are at a disadvantage because you haven’t missed a payment.

Think of it from the lender’s perspective. You signed a mortgage promising to pay a certain amount every month. You’ve paid that amount, even if it’s been a hardship. So, why would they renegotiate your loan if you’re paying as agreed? There are so many people ahead of you calling and who have received foreclosure notices, that it’s likely you won’t get any assistance on your first try.

But, having said that, lenders also are acutely aware that there are many homeowners like you, who are just a paycheck—or drained savings account—away from losing their homes.

So, here’s what you should do:

  • Call your lender right away and see if there is anything the company can do to lower your payments for now. But, at some point, you need to get into a fixed rate mortgage.
  • If that doesn’t work, contact a HUD-approved housing counselor. The “HUD Approved Housing Counseling Agencies” page of the agency’s site can help you find one near you, or call toll free (800) 569-4287.
  • I also want you to view a list of very useful “Tips for Avoiding Foreclosure” provided on the HUD site.

I know this is a hard time for you, but at least you are looking for help before you miss that first mortgage payment.

January 26th, 2009, by

Q: Should we cash out our IRA for a down payment on a great deal of a house? It is a short sale in a great area; so, we would have 20% to put down and avoid PMI and get a 4.75% interest rate?

A: For those who don’t know—and there are many—let me explain what an IRA is. An individual retirement arrangement, or IRA, allows you to set aside money for retirement with some tax advantages. You may be able to deduct some or all of your contributions to your IRA. Your contributions and earnings generally are not taxed until distributed to you. However, if you take the money out before reaching age 59½, you may be subject to a 10% additional tax.

However, recognizing that people have limited savings, there are exceptions to the 10% penalty rule. Here are some of them:

  • You have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income.
  • You are disabled.
  • You are the beneficiary of a deceased IRA owner.
  • The distribution is due to an IRS levy of the qualified plan.
  • The distribution is a qualified reservist distribution.
  • You use the distributions to buy, build or rebuild a first home.

As for the first home, you do not have to pay the 10% penalty on up to $10,000 ($20,000 if you are married) of distributions you receive to buy, build or rebuild a first home. Generally, you are a first-time homebuyer if you had no present interest in a primary home for the previous two years. If you are married, your spouse must also meet this no-ownership requirement.

I should note, your withdrawal is still taxed at your current marginal tax rate.

Before using the IRA money, read IRS Publication 590 “Individual Retirement Arrangement (IRAs).”

Now, having provided the background and the facts, let me give you my opinion. I would do everything in my power to avoid tapping this money.

Even without the 10% penalty, you’re hitting up the fund you specifically set up for retirement. While homeownership is a worthy goal, you shouldn’t do it with money intended for your retirement. If it were me, I’d wait and save up the money. Besides, if you’re like many right now, your IRA investments are probably way down. You’ll be locking in losses on top of having to pay tax on the money.

But, if you are dead set for taking this money, be sure the mortgage is affordable and you can quickly rebuild your retirement account.

January 15th, 2009, by

Q: I am in my forties with two daughters-one is 16, and the other is eight. I have credit card debt and a mortgage to pay. I would like to know how I would start investing now for my girls to go to college.

–A visitor, Philadelphia, PA

A: You are so right to be thinking about saving for your children’s college education. Studies show that the typical college graduate leaves school with close to $20,000 in student loan debt. And many more graduates leave with much more than that.

But, it doesn’t appear you have the funds to save, just yet. You need to first get rid of that credit card debt. I don’t know how much you have, but any amount you aren’t paying off every month is too much. You should also have at least three months living expenses saved up. And by that I mean you should have enough money in an emergency fund to cover all your expenses—mortgage, car payment, food, utilities, cable, etc.—for three months. That way, if you lose your job or become ill, you will have enough to live off.

I also hope you are saving for your retirement. If not, that actually should come first before you begin saving for college for your children.

Once you become free of that credit card debt, and you’re saving for your retirement, I would recommend a 529 college savings plan for the younger child. When you invest in a 529 savings plan, you put in after-tax dollars, but your money grows tax-free, and distributions (the money you take out later) are free from federal taxes, as long as the money is used to pay for qualified higher education expenses.

Every state and the District of Columbia offers at least one 529 plan. But, you are not limited to investing in your own state plan. Another state may offer a plan that performs better and has lower fees. However, you still should check out your state plan, especially if the state offers a tax deduction for your contribution.

In your case, I see you are from Pennsylvania. Lucky you, because the maximum annual state income tax deduction is $12,000 per Pennsylvania taxpayer per beneficiary and $24,000 for married couples filing jointly, provided each spouse has taxable income of $12,000. Click here for more information about Pennsylvania’s plan.

This type of 529 plan operates much the way 401(k) retirement savings plans do. States, like employers, arrange for an investment company to set up and manage their 529 savings plans.

I should also note your child does not have to attend a school in the state where the plan is set up.

Each 529 plan can have a number of investment options. The money you invest is always yours. However, if you withdraw the money, and it’s not used for qualified higher education costs, your earnings may be subject to taxation and a 10% penalty.

I’m going to refer you to some resources for more information on 529 plans. The first is “A Guide to Understanding 529 Plans,” which you can download by clicking here (PDF).

The second source is Savingforcollege.com. This site offers a wealth of information about 529 plans.

Saving now for your 16-year-old will be more difficult. Because investing in a 529 plan should be long term, and your child will probably be entering college in less than three years, I’m not so sure you want to put any money you have at risk in such a short period of time. Considering the see-sawing we’ve been seeing in the stock market lately, you don’t have a lot of time or money to risk, where the older child is concerned.

That means thinking of other ways to cut cost for college. If your household income is relatively low, your child is likely to qualify for a lot of scholarships. For example, many Ivy League schools are offering full scholarships to families with low to moderate incomes. Start looking now to see what may be available.

Also consider community colleges. Your child could get all the basic course requirements out of the way and then transfer to a four-year university. Or he or she could go to a state school and commute from home to save money.

The point is there are many ways your child can still go to college and not break the bank. Good luck!

January 12th, 2009, by

Q: How do you roll a 401(k) into an IRA with the same investment company? Should I be able to preview their investment options before I decide? Will I lose any money on the rollover?

A: Typically, the question of what to do with a 401(k) plan comes up when someone is switching jobs. If you are leaving your job, you have a few choices as to what to do with your retirement money.

You may be able to leave the money in the old 401(k) plan and roll it into your new employer’s plan, if thats allowed, or roll over the money into an Individual Retirement Account (IRA). Theres another option; but, unless you are in dire straights, I wouldnt recommend it. You could cash out, but thats an expensive choice. So, lets look at the other choices.

A change in the tax law allows you to take your retirement money to your new job if the employer has a 401(k) plan. You may have to wait awhile before you can make the transfer of funds. During this wait period, you can just leave the money where it is. If your account has more than $5,000, your former employer can’t kick you out of the company-sponsored plan. If you are happy with the returns and choices in your old plan, you could just leave it be. If you have less than $5,000 in the plan, you may not be able to stay in your old plan.

If you arent happy with your old plan, or you just want more options, you take the money and put it in whats called a Rollover IRA, which allows you to invest the money however you want. If you choose this last option, make sure the money is transferred directly from the old plan to the new IRA. If your employer makes the check payable to you, the company is required to withhold 20% of the money for tax purposes. If your employer sends you a check for the remaining 80%, you have to make up the missing 20% to avoid the penalty for taking a nonqualified distribution.

However, dont worry; youll get the money back when you file your next federal tax return. If you dont make up that 20%, it will be included in your gross taxable income. So, remember to avoid any tax issues in a rollover, make sure your company 401(k) plan makes the check payable to the institution setting up the IRA and that check is deposited directly to your IRA.

If you forget this advice and get the retirement money, please, please, be sure to roll it over before the 60-day deadline. If you fail to roll over the money within 60 days, you will be subject to a 10% penalty for withdrawing the money early. I can’t tell you how many people get caught with a nasty tax bite because they neglect to roll over their retirement money to meet the 60-day deadline. [There are some limited exceptions to the 60-day rule. The IRS may grant you a waiver if, for example, you became disabled or are hospitalized.]

Doing the rollover wont result in a loss. A rollover is just the process of moving your retirement savings from the 401(k) into the IRA. Rolling over to an IRA allows you to keep your savings tax-deferred and typically gives you a broader choice of investments. And of course you will be able to determine how your money is investment with a rollover IRA.

December 30th, 2008, by

Q: What are your thoughts on municipal bonds?

A: First, I should explain municipal bonds. A municipal bond is a debt obligation issued by states, cities, counties and other governmental entities to raise money to build schools, highways, hospitals, etc.

As described by the Securities and Exchange Commission, when you purchase a municipal bond, you lend money to the “issuer,” the government entity that issued the bond. In exchange, the government entity promises to pay you a specified amount of interest, usually semiannually, and return your money, also known as “principal,” on a specified maturity date.

The reason investors like these securities is that the interest you receive is generally exempt from federal income tax. The interest may also be exempt from state and local taxes, if you live in the state where the bond is issued.

To learn more about investing in municipal bonds, visit the Investing in Bonds site.

So, having said all that, I like municipal bonds, and I own some myself. If you are looking for relative safety and a tax advantage, this type of bond can fit nicely in a well-diversified investment portfolio.

December 22nd, 2008, by

Q: With drops in the stock market, what is the best way for me to deal with my 401(k)?

A: I know these are tough times for investors. Seeing triple-digit drops in the stock market is enough to make you clutch your heart like Redd Foxx used to do when he played Fred Sanford in the ’70s sitcom Sanford and Son.

But, despite the market tumbles, if past performance is any indication, it will go up again. Of course the question is when.

Nobody knows when the market will recover. So the thing is to stick to a good investment plan. If you have a decade or two to go before you need to retire, don’t lose faith. Think of this time like a closeout sale. You can get shares of good companies on sale. This is a good time to buy but you need to be sure you are buying right.

Diversification is the key word in this market. And all that means is making sure you are investing the money you are putting in your 401(k) in various asset classes, overall stocks and bonds. You want to be sure your retirement account has shares of large, medium and small companies. The longer you have until the retirement, the more stock you might want to own within that portfolio.

Talk to a representative of the company managing your workplace 401(k) plan to get more specific help.

And if it helps, I haven’t stopped contributing to my retirement plan, even though I’m experiencing the same losses as everyone else. But, if you jump out, know that those losses, which are only on paper now, will be locked in.

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