In Times Of Transition, Get Practical About Your Finances
MICHEL MARTIN, HOST:
I'm Michel Martin and this is TELL ME MORE from NPR News. Now we're going to talk about matters of personal finance as we have mentioned, this is the last week of our program and that means many of us are finding ourselves in transition. Some are going to new jobs here in this building, some are trying their hands at freelancing and while that's going on some are welcoming new family members. We figured we're not alone in this, so for our last Money Coach conversation, on this program anyway, we decided to gather some of the people who've been nice enough to give us some good advice over the years to talk about managing money during transitions. Joining us now are personal finance expert Louis Barajas with us from Irvine, California. From Cleveland, Plain Dealer consumer columnist Cheryl Harris. And Alvin Hall a financial educator, our original money coach, with us from New York City. Welcome everybody. Thanks so much for joining us.
ALVIN HALL, BYLINE: You're welcome.
LOUIS BARAJAS: Glad to be here.
CHERYL HARRIS: Thanks, Michel.
MARTIN: Alvin, you don't sound as glad as you could.
HALL: I am very glad to be here. I'm a little sad.
HARRIS: Me too, Michel.
MARTIN: So are we all but let's make the best of it. To that end, Alvin, people always say, you know, don't make any big decisions, you know, in a crisis. But you can't help it. I mean, you can't help it. So for example if there's a job loss or sudden job loss you don't have a choice but to make some decisions. So what's the first thing you should do when you're faced with something - particularly something unexpected?
HALL: Try to avoid making any decisions when your emotions are very high or you feel a lot of anxiety because almost always that indicates you're going to lose your perspective on the situation. So take some time and start taking notes on things that you need to take care of, things you need to look at financially and then prioritize those things over a time as you gain a little bit more - a calm about the situation. Because I've been in that situation where you walk into an office one day and your boss says to you, this is your last day on the job. And you walk out of there almost starstruck - just dumbstruck by the situation. And so, what I tell everybody, take some time and calm down and start to prioritize those things you need to pay attention to.
MARTIN: Cheryl, what about you? Obviously if you're faced with sudden job loss or some kind of, you know, something like that you're going to have to adjust your budget but what do you do first? What do you do first?
HARRIS: Well, what I think is first of all, don't make your situation worse. Don't start adding new debts, you know, try to look at, you know, the payments that you have, the income that you actually have on hand, the payments that you have going out, especially debt payments and credit card payments. The two biggest payments that you want to be able to keep making are your house payments or, you know, rent - keep a roof over your head. And a car payment. So I think you're just going to have to kind of prioritize payments. There is a wonderful, wonderful website for anyone who gets caught flat-footed by a layoff or a job loss. It's the extension site extension.org. These are the home extension agent and home ec people. If you go to that website extension.org and type in managing money in tough times, they have everything from how to barter for services, how to cut your food budget, I mean, they are practical and wonderful tips and I recommend them to everyone all the time.
MARTIN: Louis, anything you want to add to that?
BARAJAS: Yeah. I always use a formula called E plus R equals O. Where the E equals the events and sometimes you just can't control the events in your life and so what happens is most people react by giving a knee-jerk reaction to those events. And the O stands for outcome, so E plus R equals O. So what I do is I shift them to the outcome. So some things happen, you can't change that. Let's focus on the outcome. Instead of reacting to what's happened, let's respond. What do we need to do? And then create a plan for that.
MARTIN: So, Louis, let's go the other way. Let's say you've just gotten a promotion or big bump or something like that. Louis, what's the first thing you do or you recommend that people do when something like that happens?
BARAJAS: Well, again, I want to clearly communicate with them or have them communicate what are they trying to accomplish? If they're behind the 8-ball for their retirement, now's a wonderful time not to use that extra money when they've gotten a promotion is to spend it - it's to actually decide how much more are we going to continue to the retirement plan or how much more can we add to the children's education. So it's going back and kind of going back to the basics and looking at your budget seeing how that extra income is going to actually create some changes in their lives.
MARTIN: So, Louis, you know, it's - sometimes people recommend that you take a little bit of a bump and blow it just so you can have that experience of doing it. I mean, I've heard people give that advice to somebody who's gotten like a big windfall like a lottery or something like that, where they just - or some kind of unexpected windfall - a bonus. You designate a portion of it to do something stupid just so that you can - do you believe in that? Or do you think that sends you down the wrong path?
BARAJAS: You know, that's hilarious because almost everyone that I meet these days is blowing it whether they have the money or not, right?
MARTIN: Oh boy, OK.
BARAJAS: They're taking the vacation. So at some point I say, look that you've had enough chance, you know, whether you've been on a diet, you've been blowing it. Now's the time to really get on a diet and right now's the time to really start saving. So again, I want to kind of clarify that they want to make sure that this extra money that just came to their hands - sure, fine, go out and have a great dinner. But let's get it to use in something that's really important in their lives.
HARRIS: I like the one third, one third, one third rule. You stuff one in your retirement because it's going to work for you. You shove a third of what you're getting into a savings account - because nearly everyone in America needs a bigger savings account than they have. And then a third you can live on it and enjoy, you know, the fruits of your labor so...
MARTIN: You know, Alvin I wanted to talk to about freelancing. So some people when they are faced with a job loss, they say to themselves, you know what, this is the time to do what I really want to do. And so they convert to say, let me try hand at freelancing so I can do more of what I want to do and less of what don't want to do. Do you have some advice for somebody who just says, this is a great opportunity to transition into freelancing? Because I know that that's something that you've done - how do you do that?
HALL: Yes. And I was just having the conversation on Saturday with a friend of mine who made this same decision. And I said to him, do you have three to six months worth of your business expenses in the bank so that you can cover yourself? Because when you start freelancing you may not have a client on the books at that time or you may have one or two, but bringing in the new client is going to be a lot more difficult than people think. The second point I make is be prepared to work harder than you've ever worked in your life because when you work for a company, the check comes in, administration gets taken care of. But when you're freelance you become everything - the marketing person, the billing person, the collection person, the admin person. You have to keep that going and you have to be really organized. And you end up working much harder than you imagined. And third point is to keep yourself motivated. Don't get so caught up in the work you're doing now that you forget to set aside a certain amount of time to always look toward the future so you can continue to bring in new business. You have to be very organized and very much in control of yourself to succeed at being freelance.
MARTIN: We're having a Money Coach conversation about things to consider when you are in transition. We're talking job loss, salary increase, expanding family, divorce. What are the things that we need to know when life changes are. Our guest are financial educator Alvin Hall, consumer columnist Cheryl Harris and personal-finance expert Louis Barajas. So, you know, expanding a household or family changes - that's a big one for a lot of people. And, you know, we are very happy to report that we're planning to welcome two new, not me - just to put that out there, don't want anybody baby scared, especially not my husband - but two members of our staff are expecting new additions. And we're really happy about that. But Cheryl, why don't you talk about that? Because one of the things that I've noticed is people get inundated with stuff, you know, offers for stuff. Do you have some advice about kind of weeding through what's the right stuff?
HARRIS: I do. And I think there are tons of useless baby products that people should not waste their money on. I mean, the two biggest purchases that you need to make - good quality new or newer crib - no crib that's older than 10-years-old, cribs without cutouts, I mean, cribs are the place where you keep your baby and you're not there to watch them. And it's important to get a really safe, good crib. A good car seat and preferably one for each car you have because you're going to be handing off a baby - it just happens. So it's better to have both cars stocked, equipped with really good car seats. And if you're not sure how to put them in, if you go - there's a place in your community usually it's the Fire Department that will help you. They'll help you learn how to strap it in so that you install it correctly. What I think you shouldn't buy is a bassinet. And they're so cute and they're so darling. Everybody's got one. They all used it for about six weeks and it's not a good purchase to have. Bumpers, baby bumpers, the crib bumpers, comforters, pillows those are dangerous. The very first thing your pediatrician is going to tell you is do not put your baby in a crib with pillows, crib bumpers. You have to take all that stuff out because those are suffocation hazards and they're very real ones. So just go with a plain crib from the start and, you know, decorate after they become toddlers.
MARTIN: Decorate after they become toddlers. And throw stuff on the walls, yeah. (Laughing).
HARRIS: Exactly. (Laughing) And the last thing, Michel, if I could just add - baby bath seats these are really dangerous things. And the reason they're dangerous is because the way people use them. They think that because a baby is sitting in a ring in water and their head is above water that they can be distracted for a moment - they can turn their back to answer a phone, leave the room to grab a towel. Baby bath seats should not be in your house. And once you have your baby don't ever let the baby sitter wash the baby for you. I mean, that's a job that you should do. It's a really important job. And I would say tiny baby bathtub maybe, but you have hands-on, eyes-on baby at all time when it's in the water, so.
MARTIN: OK. You know, Alvin a lot of people when they're expecting think I need a bigger place, I need a bigger place. How do you - how would you recommend that somebody go about deciding that? Whether you need a bigger place or should you even think about, you know, renting versus owning how do you go about making that decision about when is the right time? I know these days a lot of people are really thinking whether it's in their best interest to own or not.
HALL: Yes. I think you look at the impact that the child has upon your life and your budget once the child comes into the world. Because then you get a sense of what your real expenses will be and how that will impact your carrying costs if you go to buy a new house. That old wisdom of buy the biggest house you can afford even with a kid because your family is going to expand - it may not be true. Because you're job's so iffy at - right at this point. The economy may not be doing well. So you need to look at how much of an impact having that child will have on your cash flows, on the money that you have and then consider buying a house or moving into a property that will suit your budget. And renting is not bad as a bridge between owning two properties. If you already own, maybe it's time to take advantage of the good market that we see in many cities across America and rent for a little while until you can find the house that meets your financial needs that you know you can afford through good times and bad times.
MARTIN: Louis, what about you? Do you want to add something here? Are there common makes you see people make when they either welcome a new addition to the family or get married for the first time or something like that?
BARAJAS: Yeah, for new parents, I mean, there's three really big issues that they need to take a look at, at least from a financial planning stand-point. And one is for the first time, if they haven't thought about it, is creating an estate plan - having a nomination of a Guardian, a will, a trust, in case something happens to the parents, what's going to happen to their children? Now that's really important. The second issue maybe they've never even thought about before they had children was maybe increasing or getting life insurance that will help take care of their families in case something happens to the parents. And at the same time, it's not too early to start thinking about college funding and thinking about what 529 plans or how much money it's going to cost your kids to go to college 18 years from now. Can you imagine what those costs will be? And so, those are three key issues for new parents to look at as well.
MARTIN: So Cheryl, to the opposite end going back in the sad direction now, uncoupling - that, you know, that does happen. Are there common mistakes you think people make? Are there some tips that you would want to give to people who have, you know, made the decision that it's time to sever a relationship - particularly a marriage - common mistakes or pitfalls that you think you'd like to help people avoid?
HARRIS: Yeah. One is joint credit cards and joint accounts. If you think you're going to be parting ways, it's really important to get your name off of joints especially credit card accounts with someone because a lot of spouses think - sometimes people get very vindictive in those situations. Not everybody's thinking really rationally and they'll run up a bunch of debts and as sort of a punitive thing with an ex or a soon-to-be ex. And I just want to tell folks even though a judge may at the end of the divorce say, look this party is responsible for the bill - that really doesn't play outside of the courtroom. If you both have your names on that account as users when it goes into debt collection or someone's not paying that bill they will go after you for the money. It's really hard to dodge those costs. So I would say start uncoupling your finances first. Have your own credit card - especially for women if they have joint accounts, I hope no one does this anymore, but I really hope people have separate credit accounts but I would start uncoupling those first.
MARTIN: Alvin, any final thought there?
HALL: Yes. I think that they need to sit down and, as rationally as possible, look at what their lifestyles are going to be like after the divorce. Often there is diminution of lifestyle that they do not anticipate. And then as they watch, as things get smaller, they're struggling more, they become vindictive. Just as Cheryl says, you know. I shouldn't be living this way, look at what I had before. You have to be really rational when you go through a divorce. And it's a hard thing to do. Look at what your budget is going to be and your lifestyle is going to be after the divorce and expect it to be smaller.
MARTIN: Louis, final thought from you on that?
BARAJAS: Yeah. There's some huge tax issues. A lot of people, what they do is they just want to get the divorce or the separation over. And what they'll do is they'll just hand over certain assets to the other person. For example, if I get a divorce and I tell my wife, well you keep the house and I'll keep the 401K, in reality my wife is getting 100 percent of the equity in that house and I may only be getting 70 percent of what I kept in the retirement plan because if I were to pull money out I'd have to pay taxes on that. Where I would not pay taxes on the equity of my personal residence. So be very careful about that and don't make any knee-jerk reactions.
MARTIN: So, Alvin, we have minute left. Since you're our original Money Coach guide, we've got about a minute and half left. Do you want to just give us some final thoughts? I just want to say that we appreciate all of you over the years - the advice that you've given, the fact that you've kind of pointed out things that perhaps people don't think about, you know, lots of people write books. Many of you have written books, but you also talk about kind of the emotional side as well as just the dollars and sense side. And I really appreciate that in your contributions to this and also thinking about the ways that people are different in the world. You know, everybody circumstances are not the same. So we've really appreciated that fact that you've always been mindful of that. But Alvin, we have about a minute left - do you have any advice for us?
HALL: Yes. First of all, it's been great to work with Cheryl Lewis and you over all these years. But I think the one thing going forward that all of us need to remember is that people want money to be magic - even though we sit on this program and we offer them really practical advice, Cheryl's website that she just talked about, Louis' ideas about taxation all that sort of stuff - really good. But everybody wants money to be magical. They want to spend it, they want to make it make their dreams come true without any relationship to reality. One of the things I think all of us need to think about as we talk about money in the public forum is to give people enough freedom so that they can fantasize about money but also bring them back to the level where they can be practical. Encourage them to prioritize what their dreams are and to pursue practical dreams, ones that will make them feel good. But handle money well, because there are always those what-if's situations and there's always time ticking away toward retirement.
MARTIN: All right. Alvin Hall, financial educator in New York City. Louis Barajas is a personal finance expert in Irvine, California. Cheryl Harris is consumer columnist for the Plain Dealer in Cleveland. Thank you all so much for joining us. We'll see you on the other side.
HARRIS: Thanks, Michel.
HALL: We're making a transition.
NPR transcripts are created on a rush deadline by a contractor for NPR, and accuracy and availability may vary. This text may not be in its final form and may be updated or revised in the future. Please be aware that the authoritative record of NPR’s programming is the audio.