Angelique asks: "My husband seems to always over-spend … on things we really don't need. How do I get him to start a budget with me? This year we will be building a home."
It’s no secret that opposites attract and it’s especially true that savers often marry spenders. In fact a 2009 academic survey found that people with opposing emotional reactions toward money (e.g. spendthrift vs. tightwad) are attracted to one another. While that can be exciting at first, over time these differences can strain a relationship.
Mary Claire Allvine, a certified financial planner and co-author of “The Family CFO: The Couple's Business Plan for Love and Money
,” suggests encouraging your husband to budget with you by having a discussion about your 2013 goals, which in this case is to build a home. With the new year upon us, now’s a great time to get down to business.
“Enter the conversation by orienting it around goals that you both agree on and how some spending deviates from that,” she says. “The couples that have the least arguments about money aren’t always the rich ones. They’re the ones that have common financial goals.” Through this, too, your husband will hopefully see that you’re trying to be a team player, as opposed to pick at his faults.
To make budgeting simple and effective, try to automate as many recurring bills as you’re comfortable with (e.g. housing, car payments, utilities, etc.), along with an agreed amount of savings going toward the new home — say, 5% to 10% of each of your salaries per month. This approach reduces the chances of money being frivolously wasted and you can sleep calmly at night knowing that even if your husband does go out and splurge on a new toy, you have your financial bases covered. “Once your bills are paid and you’ve set aside money for your goals, there’s not much to argue about,” says Allvine. (For more on making smooth automatic transactions, see my answer to a reader’s question last week here).
And as for any new toys your husband may be tempted to buy, perhaps both of you should set aside money in your budget designated for those “nice to have” purchases. Decide what would be an appropriate percentage to allocate to your individual accounts and from there, enjoy spending without the guilt.
Mario asks: Is it wise to take a loan against your 401(k) retirement plan for bill consolidation purposes?
About 90% of 401(k) plans provide a loan option, according to researchers at Yale University, with one in five participants carrying an outstanding loan. But just because you can doesn’t mean you should take out a loan. Most financial advisers would say that, unless you truly have no other recourse, borrowing from your 401(k) should be avoided at all costs.
Before I spell out the potential risks involved in tapping your 401(k), let’s be clear about the upside: A 401(k) loan tends to offer relatively lower interest rates than a private bank loan or credit card. The rate is usually somewhere around prime + 1%, according to the National Bureau of Economic Research. (Right now, prime is 3.25%). And the interest you do pay returns to your account. A 401(k) loan is also more convenient to secure, as you don’t have to fill out a lengthy application or wait for a credit check for approval.
What’s the catch? Plenty. First, there are borrowing limits, usually up to half of your vested balance or $50,000 — whichever is less. The loan’s term — at most — is just five years, which may be too short a time period to repay. You also need to understand that if you lose your job or switch employers, the 401(k) loan will need to be repaid in full quite soon, usually within 60 days of your departure. If you fail to pay it back for any reason the outstanding loan balance will be considered in default. It will be taxed and if you’re under the age of 59½, it will also be considered an early withdrawal subject to a 10% penalty.
Finally, borrowing from your 401(k) essentially defeats the purpose of saving for retirement. You may find it challenging to continue contributing to the account while repaying the loan, but even if you can, many plans do not allow you to contribute until the loan’s repaid in full. That means missing out on tax-free compounding interest, as well as any employer match you could be getting. “The golden rule is to pay yourself first, and this destabilizes that. It can be a huge setback if you’re near retirement age,” says Bruce McClary, certified credit educator with ClearPoint Credit Counseling Solutions.
McClary actually advises steering clear of this option and pursuing other strategies if possible, and I agree. “If you have some credit card debt but also a good credit score, you can possibly secure a traditional loan with a competitive rate,” he says. Another alternative, if you don’t have too much debt, is to cash in some personal assets and use that money to pay off the debt. If you don’t have enough in assets, you may want to work with a non-profit credit-counseling group to help you negotiate better interest rates and lower payments.
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