Master Your Debt

In Your Teens and 20s: Clean Living

The single most important move you can make as you are beginning your financial life is this: Learn about money. Reading this book is a great start. Check out the resources at the back of the book, and do more studying on your own. Think of it this way: You probably have spent more than a dozen years taking math, or Spanish, or history. That has prepared you for some tasks and for more study. Learn about borrowing, budgeting, spending, and investing, and it will come back to you in the form of dollars saved and earned over your entire life. Here are other money strategies for 20-somethings.

• Use money. Get a checking account and debit card as soon as you have a job (even if it’s a babysitting gig) and start earning money. Get your parents to help you open the account, if necessary. Learn to deposit and save, withdraw and spend.

• Build credit. Once you’ve got that down, get a credit card. Following recent credit card legislation, you may need to get your parents to cosign the card with you. That is okay, but you should manage the card, get the bills, and pay them, even if you are doing so from an allowance while you are in college. Use the card as a convenience instead of carrying cash, and pay it off in full every month. Keep your credit limit low until you’re comfortable working with your card.

• Limit student loans. Think three times or more before you sign up for any costly private loans, especially if you’re not sure what you want to do after college. Comparison shop for the student loans you do take out. Remember that paying them back could crimp your postcollege choices.

• Start saving for short-term goals. You will need a decent credit score and an extra couple of months’ rent to get your first apartment, and you will need money to furnish it. It’s hard to save while you are also building your first professional wardrobe and commuting to your first low-paying job. But the more cash you accumulate, the better—especially of you want to position yourself to buy your first home. In this tough new mortgage era, you will definitely need a down payment.

• Add other debts. As you move through your 20s, you’ll probably sign for your first car loan, and possibly for your first home loan. All of that will help you to build a solid credit file. And that will help you to borrow more money less expensively in the future.

• Get health insurance. Even if you have to pay for it yourself, you should have health insurance. Even invincible athletes can sustain injuries. You aren’t just protecting the few bucks in your bank account; you’re buying access to better health care. And you’re protecting your parents’ future, too: If you did have a health emergency and no health insurance, you know they’d probably step in and help, even if they couldn’t really afford it. Until recently, insurance companies typically removed kids from their parents’ insurance plans as soon as they graduated from college or turned 24. But many states have passed laws allowing parents to keep their children on their health insurance plans until they are as old as 30. Check the rules in your state.

• Start to invest. Use a Roth individual retirement account if your taxable income is not very high. Put at least enough into your employer 401(k), 403(b), or 457 plan to make sure you get the full benefit of company matching contributions.

• Be rigorous about paying bills on time and not borrowing too much. I hear from so many young people who get in serious, serious trouble before they even understand what they’ve done. Then it takes years to climb out. Protect your future.

The 30s and 40s: Building Wealth, Getting Squeezed

These middle years may be ones in which your career finally feels like it is clicking, but you probably still feel squeezed. No wonder: You have to figure out how to pay for everything from soccer shoes to sofas to retirement contributions. Your parents may be looking to you for help. The central financial task for this time of your life? Setting sensible priorities and sticking with them. When you decide what you really want to say yes to, it’s easier to know what to say no to. Other debt management moves for the middle years:

• Stay on top of your credit cards and other consumer debts. Terms change annually, so at least once a year review all of your accounts and make sure you are getting the best deals. Don’t be afraid to shuffle balances from one account to another if it gets you closer to your financial goals.

• Expect a lot from your mortgage. If you don’t love the loan you have, consider refinancing. Determine whether you want to put yourself on a schedule for paying it off early.

• Apply for a home equity line of credit. Even if you don’t use it right away, it’s useful to have this borrowing power at your fingertips. And when you need it, you may not be able to qualify.

• Borrow and spend money for appreciating assets, not depreciating ones. Skimp on your car, if you must, to make your mortgage payment and your retirement contribution.

• Invest, invest, invest. Invest in retirement accounts and in your own career via continuing education, business equipment, and other expenses that will make you money in the future.

• Help set your kids up for college. Establish Coverdell or 529 college savings plans for them. When grandparents and other relatives ask for gift advice, point them in that direction.

• Protect your family. That usually means having adequate general policies for life, health, home, auto, and disability insurance. It usually doesn’t mean having specialized policies aimed at everything from cancer to credit cards.

In Your 50s: Countdown to Retirement

It’s a good idea to become debt free before you retire, and that’s true even if you can afford payments on a good mortgage. Here’s why: If you expect to be supporting yourself in retirement on withdrawals from a tax-deferred account, such as a 401(k) plan or individual retirement account, you’ll pay income taxes on every amount you withdraw. Furthermore, those withdrawals are likely to raise your total income over $34,000 ($44,000 for couples)—the point at which 80 percent of your Social Security benefits are taxable as income. So, if you are withdrawing money monthly to pay your mortgage, you’re spending extra every month.

As you move toward your empty-nest and retirement years, your central financial task is setting your financial life up so that it will afford you the retirement you want.

• Get serious about paying off your mortgage and other loans.

• Invest in a variety of savings vehicles, including taxable accounts as well as tax-deferred retirement accounts.

• Help your children through college, but don’t take on debt you can’t afford in order to do that. They will have other options, including less expensive schools and long lifetimes to pay off their own loans. If you are moving toward retirement, you may not have the time to pay off costly college obligations.

• Use a home equity line of credit or refinanced mortgage to do the home repairs you think you will need before you retire. Once you retire, you may not be able to borrow, or pay back, this money.

• Consider buying your retirement home early. Mortgage rates and home prices look attractive now, especially in retirement areas that were very hard hit. You could buy that place in Florida and have it close to paid off before you move there—but only if you’re really sure you want to move to Florida.

The 60s and Beyond: Early Retirement

Once you have stopped working, you are in a different financial world. You may not be able to borrow money easily, even if you have solid savings and retirement account balances. If you still have debts, you may have a harder time paying them back.

You may also find yourself losing employer-provided health insurance before Medicare kicks in. Your financial tasks at this age? Using your money to enjoy the early years of retirement without sapping your savings.

Over 75: The Second Half of Retirement

You’ll have to make lifestyle decisions again once you’ve hit the slower, later years of retirement. Of course you will still enjoy activities and hobbies, but you may find that the house is too much for you. Or you may find you want to stay put.

• Live on your house. Most homeowners do eventually tap the equity in their home to pay for their later years of life. There are three main ways to do that: (1) sell your home and invest the money you receive, (2) take out a reverse mortgage that will let you take cash out of the house while you stay in it, or (3) take out a home equity loan if you still qualify. Some families work out other alternatives: Either the kids move in with their mom and help cover her expenses in exchange for free rent, or the mom sells her home and uses some of the proceeds to have living space built for herself at her children’s home. All of these possibilities have pros and cons; what’s important is studying the ramifications and choosing the best one for you.

• Protect your nest egg. Older people are the top targets for scams of every sort. Their identities may get stolen, or they may be sold fake products, or they may be asked to contribute to questionable charities. Follow the same smart strategy you’ve used all of your life: Ask questions, do the research, and avoid any financial deal that doesn’t make sense to you.