Welcome to Ask the Bills, where every two weeks Helaine Olen answers readers’ questions about their most nagging personal finance and financial etiquette dilemmas. Seeking advice on a money issue? Email helaine.olen@slate.com.
Helaine,
I am 41 years old and have not come into any windfalls of money, nor is there any hope I will. My financial situation is as follows: I make $15 an hour plus tips, and my paycheck is usually about $1,300 every two weeks after taxes. My rent and utilities take up about half of this income. My husband is unable to work because of a disability that is not disabling enough to qualify for Social Security. Our children are 22, 19, and 16. We have been living in a cycle of poverty pretty much for the past 23 years. And yes, we’ve been hit with student loans and medical bills that just don’t get paid—my husband is $30,000 in default. My older kids are working in low-wage jobs, $10 to $12 an hour, but as of now are not contributing to household expenses because I want them to build a life outside of the money-sucking hole of my reality. So, yeah, it’s dire. What kind of financial planning helps people get out of poverty? I am moderately intelligent and a really hard worker. I’m also kind of giving up. Most of the time, I would rather spend $8 on a pack of PBR than plan for retirement or emergency funds. My financial life is an emergency. Is there a way to climb out of this?
A few years back, McDonald’s decided to teach its employees how to budget. Executives apparently convinced themselves the reason so many of their workers were trapped in cycles of poverty wasn’t the low wages the company and its franchisees offered employees but that maybe they didn’t know how to manage their funds. But the only way McDonald’s and partner Visa could make the numbers work on their sample budget was to assume their fictional employee worked two jobs, didn’t use heat in the winter, eat food, or have any children. It was ludicrous, and eventually the media, tipped off to the initiative by a group affiliated with the Fight for 15 movement, called McDonald’s out on it.
I bring this up because there’s this notion out there that personal finance can do it all for you, that the problem is that people who can’t make it from paycheck to paycheck without getting into debt aren’t experiencing financial issues because they don’t earn enough to meet expenses, but because they’re living beyond their means. While that’s true for some, this is insultingly ludicrous to the vast majority of people who can’t keep up. Yes, you earn more than the typical McDonald’s worker, and your income isn’t technically poverty-level, according to federal government measurements, but you still aren’t bringing home enough income to get ahead. Household incomes are still below where they were in 2000 while the cost of everything from child care to health care to housing is up—and by a lot. More than a quarter of renters now spend more than half of their household income on rent. Out-of-pocket medical costs for a household with employer-based health insurance have increased by more than 50 percent since 2010. Almost half of us claim we couldn’t come up with $400 in an emergency without turning to credit or a family member for help. You are not alone, not in the least.
If you throw up your hands, and sometimes get a PBR or indulge in some other small luxury instead of doing “the right thing,” that’s to be expected—in fact, you’d be less than human if you didn’t sometimes give in to despair. While almost all of us—and I mean all the way up the income spectrum—could learn to manage our funds better, the problem isn’t as severe, or even noticeable, for the wealthy, and for a basic reason: They don’t need to choose between buying the occasional PBR or latte or saving for retirement or college. So they don’t. Lots of people will tell you about The Millionaire Next Door, that book that purported to show that millionaires were a bunch of cheapskates who got where they were because they eschewed daily luxuries. What they won’t tell you? The book was based in part on the responses of millionaires who responded to paid offers—sometimes as little as $1—to answer the authors’ questions about their lifestyles. That’s about as effective a way as I know of skewing the sample group. You think Donald Trump would answer a survey on his spending habits for $1? Hillary Clinton? Heck, most of us probably wouldn’t. Don’t judge yourself. Based on what you told me, this isn’t the source of your monetary woes.
But onward.
You want to know how to stop living paycheck to paycheck, with no financial success to show for all your hard work. You need to figure out how to bring in more money, and reduce your debts, and, no, you aren’t going to do it by eschewing the occasional six-pack, no matter how much someone like Dave Ramsey wants to say otherwise. There is no magic answer that will allow you to spin gold out of financial straw—and it sounds like you’ve been handed a lot of straw. I do, however, have a few suggestions that might make your life a bit easier and, eventually, help you make a new financial start.
First, you say your husband is too disabled to work, but not so disabled he can get Social Security Disability Insurance, known as SSDI. Did he apply? Appeal a denial? He should. The majority of claims for SSDI are initially dinged. If someone appeals, the chance of success goes up significantly. According to the Social Security Disability Resource Center, about half of denied claims are approved if they go before a judge—a percentage that increases if a lawyer represents the claimant. There are law schools that offer disability clinics where students take on the cases as part of their education and don’t charge for their services. Moreover, most lawyers specializing in this area are paid on a contingency basis, taking a percentage of the back benefits as their fee.
A medical crisis—and, yes, a disability is a medical crisis—is one of the leading causes of bankruptcy. Little wonder. Not only does it bring bills, but it brings them at a time when household income is reduced—often permanently. I don’t know the full extent of your debts, but if you’re having trouble keeping up—and defaulting on student loans sure raises a red flag in this area—you might want to look into bankruptcy. Student loans are all but impossible to discharge in bankruptcy, but the medical bills and other debts you mentioned are most certainly eligible for relief. Consult with an attorney who can tell you if this is a good strategy for your household.
As for those kids, if they’re living at home, working, and not in college, you need to ask them to pitch in and help out. You can’t afford to financially carry a 22-year-old. But what would I rather see happen? Getting those children a college education. They will almost certainly be better off borrowing money to attend college than saving some money from their $10 to $12 an hour salaries for future needs—which is what I assume they are doing if they aren’t contributing to the household bills. People who attend and graduate from a four-year college earn significantly more over the course of their lifetime than their peers who don’t have a degree. They need to complete the course of study, so that they can climb out of what you call a cycle of financial emergency. No, it’s not a guarantee, but it’s the best chance they’ll get.
I’m not saying any of this will be easy. It can’t offer a quick solve. But it will potentially allow you and your family to get second chance at a better financial life in the future, and help your children avoid falling into the same money trap as you did. And you’re only in your early 40s: There’s still time to take action that can make a meaningful difference in your life.
Helaine,
After the big 2008 crash I was very frustrated with investing and pulled my small retirement investments out of the stock market. I know, big mistake! My in-laws convinced me to start investing again in 2011 and suggested I work with their CFP broker, whom they’d been happy with for many years. She took the annuity I had (yes, another big mistake) and my small investments and helped me grow them into a much better investment than I hoped for. She’s also been rolling over my traditional IRA into a Roth IRA each year. The annuity is finally going to be available next year, and I was hoping to take that and my other investments and place them in Vanguard index funds, so my management fees will not be so high. My broker tells me her fees are very small—only 1.5 percent to 1.8 percent, she says. But I have heard that the index funds are much smaller, around .4 percent. Can I ask her to make this move for me, or will she try to keep me where I am so she can collect the higher fees? If it is time for me to move on, how do I do so and where do I go to start moving everything into the correct index funds? I’ve been duped more than once, and I am trying not to be duped again. Oh, and I’m 39, married with no kids. My spouse has his own retirement plan through his work 401(k).
You’ve made any number of financial mistakes in the past. You’ve been led to invest in an annuity of some sort, something that was almost certainly not optimal advice given your age. No one, it appears, stopped you from giving into panic and selling off retirement investments when the stock market swooned in 2008. Your in-laws sent you off to their certified financial planner, and, you say, she did well by you and stopped you from making further financial mistakes.
If this planner is any kind of decent financial adviser at all, however, it would have been pretty hard not to do well by you over that period of time. Between the beginning of 2011 and the close of the market last Friday, the S&P 500 increased by more than 60 percent.
It sounds like you paid dearly for those financial gains. Under no circumstances should fees of 1.5 percent to 1.8 percent be described as “fairly small.” They aren’t. Vanguard Index 500 ETF is currently charging .05 percent in annual fees. That’s what’s known as “fairly small.”
I hound readers and letter writers ceaselessly about the need to make sure a financial adviser is working to the fiduciary standard—that is, has a legal duty to act in your best interests, not her own. Ceaselessly. But the fiduciary standard isn’t perfect. A certified financial planner can offer terrific advice but charge too much damn money for it. It seems likely this happened to you. Just because this woman got you back in the markets, that doesn’t mean you are morally obliged to pay high charges for the privilege of investing in perpetuity.
Do I think you should completely go it alone? No. You’ve told me in so many words that you panic when things aren’t going well in the markets. But that doesn’t mean you need to pay these sorts of fees to an adviser or for managed mutual funds she recommends so that the next time the market takes a plunge, someone will hold your hand and stop you from selling. Rebalance IRA, which focuses on retirement investments, charges only .5 percent, offers access to a financial adviser legally bound to act in your best interests, and invests in a selection of low-cost, indexed, exchange-traded funds. But it requires a $100,000 account minimum, and only services retirement accounts. Another suggestion would be to work with a financial planner who only charges an hourly fee. If you need suggestions, you can contact the National Association of Personal Financial Advisors, better known as NAPFA, or the Garrett Planning Network and ask for a referral.
