#230: Newton's Third Law of Motion (Friday, May 27)

For every action, there is an equal and opposite reaction. -Sir Isaac Newton, Laws of Motion

Unfortunately, many people don't realize that not paying your bills on time could affect your loved ones too. Here's a true story:

A friend of mine (we'll call her Pam) was really bad at money management. She had multiple credit cards and store cards which she rarely paid on time, and very time I visited her house, she was either dodging a phone call from a bill collector or there were numerous "Past Due" notices on her kitchen table. There'd even be times when I called and her cell phone would be shut off because she hadn't paid the bill on time. And to add insult to injury, she always has new clothes for every occasion.


A few years ago, Pam's son was ready for college. She hadn't saved any money for him. ("Oh, he'll get a scholarship, or financial aid, or take out loans and work," she'd said when I suggested she open a college savings account for him.) Unfortunately, since scholarships are usually so competitive, he didn't get any of the ones he applied for. Even with his financial aid (which included work study), he would still have to come up with about 40% of the funds for each school year. Since he had work study, he didn't have enough time to get another job and keep up his credit load, so the only other option was to take out a loan.


He applied for a student loan, but the bank told him he needed a guarantor, who would accept responsibility for the loan in case he defaulted. He used his mother's name, but because of her credit history, they said he needed a second guarantor. Alas, since Pam's poor money management was no secret, none of her family members or friends wanted to take on that responsibility.


He decided to take a couple years off to work until he could afford to go to school. He still hasn't gone back. 


The moral of the story: you don't have to pay your bills on time, but don't be surprised when it prevents you from reaching other goals such as owning a home, sending your kid to college or getting a job you've always wanted (yes! more employers are looking at your credit history these days before they hire you).

#229: 3 Things You Need to Know About Retirement (Friday, May 20)

So recently I had a conversation with a friend who didn't realize that Social Security was in trouble and might not be around by the time we get to retirement. I was completely shocked by this, since I write about these statistics every day and just assumed everyone knew. Then I had a similar conversation with another friend and realized that many people are in the know, so here are five things you need to know about retirement:

• Last week the Trustees of the Social Security Fund released their 2011 Annual Report. The report shows a projected deficit of $46 million for 2011, and that the Social Security reserves will be exhausted in 2036, a year earlier than previous projections. This means that unless Congress comes up with a plan to fund Social Security (which, given the current budget problems, is a bleak prospect), tax income would only be sufficient to pay 3/4 of scheduled benefits through 2085.
• Given current medical enhancements, people are living longer than any generations before them. This means that you could spend 30 years or more in retirement. Since the reserves expire in 25 years and the tax income will last only another 49 years, those of us in our 30s or younger, need to start saving our own money for retirement.
• The average monthly SS benefit is $1,077...not nearly enough to cover expenses such as mortgage/rent, food, healthcare costs, etc.

This isn't to scare you, but it is to make sure you know you have to be proactive and start making a plan now. Assume you will not get full SS benefits and that you'll spend 30+ years in retirement. Assume you'll need a monthly income (comparable to what you use now) to live on in those 30 years.

Start today by taking one small step: Maximize your contributions to your 401(k) or other retirement account--especially if you are lucky enough to have a company match. It's money you're leaving on the table.

#228: How to Get to 100% (Friday, May 13)

I’ve been learning a lot about credit lately—even some things that I didn’t know I didn’t know. Last week, I learned about the factors that make up one’s FICO (Fair Isaacs) score. This is really good information to know, especially if you plan to make a major purchase in the future. Here are the five things that make up your credit score: 

Payment history: 35% - This takes into account how often you’ve paid on time, how many times you’ve been late, etc. 

Amount owed: 30% - Lenders need to know this information to see how much of your credit you have in use (generally your debt should be no more than 20% of your net income) versus the amount that is available to you. So for example, if you have a limit on your credit card of $10,000 and you’re using $9,500, you may not be an ideal candidate to receive additional credit. 

Length of credit history: 15% - How long have you been using credit. Generally, those with longer credit histories have higher scores than those with new credit. 

Mix of credit: 10% - This looks at the elements that make up your credit. Ideally, it is better to have different types of credit (student loan, credit card, car payment, store cards, etc.) since each type of credit has its own requirements. For example, the requirements for obtaining a student loan is very different from that a store card. 

New Credit: 10% - This looks at how much new credit you’re applying for. If you already have credit and you’re applying for new lines of credit, this presents a risk to a lender and they are less likely to offer you a loan. 

#227: Peas 'n Love - The Economics of Eating Out (Friday, May 6)

If you're like me, you spend a lot of your time eating out--and it's usually group dining. Years ago it wasn't an issue, but recently dining out has become a complicated event. I've watched groups bicker over who pays for what and sometimes, it can end up being a financial burden when it should be about enjoying great company and good food. (I once paid $40 on a non-birthday dinner when I'd only had dessert, just to keep the peace.) I don't mind splitting the check evenly, but I do realize that not everyone is in the same financial situation. A regular Tuesday dinner for me could be someone's monthly treat.

My sorority sisters and I have a great plan that has worked for us for over 10 years. For birthday dinners, we add the birthday girl's tab, tax and tip and divide it by 6, then add that to whatever we ordered. And if we all ordered something comparable, we split the tab.

Eating out shouldn't break your wallet, nor should it be a complicated event. Here are some etiquette rules from the experts for group dining:

• It is acceptable etiquette to ask for a separate check. If you're in a large group, ask the waiter quietly (so that every party at the table doesn't want a separate check) and do so before the meal begins.
• If it is a birthday dinner, it is customary to split the check for the person celebrating the birthday.
• If the group has opted for one check and everyone orders food in the same price range (within a few dollars), it is acceptable to split the bill evenly.
• Conversely, if someone orders food that is significantly more expensive than others or more drinks, that person should offer to leave more. 
• However, the taxes and tip should be split evenly among all diners regardless of how much individual meals cost.
• Bring cash to group dinners.
• Diners can opt to just pay for what they order, but it is rude to use calculators during dinner. Instead, round your portion to the nearest dollar.

Don't let a squabble over the bill ruin a great evening with friends.