Ask The Money Coach

Posts Tagged ‘Couples and Money’

Congratulations on your upcoming wedding and on you and your fiancé getting that home. To get out of the cycle of living paycheck to paycheck you really are going to have to take a hard look at your budget. I know you have a lot of bills to pay, but to get ahead financially – and stop being cash-strapped all the time – you absolutely must get your spending in alignment with your actual income. In a nutshell, you can not spend more than you earn. In fact, your spending should not be anywhere near your earnings, and you should be putting aside 10% of your income into savings. To get yourself on the right path, look at every area of your life where you’re spending money, and create a proper, realistic budget. Read on for more tips to do just that.

Two Easy Steps to Creating a Budget You Can Live With

I know that most people loathe the thought of being on a budget. The word “budget” alone conjures up images of deprivation – making us think about every thing we can’t have, can’t do, or can’t buy. But creating a budget – and living with it – doesn’t have to be so restrictive and it certainly need not be a painful process.

In fact, having a good budget offers a host of benefits. A well-made budget:

•    Gives you power and control over your finances
•    Keeps you from living paycheck to paycheck
•    Allows you to save for future goals and dreams
•    Helps you avoid going into debt

Here is my simple, two-step system you can use to create a livable budget that will help you achieve peace of mind and eliminate worries about your money.

Step 1:  Make a list of your expenses
Begin by itemizing all the different areas of your life in which you spend money. Some common categories are:

•    Food
•    Housing
•    Entertainment
•    Transportation
•    Debts
•    Utilities
•    Educational Costs
•    Childcare
•    Insurance
•    Miscellaneous

When you make your list, take a moment to think about how you really live your life on a daily and monthly basis. Do you have kids for whom you regularly buy gifts? If so, include a gifts category for things like birthdays, holidays, graduations, or other special occasions. Or maybe you’re an avid reader, so you should add a category for monthly magazine subscriptions or books you routinely purchase. Your list can be handwritten, or entered on a computer spreadsheet.

Step 2: Adjust to avoid budget-busters
If your expenses exceed your income, you’ll have to cut back on areas that aren’t necessities. Also, to avoid blowing your budget, remember that unexpected events and emergencies always arise. That’s life. You can minimize the impact of these occurrences by adjusting your budget according to the principle of LIFE. LIFE is an acronym that describes the four ways that your budget gets out of whack – forcing you to spend more than you planned for the month, or causing you to live from paycheck to paycheck. The features of the LIFE formula are described below:

•    Listed items are under-calculated
The “L” in LIFE stands for expenses that are “listed” items in your budget, but the numbers you used are actually very inaccurate. For example, if your credit card bills show that you spend $250 a month on clothes, don’t put $100 into the clothing category. Don’t underestimate your spending. Enter a realistic number.

•    Impulse purchases seduce you
The “I” in LIFE refers to the “impulse” purchases that everyone makes now and again. Make sure you’re not buying things on a whim week after week, month after month. That’s a sure-fire way to kill your budget. Whenever you make an unplanned purchase – whether you’re shopping online, buying something from a street vendor, or getting something from the mall when you were supposed to be “just window shopping” – that’s considered an impulse purchase. Keep those to a minimum.

•    Forgotten bills surface
The “F” in LIFE is for those “forgotten” bills that pop up when you least expect them. Some bills get paid annually or perhaps twice a year – like your membership to the gym or perhaps your auto insurance. If you’re not mindful of these expenses, you can forget them and then when the bills come due you’ll be short of cash. To avoid this pitfall, do not omit them from your budget. Just factor them into your monthly budget on a prorated basis and put the money aside. For instance, if your auto insurance is $1,200 a year and it’s due in December, enter $100 in your monthly budget for this expense. Then put $100 cash aside each month for 12 months – instead of trying to come up with all of the money at the end of the year.

•    Emergency or unexpected events occur
The “E” in LIFE stands for “emergencies.” There are obviously times when emergencies – like a burst boiler unit – can ruin a budget. Try to minimize these events with preventative measures, such as regularly servicing your boiler, having routine maintenance done on your car to avoid breakdowns, and making periodic visits to the doctor to stave off serious medical conditions.

Once you realize that LIFE happens to everyone, you can take some steps to safeguard your finances and create a realistic, workable budget. For most of us, that’s the first step to having fewer money problems and achieving financial freedom.

I would not open a “few” secured credit cards, however, obtaining a single secured card and making on-time payments can definitely help you boost your credit scores. Paying consistently on a secured card will establish some positive payment history for you, which will help counter-balance (to a degree) some of the negative data that is currently in your credit files. Opening several cards will result in multiple inquiries and could further lower your credit scores. Before opening a secured credit card, just make sure the bank that issues the card does, in fact, report to the credit bureaus.

Other Credit-Boosting Steps
To get an even bigger boost to your credit rating, you should try to clean up some of the blemishes in your TransUnion, Equifax and Experian credit reports. If you can contact your previous creditors and offer then a small lump sum payment to settle your debts, in exchange for them removing the negative information on your credit reports, then that will enhance your credit rating. Only do this for recently delinquent accounts (i.e. those from the last two years). Also, only give up cash payments to those creditors who agree, in writing, to delete black marks from your credit. If they simply note the account as “Paid” but leave the old, negative information there, that won’t help your credit.

Improve Your Credit Without Taking On New Debt
You also mentioned that your car note is currently in good standing. That’s great, because at least you have one “traditional” form of credit in your credit file. A car loan is an “installment loan,” and the fact that you’re paying it on time is viewed positively in the credit scoring world. The other two forms of debt that get analyzed, from a credit scoring standpoint, are “revolving debt” (which is credit cards), and mortgage loans. The fact that you rent, and don’t own a home, doesn’t mean you can’t establish a good payment track record with those rental payments. Try using a service like Payment Reporting Builds Credit. Their website is www.PRBC.com. It allows you to document “non-traditional” forms of credit, like rental payments, child care costs, utilities – anything where you’re making regular monthly payments. The information gets tracked by PRBC and helps you build your credit history and show a potential lender or creditor that you’ve been paying various bills on time.

Pay Down Credit Cards and Pay Everything On Time
Also, just make it a priority to pay all your bills in a timely fashion. That’s the biggest factor in calculating your credit score. Lastly, if you do already have any standard credit cards (i.e. not secured cards), try to pay down those balances. A good target is to keep your credit card balances at 25% or less of your available credit, if possible. That too will increase your credit rating.

You are in a very, very tough and complex situation because based on everything you’ve said to me, here are the facts:
•    Your husband has been put of work since March 2008 and receives his last unemployment check (after four extensions) this month.
•    You’ve repeatedly sought a loan modification, since December 2008, from your lender but have been consistently rejected because you are current with your payments
•    You’ve already depleted your savings from $25,000 to about $9,000
•    You have roughly $25,000 in credit card debt
•    You’ve been advised by a lawyer and a loan modification company to stop making payments, attempt a short sale, and if that fails file bankruptcy or go into foreclosure
•    You cherish your home and neighborhood and really don’t want to leave there
•    You and your husband both have very good credit scores in the 700s. Your credit score is 762, and you want to maintain a good credit rating

The Perfect Storm

It sounds like you and your husband have been caught in the middle a “perfect storm” financially speaking. Not only are you seriously underwater in your home – as are 1 out of 4 homeowners nationwide – but you are also grappling with a serious loss of income, due to your husband being out of work for nearly two years. Moreover, the credit card bills are mounting and the savings you’ve amassed are quickly dwindling.

Obviously, you have been able to hang on until now, using your individual job earnings and your collective savings as a way to stay afloat. But I recognize that you’re in desperate need of a life jacket – and soon.

Tough Choices Ahead

You did not say how old you are, but you did indicate that you would have liked to “grow old” in your current house. So I sense not only how passionately you love your home, but also your willingness to stay put for many more decades. If that it the case, then you have to make some difficult choices. The first is whether or not you’re willing to sacrifice your credit rating in the short term, in order to achieve a long-term objective, namely saving your home. Currently, your mortgage balance appears to exceed the value of your home by 50% or more. Realistically speaking, it could be another 10 or 20 years before your home regains it value. Who knows? This makes any potential sale highly unlikely – at least without doing damage to your credit report, as a short-sale will definitely do. A short-sale, foreclosure, or a deed-in-lieu-of-foreclosure are all treated the same for the purposes of your credit rating. They are major negative events that will cause a triple-digit decline in your FICO credit scores.

But in my opinion, a short sale is not the best option for you – certainly not at this time. Because your home is so deeply underwater, you may have difficulty finding a buyer. And even if you do, it’s likely that you lender will balk at agreeing to such a low price. No matter what the market value of the home really is, the bank may reject your short sale deal because it may result in a potential loss of a few hundred thousand dollars for your lender.

Don’t Succumb to a Short-Sale, Foreclosure or Bankruptcy

As I said, however, it’s a little premature for a short-sale – primarily because you adore your home, you want to stay in your neighborhood, and you have actually been able to make the payments (as hard as that’s been).

Given all of your circumstances, I do think the attorney and the loan modification company were correct about one thing: if you really want to get your loan adjusted, unfortunately you will have to miss payments. Yes, this will cause damage to your credit rating. But the damage of having a 90-day late payment on your home will be a single, isolated event. It will be far less harmful than bankruptcy (which will stay on your credit report for 10 years) or foreclosure, which will also haunt you for seven years, and means that you’ve lost the home you treasured.

Contain the Fallout to Late Mortgage Payments

Instead of bankruptcy, foreclosure or a short sale, try to contain the damage to just being 90-days late on your mortgage. Keep up those credit card payments; even if you’re only making minimum payments, and you will be able to rebound, from a credit standpoint, from the late mortgage payments. It’s a kooky system we’re dealing with now. But the sad truth is that so many homeowners are struggling with payments that banks are “prioritizing” and only offering help to the “neediest” of borrowers – i.e. those that are already behind of their home payments. Ironically, although you and your husband are trying to be responsible and do the right thing by staying current, your fiscally responsible behavior is the very thing standing in the way of you getting a loan modification.

Ask for a Trial Modification

So the bottom line is this: I hate to have to offer this recommendation, but if you really want to stay in the home, or even just buy your family a bit of time until your husband can get a replacement job, then you should first find out all the details you can about your lender’s home loan modification program. Get all the paperwork, applications, and other forms you can – even ahead of actually missing a payment. Once you are late on your mortgage, many lenders offer you the opportunity to go through a “trial” modification period. That’s where you make reduced payments – usually for three or six months in a row – to show the bank that you can afford the modified mortgage amount.

Again, I know this isn’t an ideal situation. But in your situation, you can not achieve all the objectives you want simultaneously. Think about the long-term. If you truly want to stay in the home, and if you and your husband can afford it with a modified mortgage, then don’t be so stressed by the fact that the home is underwater. After all, if things work out, then your equity “loss” really mainly matters on paper, because you’ll never sell that home you love so much anyway – not now, and not in the future.

I’m sorry for your job loss and credit problems. While I’m not a lawyer, nor an expert on garnishment law in your state, I do not believe that a creditor would be able to seize the money in your husband’s bank account for several reasons.

First, you indicated that your debts are in your name alone. That means that you are the one legally responsible for those outstanding obligations; not your husband. Additionally, you stated that the account in question is your husband’s alone. As you are not an owner or co-owner of that bank account, I do not see how a creditor would be able to get a judgment or a garnishment order from a court to tap into an account that does not belong to you. Lastly, some types of assets are protected from seizure and garnishment. In certain states, unemployment checks fall into that category. I know you are cash strapped right now and likely can’t afford to pay big bucks to a lawyer. But at the very least, I would suggest that you reach out to a legal aid clinic or a low-cost attorney service for more insights into this matter.

The only tricky matter is whether or not the state of Michigan forces individuals to pay the credit card debts of spouses. I honestly do not think so; but I can not say with 100% certainty whether that is true when someone has been sued, or perhaps a judgment against an individual has been issued. A good consumer lawyer will be able to give you more definitive answers. Good luck!

In a nutshell, your past bad credit won’t impact him at all. It is a common misconception that once two people get married, so do their credit files or their credit histories. But that simply is not the case. Your future spouse may be impacted financially by you in a whole host of ways (perhaps you’re a spender and he’s a saver … or maybe he will opt to pay off some of your past debts), but I can assure you that he can maintain a stellar credit rating after you marry, as long as you both adopt a few financial safeguards.

Some Simple Do’s and Don’ts

First, don’t open any joint accounts until after you clean up your credit. His credit history is currently his alone; ditto for yours. Even after marriage that won’t change. What can change, however, is that the two of you may want to have certain shared obligations and open joints accounts (like a car loan or a mortgage). If you do, then both of your credit files will reflect that you are equally responses for those debts. Needless to say, if it’s a bill you are or were supposed to handle, but fail to pay, then that will damage his credit rating – along with yours.

You should also limit adding each other onto your respective credit accounts. Actually, to spell this out a little more clearly: he should definitely not be added onto any accounts of yours, because that will cause his credit file to contain some of your existing accounts, which may have late payments and other negative marks. On the other hand, if you both agree, it would be beneficial for you to be added onto a few of his accounts.

In all candor, I would recommend that he only add you onto his credit accounts after you have demonstrated (by paying your bills on time) that you can juggle credit responsibly. By adding you to his credit accounts, as an authorized user, you will get the benefit of “piggybacking” off of his good credit rating, which will, in turn, help to more quickly boost your own credit rating. If you manage your financial affairs correctly, there’s no reason you can’t have a much, much better credit rating and higher FICO credit scores, by the time your wedding occurs in 2012.

Be Open to Learning

Lastly, it probably wouldn’t be a bad idea to let him take the lead in managing your household finances – at least initially, after you get married. Since he has perfect credit, there are probably some things he can share with you about how he achieved outstanding credit. I know you’ve learned some tough lessons based on your dealings with your ex. But don’t put that baggage on your new love. Be open to his suggestions. Don’t resent him for his high credit rating. Just learn a bit more and try to do better. Appreciate the fact that he has proven himself to be fiscally responsible. Many women would love to learn from such an individual.

But all in all, there’s no real reason to worry that your past credit blemishes will automatically taint his outstanding credit. Fortunately, the credit system just doesn’t work that way. Good luck with your relationship and best wishes for your upcoming wedding!