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Jean Chatzky: Money Q&A

Too Much Debt?

Q. Dear Jean: I have about $5,000 worth of debt. Is that too much? -- Rachel W.

A. Generally speaking, the less debt you have, the better. The money you're now putting toward your credit cards or other debts could be used for retirement savings or your child's education. Still, some debt isn't bad. You'll want to consider your debt-to-income ratio -- that is, the percentage of your income that you have in debt -- which should give you a good sense of how much debt you can handle.

As a general rule, your total debts (excluding mortgage) should be no more than 10 percent to 15 percent of your take-home pay (meaning, after you take out taxes and the like). If you're not likely to incur any additional debt or unexpected expenses, you may be able to handle upward of 20 percent. Including your mortgage, your debt level should exceed no more than 36 percent of your take-home pay.
If your debt load is higher than that, now is the time to consider paying down the debt. Cut back on your spending or look for ways to reduce your expenses. And even if your debt load is low, remember there may be better ways to use that money. (Published 2/10/04)

A Late Start on Saving for Retirement

Q. Dear Jean: I'm 50 and nearing retirement. I've done a little planning, but I'm concerned I may not have enough money to get me through. Is there anything I can do? ?Linda F.

A. At 60, 55, or even 50, retirement is no longer something you're thinking about for the distant future. But even if your retirement planning is a little late, there are ways to play catch-up. Here are a few tips:

Get amnesia. Forget the mistakes you've made in the past and just dive in. You may not have as much money 10 years from now as you would have if you'd started saving at age 30, but at least you'll have something. And it may be substantial. Say you refinance your mortgage, freeing up about $2,000 in extra cash each year. If you put that money into a Roth IRA or another tax-deferred retirement account and invest it in stocks (we'll assume it earns 11 percent annually), it will be worth $39,123 in ten years; it will be worth $144,530 in twenty years; and it will be worth $443,826 in thirty years?when you're eighty and really need it.

Clarify your goals. Too many retirement stories today are out there to scare you. Instead of thinking in numbers, focus on how you'll really want to live and how much that will cost. Thinking: "I want to move to Scottsdale and build my own house. How much will that cost me?" is better than thinking: "I need to have $1.3 million by age 65." Even the rule of thumb that says you need 70 percent of your preretirement income to live comfortably after you slow down is up for debate. Some people can retire comfortably on 50 percent. Those who plan on summering on the Riviera and wintering in Telluride obviously need more.

Give up some nonessentials. Run through your monthly expense to see what you can live without. Start with your last Visa bill. Can you swap your weekly manicure for a biweekly one? How about eating out one or two times less each month? And then there are the big-ticket items. Do you really need a new car right now? Would a used one do? Come April, make sure you're taking all the deductions you can, and if you end up with a refund, be sure to invest it instead of spending it.

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