Q&A with Manisha Thakor, Co-Author of Get Financially Naked, Part 1

Thank you to everyone who contributed questions to the Get Financially Naked and/or entered the giveaway, and a BIG thank you to Manisha for taking the time out of her busy schedule to give such detailed answers!

**Due to the length and detail of these answers, I’ll be breaking the Q&A into 5 parts, with 1 winner revealed at the end of each Q&A. Look for the subsequent parts to come in a few days.

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Bonnie: My BF is older than I am and has virtually no retirement savings right now. He did start a 401K last year, and he’s going to open up a Roth IRA soon. How much should he be contributing to ‘catch up’ to those of us who started in our 20s and early 30s?

Manisha: The short, tough love answer is… he should be socking away at least 15% for his retirement between this 401k and Roth IRA if he’s in his 40s. If he’s in his 50s, he’ll need to up that to 20%.  The rough rule of thumb is that in order to maintain your standard of living in retirement, you’ll need a nest egg that is between 20x – 25x the income you require to comfortably live on.

For each decade you delay past your early 30s, you’ll need to tack on an additional 5% to the oft quoted rule of thumb to “save 10% for your retirement annually” if you want to make up for lost time.

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Cate: When one partner is handling the majority of the finances, what is the best way to keep the other person up to speed on what’s going on with the money?

Manisha: In today’s CrazyBusy24/7 world… this scenario is increasingly the norm, not for gender reasons but for sheer lack of hours in the day.

The key in this situation is to sit down together at least once a year (and ideally twice) to discuss the following items:  (1) Your current net worth, i.e. what you own minus what you owe, (2) How much income your household has had year to date and how much you’ve spent, (3) How the difference in #2 has been handled – if it’s a positive number how was that money invested.  If you spent more than you earned, what was the source of debt and how can you bring it down asap.

I also advise couple to set a dollar amount above which they both agree to consult each other before spending / investing to make sure that during interim periods no one person can wander off the financial ranch.

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Kari: My bf and I have been living together for 3+ years. He is planning on going to law school part-time next year which will last for four years. I have been saving up to buy an apartment and plan to do so before he graduates.

He would live with me and pay a portion of the rent but cannot be on the mortgage or deed as assets will count against him for student loans. What’s the safest way to do this to ensure we’re both protected even if we broke up

Manisha: Good for you for having been a diligent saver.  Before I say anything else, I’m sending you a mental high five for that.  As for your question, to be honest, I personally feel that you should not buy property together if you are not married.  The sheer number of horror stories I’ve heard from couples who have would make your eyelashes self-curl.

My feeling is that if you have saved up money for the house and it’s your name alone on the mortgage and deed – then it’s your house.  That means that your BF is essentially paying rent.  The downside to him in this arrangement is that he is not building equity in your home. However, you are the one taking the risk by buying the home in the first place.  You could consult a real estate and/or family law professional to draft up a formal declaration between you two on how you want to divide things should you break up.

My advice, however, would be to keep it simple.  If you buy the house, you are the landlord and your BF for now is merely a tenant. There’s no shame in him renting! I’d also suggest thinking long and hard about buying a home – until you are sure you can put 20% down, will live there for at least 5 years, and that the sum total of your mortgage payments, property tax, insurance, and upkeep will not be more than 1/3rd of your gross income (and I say your income because you want to make sure you can still afford that home on your own if you and your BF split up).

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Mrs. Smith: I got married in August and have a question about melding finances. My husband has a pretty low credit score (based on some bad habits with credit cards in college) and mine is pretty high but has slumped a bit recently due to 5 months of unemployment and unusual credit card usage.

Is it better to work on improving one credit score before the other? For example, besides making minimum payments on all credit cards and student loans, should we pay down my debt first to get my score back up, or focus on his to bring him up while I continue to carry a credit card balance?

Also, would it help him (or hurt me) to add his name to my credit cards since traditionally (before the last few months) I had better terms on my cards, a better history and little to no balance? Thanks for your help!

Manisha: First, congratulations on both your marriage and your desire to get on top of your finances.  The desire to improve is 9/10th of the battle.

The best way for you both to improve your credit scores is for you to do these three things:  (1) Make all minimum monthly payments on time, every single month.  That’s drives 35% of your credit score.  (2) Each of you tackle your credit card debt simultaneously and try to pay 2x the minimum monthly payment each month on each card.  This will improve your “debt utilization ratio”which is 30% of your score, (3) Both of you should keep your oldest credit card open and in good standing as this shows length of credit history, which is 15% of your score.  Those three steps drive 80% of your credit score, and if practiced consistently for a 6-12 month period should improve both your scores.

Yes, you could try to get super tactical about whose debt to work on first – but credit scoring is not a precise science.  We don’t know with 100% certainty how every single action will affect your credit score, so therefore I suggest focusing on getting the big things right.

As for adding each other to your cards as authorized users for the sole purpose of trying to improve each other’s credit scores, personally I wouldn’t advise doing that.  If you want to have each other on the cards because you are both using them for mutually agreed upon joint expenses that you will responsibly make together… fine.

But the credit scoring system is very opaque.  While it appears that FICO is again considering behavior by authorized users in their calculations of credit scores, individual financial institutions that you may be going to for a loan are free to use their own methodology – which may or may not include authorized user data.

This is my long winded way of saying, rather than trying to game the system your time will be much better spent practicing the best possible personal finance habits from this point forward as that is what will improve the scores for both of you.

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The 1st Winner of the Giveaway is Bonnie! Congratulations. Please email me your name and mailing address to receive your prize.

Tagged as: money and relationships, Q&A