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Play the percentages to pay off debt

Manage spending with a 50/30/20 divvy of your after-tax income.

December 27, 2009|Liz Pulliam Weston | Money Talk

Dear Liz: My wife and I are working to get out of debt, and I am interested in comparing the amounts we spend on mortgage, food, diapers and so on with what would be considered ideal or at least average for homeowners living in areas with a high cost of living. Do you have recommended percentages for various items? I am always looking for places where we can cut our expenses so we can pay off debt faster.

Answer: You can find averages in the U.S. Census Bureau's annual Consumer Expenditure Survey, which you'll find at The categories are fairly broad -- you won't find a line item for diapers, for example -- but the bureau provides averages for housing, food, transportation, clothing and insurance, among other categories. The bureau also slices the data various ways: by income, by metropolitan area, by child.

You may find the information more interesting than helpful, however, because every family's situation is different. A couple with little debt and no children, for example, can comfortably afford a bigger mortgage payment than a family that has both kids and debt.

A better way to manage your spending is to use Harvard bankruptcy professor Elizabeth Warren's 50/30/20 plan. Warren, who outlined the budget in her book "All Your Worth," recommends limiting your "must have" expenses to 50% of your after-tax income. Must-haves include shelter, food, transportation, utilities, child care, insurance and minimum loan payments.

That leaves 30% for wants, including clothing, entertainment, gifts and vacations, and 20% for savings and debt payments.

Many families in high-cost areas find it extremely tough to keep must-haves to 50% of their after-tax pay. Some spend that much, or more, on their housing. But the 50/30/20 plan underscores how important it is to contain your basic overhead if you want to have money left over to pay down debt from the past, save for the future and enjoy your life in the present.

Social Security survivors benefits

Dear Liz: Can you clear up something for me regarding Social Security survivors benefits? The yearly summaries I get tell me my family will receive payments if I die. But it's not clear to me how long these last and if they expire when my children are no longer minors. Do payments continue to be made to my surviving spouse as well, and if so for how long?

Answer: Your unmarried children can receive Social Security survivors benefits until they turn 18, or 19 if they are still attending high school full time. Your kids can get benefits at any age if they were disabled before age 22 and remain disabled.

Your spouse can get benefits as long as he or she takes care of a child receiving your survivor benefits. Your spouse also can receive widow or widowers benefits as early as age 60 (or 50 if disabled).

The amount of the benefit depends on your average lifetime earnings and is estimated on the annual Social Security statement you get. The more money you make before you die, the greater the benefit.

For more information, SSA Publication No. 05-10084 is available on the Social Security Administration website at or by calling (800) 772-1213.

Buy insurance on rental cars?

Dear Liz: After 36 years in insurance, I don't have a convincing argument for or against damage waiver "insurance" from rental companies. I know that my auto policy's coverage usually transfers to the rental car. However, "economic loss of use" to the rental car company while being repaired is typically not a covered loss under the customer's insurance policy.

That gray area forces us to grit our teeth and recommend that our clients buy the damage waiver endorsement when they rent the car. The rental companies charge an insane daily rate, but what can you do? I personally do not usually follow my own advice and decline the coverage. Maybe I'm ahead, but maybe I'll be stung some day.

Answer: If you pay for the rental with a gold or platinum credit card, you may well be covered for "loss of use" charges while the car is being repaired.

You'll want to check the benefits guide that came with the card (if you've lost it, ask the issuer to send you a new one). The guide will outline restrictions on coverage, which typically include requirements that you use the card to pay for the entire rental cost, that you decline the rental company's collision damage waiver option and that the rental be 15 days or less (31 days or less in a foreign country). Credit card coverage also typically doesn't apply to antique or luxury vehicles (with the definition varying by issuer), motorcycles, trucks and vans.

Liz Pulliam Weston is the author of the book "Your Credit Score: Your Money and What's at Stake." Questions for possible inclusion in her column may be sent to 3940 Laurel Canyon Blvd., No. 238, Studio City, CA 91604, or via the "Contact Liz" form at Distributed by No More Red Inc.

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