When There’s No Safety Net for Lean Times, Retrench to Survive Downturn

Q: I am 27 years old and work as a freelance artist and writer. For a few years I did quite well, but during the last year consistent work has been hard to come by. As a result, I have amassed almost $20,000 in credit card debt. I held on too long to the belief that another lucrative freelance job was just around the corner. If I don’t do something soon, I am going to start missing payments, something I have never done before.

A few friends have suggested either going to a debt consolidation firm or filing for bankruptcy. Telling a judge that I simply haven’t managed my money well seems like a lousy excuse. And that’s not to mention the moral implications of trying to run away from my debt. But a friend said that if I go to a debt consolidation firm, it would reflect badly on my credit and would be almost as bad as declaring bankruptcy.

I know you are pretty harsh on people who display a lack of intelligence when it comes to their finances, so I am prepared to take my medicine.

A: Oh, fine, be brave. Take all the fun out of reader-bashing.

You’re not stupid, just young. You thought the good times would last forever, so you failed to cut back on your spending or establish an emergency fund to tide you over in the lean times that come to every freelancer. You’re hardly alone. Even people who have experienced recessions and job setbacks have forgotten how important it is to save for a rainy day.

Your first step is, obviously, to get a job--any job. Even a part-time gig as a barista pushing lattes will help you cover your debts.

You also need to stop using the cards, right now, and figure out ways to save money. Check out Amy Dacyczyn’s book, “Tightwad Gazette,” for the ultimate guide to frugality. This lady makes it seem like some kind of extreme sport. There are several good Web sites, too. Gary Foreman’s Dollar Stretcher at https://www.stretcher.com is a personal favorite.

Stay away from for-profit debt consolidation firms. Instead, give Consumer Credit Counseling a call; the number is in your local phone book. This nonprofit group offers free classes in money management, as well as debt management plans.

The debt management plans are what may affect your credit rating, but if you’re in danger of missing monthly payments, they are still a much better option than bankruptcy. The service can negotiate with your creditors to get you better terms that could make paying off your debt easier.

Low Interest the Price of Liquidity

Q: I’m 55 years old and on disability retirement. The money from Social Security and my pension pay the mortgage and the monthly bills, with very little left at the end of the month.

I have about $25,000 to invest. It’s in an interest-bearing checking account and a credit union account that last year paid 4% interest. I would not need this money right away except if an emergency comes along, like in August, when one of my children had a crisis and needed $8,000 to recover. That money might be repaid, but I won’t count on it being right away.

I know it’s not a great deal of money, but isn’t there a safe, liquid investment that would pay better than 4% to 5% interest?

A: Finding an investment vehicle is not your biggest problem. Your biggest problem is that you have children who would hit up their disabled father for a quarter of his savings. Unless the crisis was of a life-and-death magnitude--a grandchild was dying for lack of medical care, for instance--this offspring has some explaining to do.

If you want the money to be available for a crisis, you must consign yourself to low returns. Investments that pay significantly more require that you have a longer time horizon. You shouldn’t invest in stocks or stock mutual funds, for example, if you expect to need the money within five years.

You can, however, boost your interest return somewhat. If you can leave the money alone for three months to a year, you can earn in the 6% range on short-term Treasury bills. Many money market mutual funds also yield in that range, and cash in those accounts is always available to you.

Can’t Get Around Roth IRA Rules

Q: I assume that the two basic requirements for establishing a Roth IRA are a Social Security number and earned income. My problem is that I would like to establish a Roth IRA for a newborn child.

Getting a Social Security number is not a problem since all children must get one to be claimed as dependents on their parents’ returns. Establishing an earned income for the child is another issue, however.

It must be possible because there are child actors who get income. I want to legally create earned income for the child and need to know what forms must be filed with the IRS.

A: Sorry, but there’s no legal way to commit tax fraud, which is what you seem to be proposing.

You’re right that child actors and child models have earned income. You also may hire your children to perform certain tasks in your own business, as long as you abide by appropriate child labor laws and file the appropriate wage and tax documents with the IRS and your local tax agencies.

Unless your newborn has already been spotted by a Hollywood talent scout, however, there’s not much chance he or she will have legitimate earned income any time soon. You can contribute to the child’s long-term financial security in many other ways. Just put the Roth IRA idea on hold until the kid is old enough to earn a paycheck.

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Liz Pulliam Weston is a personal finance writer for The Times and a graduate of the personal financial planning certificate program at UC Irvine. Questions can be sent to her at liz.pulliam@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012. She regrets that she cannot respond personally to queries. For past Money Talk questions and answers, visit The Times’ Web site at https://www.latimes.com /moneytalk.