Sep 20, 2011 – Suze Orman, best selling author and financial expert, thought she had taught us everything we needed to know about our finances. But with today’s changing economy of high unemployment, layoffs, high foreclosure, and overall economic distress, her PBS Special, Money Class, imparts new financial strategies for today’s questions on student loans, retirement funds, mortgage and foreclosure and more. In a Q&A forum, discover what you need to do to help you on your way to finding The New American Dream.
The New American Dream? That is what Suze Orman calls it. A new movement that calls for a different way of thinking, a different approach and strategy to dealing with the changing economy. For example, where real estate was once a good investment a few years ago, Suze says today Real Estate is Going Nowhere!
For real estate prices to go up for a good investment, you have to have more people wanting to buy homes, than to sell homes. Nowadays, there are millions and millions of people wanting to sell their homes. Add that to the millions and millions of homes that are in foreclosure that the banks already own because people lost their jobs and could not afford the mortgage payments any longer. You have far more supply than demand! Most likely real estate is going to stay exactly where it is at right now and in some parts of the country it will continue to get worse. However, this may be a great time to buy a home, if you want to live in it for the next 5, 10, 15 years or the rest of your life and if you have at least a 20% down payment and have an 8 month emergency fund.
Q. But in this shaky economy and rapidly decreasing property values, what if I lose my job? What are my options?
A. If you cannot pay the monthly mortgage payments, you can try to sell your house. If the house is valued at less than the mortgage that you owe, your mortgage is considered “Underwater”. Since most people will not buy a house for more than it’s worth, you can lower the price to match the current market value. If you get a buyer, you can ask your bank for permission to do a “Short Sale”, which is selling the house for less than you owe on the mortgage.
Q. Will I need to pay the difference between what I owe on the mortgage and what I sold the house for?
A. Suze says it all depends on the situation. If this is your primary residence and you have a ‘non-recourse loan’ and it’s on or before 12-31-2012, than you may be free and clear. There are temporary tax laws put in place to account for the state of the economy which has expiration dates. Normally and after 12-31-2012, even though the bank may have given you permission, you would be responsible for paying federal income taxes on that difference. Suze says if you have 2 mortgages the second mortgage is probably a home equity line of credit which is known as a ‘recourse loan’. A recourse loan means that even if the bank allows you to do a short sale, they can come back after you for the amount of money that you owe them. They have recourse. All home equity lines of credit are all recourse loans
Q. Will doing a Short Sale effect my credit?
A. Suze says Yes. It is going to effect your credit rating or FICO score. It is never a good idea to do something that currently effects your FICO score. A FICO score is a three digit number. It determines the interest rates that you pay on credit cards, car loans, and home loans. They range from 300 to 850. Anything below 500 is not acceptable in most cases.
Today a FICO score determines if you qualify for a loan at all. It will determine if a landlord will rent to you. It will determine what you will pay for your car insurance premiums. If you mess up your FICO score on a short sale, now everything else will cost you more money because your FICO score is low.
Today, every move that you make effects something else. You might end up in a situation where nobody will rent to you, nobody will hire you. Then what! Suze calls that an American Financial Nightmare! Even though your home may be ‘underwater’, if you can afford to make the monthly mortgage payments, it may be best to stay there and ride out the current situation.
Q. We hear that Social Security is going away eventually so is it better to start collecting sooner than later?
A. Suze says full Social Security age used to be 65 and if you took Social Security at 62 you would have only gotten 80% of your full benefit. Now full social security age is 66, and if you take it at 62 it is 70% of the full benefit or a 30% reduction. Now the longer you postpone collecting the more it is. From 62 to about 67 you will get a 6% increase. From 67 to 70 you will get an 8% increase. If you do not have to, I would not be collecting Social Security until at least 66 or 67 and if you can wait until your are 70 that is even better.
Q. What is the Best Retirement Investment Strategies?
A. Suze says her#1 Favorite – Roth IRA. Why? You fund a Roth IRA with money you have already paid taxes on. If you have already paid taxes on the money that you put in it, than over the years as it grows, you get to take out any money after the age of 59 ½ totally tax free! That’s big!!
#2 Favorite – Many of you work for corporations. If you have a 401K or a 403 b plan, that matches your contribution, example-if you put in a $1 they will put in $.50, you should absolutely invest. You cannot pass up free money. Even if you have credit card debt. Take advantage of it. If you put in a $1 they will put in $.50 that’s a 50% return on your money! But every corporations will only match a certain percentage of your base pay and that’s usually 6%. After you have reached the match maximum of the employer, stop contributing to your 401K. Then do a Roth IRA
Q. What should I invest in?
A. For those who are 50 years of age or more and those living in retirement, a number of years ago if you had $200,000 invested in 5% CDs, Certificates of Deposit, you could make $10,000 a year of income. Now those CDs are only paying 1%. That’s now only $2000 a year. You have just decreased your income by $8000 a year due to no fault of your own. Interest rates are low. The value of you real estate has gone down. Your expenses are going up. What do you do?
Go back to the Good Old Days when your parents or grandparents used to invest in utility stocks. They used to invest in things that paid dividends. Dividends are payments to you every quarter that if you own shares of a stock or shares of a mutual fund or an exchange traded fund, they actual pay you income known as a Dividend to be invested in their company. There are stocks, mutual funds and exchange traded funds today that easily will pay you 5,6 or 7% in dividends simply to own them. You may say “ I don’t want to risk my money. I want it safe and sound!”
Well think about the other side. If you are only getting $2000 on the 1% CD you will have to take the short fall of $8000 to pay your bills out of the $200,000. Now you only have $192,000 generating income for you. And after a number of years that amount will continue to erode.
So take the time to learn about which stocks are good, which exchange traded fund makes sense, which bonds make sense. Which one should you do so that they are paying you income. The payout percentage may go up or down but it is the same risk of only making 1% income. You need to start thinking differently. It’s not about “is it going to go up or down?” It’s about “are they paying me what I need to live on according to my lifestyle.”
Q. I am a college student and paying $18,000 in tuition all in student loans at various interest rates some at 4%. What should I be considering?
A. Suze says student loans are the most important debt that you will ever have to be paid back on time and consistently. It is more important to pay a student loan over credit card debt. Why? Student loans cannot be discharged in bankruptcy. It is also not a good idea to defer a payment or go into forbearance which means the loan company gives you permission not to make a payment. Your loan will just continue to get grow and grow and the longer that it is deferred the larger the balance becomes which means the more you will have to pay eventually. The loan company can garnish your wages and take it from your social security check if they have to.
As a student you took out those student loans knowing you were going to graduate and get a job and pay it back. But in today’s market you may not find the job you had hoped for or the job of your dream. But don’t say “I wish I hadn’t of done it!” It is great that you were able to pursue your dream of what you want to be one day and had the ability to take out those loans. If you need to, work 2 or 3 jobs to pay off those loans. Now is the time to do it while you are young, and have the energy. Don’t let your friends distract you from what you need to do.
When you go for a job do not ask how much many you are going to make. Today any job you can get in the field that you want to be in, should make you feel so lucky. The money is irrelevant today. Your goal should be to make those who you are dependent on a for a paycheck, dependent on you! If you are suppose to be at work at 8:00 you are coming in at 7:00. If you are suppose to go home at 5:00 you’re staying till 6:00. If there’s work on the weekends show up. You want your boss to take note of you and become dependent upon you. When he becomes dependent upon you that’s when you can ask for a pay raise. Do not say can “I would like a 10% increase” because he can say no. Say “I would like a 5% or 10% pay increase.” Of course he’ll pick the lower number so make sure that’s the one you want!
Q. My girlfriend and I are moving in together. What are some financial concerns we should consider?
A. Suze says many times when, a girlfriend, boyfriend or partners, move in together and plan on splitting joint household expenses they split the expenses down the middle and each pay 50%. But if each makes different salaries it is not an equal split. Example. Lets say one person makes $4000 a month and the other makes $2500 and the joint expenses are $3000. If you split the joint expenses in half then the $4000 salary would pay only 38% of their salary for joint expenses while the $2500 salary would be paying 60% of their salary for their joint expenses. That’s not equal and may cause resentment! Suze suggests this solution:
Each person should pay an equal percentage of the expenses based on their salaries.
In the same example, both salaries equal a total household income of $6500. Now take the total expenses of $3000 and divide by the total income $6500. That = 46%. Each person should equally pay 46% of their salary for the joint expenses. So the $4000 salary should pay 46% or $1840 toward expenses and the $2500 salary should pay 46% or $1150 toward expenses. Sometimes you may need to round off the amount as in this case. The total comes to $2990, $10.00 short of $3000.
Q. We have a 5 month old. How do we go about saving for her college education?
A. Suze says first of all you have to take care of yourself.
(1) Do you have no credit card debt? (2) Do you have your 8 month emergency fund in the bank? (3) Are you funding your Roth IRA to the max? If you can no to any of the above than you cannot afford to put money away for your child just yet. If you can yes to all of the above than Suze advises:
The best way to fund a kid’s college education is through a 529 plan. The money is in the parent’s name and is still considered the parent’s asset. Because it is the parent’s asset it will not disqualify your child from financial aide.
That’s very important. You do not want to put money in your child’s name, you do not want a Uniform Gift To Minors Act Account (UGMA) or a Uniform Transfers To Minors Act Account(UTMA). Your child may be an angel now but by the time they are 18 things might change. UGMA and UTMA is money that belongs to the child at the age of 18 or 21 and they can do whatever they want with the money plus make it harder for them to get financial aide. It’s best to keep the money in your name with a 529 plan. The best website to go to for information about this is SavingForCollege.com. It’s a website by Joseph Hurley who is the nations expert on 529 plans.
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