Suze Orman's Action Plan (15 page)

ACTION:
Rest assured your money is safe as long as it is covered by federal insurance. That insurance is backed by the full faith and credit of the United States government. Please don’t get worked up if you hear or read ominous stories that the insurance funds are running short of money. Here’s the big picture to stay focused on: The FDIC and NCUA can go directly to the Treasury to get any money they need to fulfill their stated insurance promises. And the Treasury will raise any extra money it may need to cover losses that exceed what is already set aside in the insurance funds. There is absolutely no way our government is going to let depositors with insured accounts lose a penny. That promise is one of the pillars of our financial system.

ACTION:
Relax. Typically, when a bank or credit union is taken over by regulators it occurs on a Friday and by Monday everything is open and running as if nothing happened. It is in the best interests of the regulators to make sure depositors have quick access to their money. That’s not only “good business,” it is also how the regulators prevent a panicked run on the banks.

ACTION:
As long as your credit union belongs to the National Credit Administration’s insurance fund (NCUA), your money is safe. The coverage limits and government backing are the same as those at an FDIC-insured bank. There is no need to move your money.

ACTION:
Check if the online bank says it is part of the FDIC insurance program. Every bank that
is in the FDIC insurance program—whether online or “bricks and mortar”—is safe. You can check the home page of your online bank; all banks that participate in the program will advertise that fact boldly. But I think it is smart to double-check directly with the FDIC; go to
www.myfdicinsurance.gov
to verify you are protected, and confirm that every penny is in fact insured.

ACTION:
You need to understand that FDIC insurance does not cover investments, such as a stock fund. Federal insurance for banks and for credit unions covers deposit accounts, not investment accounts. A deposit account can be a checking, savings, CD, or money market account. But banks are also allowed to sell investments. Mutual funds are investments. Stocks and exchange-traded funds (ETFs) you buy through a bank are investments. And they have zero insurance. Zero. When you opened the account you probably signed some sort of acknowledgment that you understood this, but those disclosures are easy to miss. And, of course, there was no guarantee that your friendly bank account manager who was excited to have you make the investment took the time to slowly and clearly spell things out.

When you invest in the stock market—whether it be through a fund you buy at a bank, a credit union, a brokerage, or a fund company—you have no protection against bear market losses.

ACTION:
It is always smart to shop around for the best-yielding savings accounts, but you need to understand that banks peg the savings rate they offer consumers to the Federal Reserve’s Federal Funds Rate. In the wake of the recent financial crisis the Federal Reserve aggressively cut the Federal Funds Rate. As I write this in late 2009, the Federal Funds Rate is below 0.25%. So if you are earning more than 1% or so on a regular savings account, that’s actually pretty good. I am all for moving your money to the highest-yielding bank accounts, and you can check websites such as
www.bankrate.com
for banks that offer the highest savings rates. But if you have a competitive yield right where you are and it is FDIC insured, I wouldn’t make it a huge priority to hunt for an extra 0.25% in yield. But hey, if you have the time and energy to shop around, go for it. Just remember: Only put your money in a bank that is FDIC insured or a federally insured credit union.

ACTION:
The short answer is no. A money market mutual fund (MMMF) sold by a brokerage firm or a mutual fund firm is not backed by permanent federal insurance. Only a money market deposit account (MMDA) sold through a federally insured bank or credit union, or a bank subsidiary of a brokerage or mutual fund company, is eligible for insurance.

I know, I know: MMDA, MMMF—why do they have to make it all so confusing?

So just to be sure you have it down straight:

MMDA:
Sold at a bank or credit union, or through a bank subsidiary of a brokerage or fund company. Eligible for federal deposit insurance
.

MMMF:
Sold through a brokerage firm or mutual fund company. No insurance
.

Now, in normal times, an MMMF is considered just as safe as an MMDA. And for decades they were indeed just as stable as an MMDA. But in late 2008 one money market mutual fund ran into trouble because it owned a security issued by Lehman Brothers. When Lehman went bankrupt, the value of that security fell to zero and the money market fund was unable to maintain its stable $1 share value.

Here’s my safe and sound MMMF strategy: Keep your money with the same firm but move it into the Treasury MMMF (every major brokerage and fund company has this option). If your money is invested in U.S. Treasuries, you have nothing to worry about. Your money is backed by the full faith and credit of the U.S. government. There aren’t going to be any defaults in that portfolio. If you don’t have a Treasury MMMF option at your existing brokerage or fund company, then I would consider moving my money into an insured bank deposit, or to a brokerage or fund company that offers a Treasury MMMF. (To be extra safe, I recommend that money you need to pay bills, etc., be moved into a bank or credit union MMDA account. The money market mutual fund that ran into trouble froze investor accounts and then doled out payments in small increments over many months. You need to make sure that money you need quick access to is in fact available. The only way you can guarantee you will have ready access is with an insured bank or credit union account.)

ACTION:
I am well aware how stretched you are financially. I fully expect that many of you may
not be able to flip the switch and magically have a bank account that is stuffed with enough money to cover eight months of living expenses. But you must start moving toward that goal. Month by month you must build security for yourself and your family. You may get to the eight-month goal in six months of aggressive saving, or it may take you a few years. That’s okay. The point is that you are moving in the right direction. Every month you will have more security, not less. Check out “Action Plan: Spending” for steps on how to reduce your expenses so you have more money to put toward goals such as this one.

One of the best ways to get on a consistent savings pattern is to set up an automated deposit from your checking account into a savings account. Studies show that once you automate you tend to stick with it; that’s true of bank savings accounts and your 401(k) investing. As the saying goes, set it and forget it.

Now, how much should you have deposited each month? Here’s the goal. Decide how much you can afford to deposit. Now add 20% to that amount. Don’t cheat here. If you were going to set aside $100 a month, commit to $120. If you were going to aim for $500 a month, it’s now $600 a month. Will that be hard? Yes. Will it take some serious spending cuts? Probably. But you cannot afford to be laid back and do what is easy. You must push
yourself as hard as possible to build your security as quickly as possible.

ACTION:
Keep some of your money in the bank, no matter how low the yield. You must keep your savings safe. I also recommend checking out municipal bonds; as I write, you can get yields of more than 4% on bonds with 15-year maturities. That’s a good deal right now and it does not require you take on the risk of investing in longer-term issues. And please check out my dividend stock strategy in “Action Plan: Retirement.” It may be a smart way for you to earn more income on a small portion of your money that you’re comfortable investing in the stock market.

ACTION:
You must keep paying. A bank’s failure does not excuse you from paying your loan.

Very soon after a bank failure, you should receive notice of the bank that has taken over your account. And if all goes well, you will just keep paying exactly as you have, with no disruption.

Now, that said, I want you to keep very careful records of all your payments. If you use online banking, print out each payment for at least six months and tuck them away in a safe place. As I said, the transition should be seamless, but when Bank A takes over Bank B, sometimes the wires can get crossed in the back office during the switchover. So you want to have perfect records to prove any problem is not because you fell behind on payments. If you do receive a notice that you haven’t paid, you have to not only deal with the bank but check your credit reports (go to
www.annualcreditreport.com
; you are entitled to one free credit report a year from each of the three credit bureaus) to make sure the bank has not mistakenly reported your loan payment as late or delinquent. If it is showing up on your report, you must ride the bank hard to correct the mistake. At the same time, file a dispute with the credit bureau. By law, they must look into the matter and report back to you within 30 days. Don’t take anyone’s word that they will take care of it. You must stay on top of the issue and keep checking (and nudging) to make sure any mistake is cleared up. As I discussed in “Action Plan: Credit,” no one can afford to let their FICO credit score drop. Especially when your bank is the one that has tripped up.

A
welcome outcome of the financial crisis is that it has made very plain the need to return to the values of acting responsibly when it comes to your money. You now understand why it is important to have an emergency savings fund at a federally insured bank or credit union. You now know you need to shift your retirement savings into high gear. You now truly appreciate the urgency of getting out from under the credit card industry and paying off your balances once and for all.

Finally, you get it.

But you have no idea where you will get the money to put toward your newfound financial goals. Many households are grappling with a layoff. In others, a furlough or a disappearing bonus is squeezing the family finances. Just when you
have all the motivation in the world to take control of your future and build security, it’s as if the universe is conspiring against you and making it doubly challenging.

There’s no easy solution here. If you aren’t making more, you need to create more by spending less. I know many of you are already committed to that fact. Over the past year the national savings rate has increased from less than 1% to more than 4%. It wasn’t a flush paycheck that made that possible. It was your own determination to make more out of what you have. There’s only one way to do that:
spend less
.

If you are one of those people who’ve started saving more, good for you. Now just keep it up. The New Rules for Spending say less is more. The less you spend, the more money you will have available to buy the most valuable commodity of all: security.

Don’t tell me spending less is unpatriotic. I’ve heard that from some of you recently. Yes, I am fully aware that roughly two-thirds of our Gross Domestic Product (GDP) is based on consumer spending. I appreciate how important the consumer is to our nation’s economic health. But come on—look at where all of that consumer spending has gotten us. An economy that relies on its citizens to overspend is at its core unhealthy and unsustainable. It is nonsense to suggest that to keep the economy growing you must keep spending.

Personal accountability is job one. And there is value in your saving; that money will find its way back into the system. Money you save is money that is available for investment by the institution where you place your deposits. Of course we still need a vibrant consumer to help our economy, but we also need a consumer who is committed to saving too.

The challenge now is to rethink, retool, and re-imagine your budget so there is more money left over each month to put toward your newfound financial goals. It is not just scouring the bills for savings, though that’s laudable; it may require downshifting your entire lifestyle to a more affordable level.

That’s not punishment. On the contrary, it is freedom, my friends. Figure out how to live on less, find ways to save more, and you will be emancipated from the shackles of financial stress. Isn’t that all the motivation you need?