Suze Orman's Action Plan (17 page)
Read Suze Orman's Action Plan Online
Authors: Suze Orman
Or let’s look even further into the future. Twenty years from now, your little ones are going to be adults, working to make ends meet for their own families. Then you come knocking on the door saying you can’t afford to support yourself in retirement because you never saved up enough during your prime working years, the years when you made the decision to give your kids everything they wanted. How does that indulge your adult kids?
I appreciate that it may initially be hard to institute new financial priorities and habits in your family. Change is always a process that takes getting used to. But the real problem here is that you think acting responsibly with your money will be punishment for your kids. You think that by slowing down the spending you are taking something away from them. I couldn’t disagree more. I see it as protecting them. When you make the commitment to spend
less, you will have more money to put toward what your family needs: lasting financial security.
And I have to tell you: How receptive will your kids be to the change comes down to how you sell it. If you are moping, if they can feel your guilt, they are going to feel lousy. Your kids don’t deserve that.
Children are incredibly adaptable, and they are going to take their cues from you. So don’t pitch this as a scary time and don’t suggest that they are in any way to blame for your problems. In an age-appropriate manner, let them know that you are all going to be fine, but you need to be extra careful with spending and saving to make sure the family is safe during these challenging times. For more advice about how to talk to your kids about money, read “Action Plan: Kids and Money.”
SITUATION:
Even after removing the “wants,” you still don’t have money to put toward paying off your credit card debt and building savings.
ACTION:
Look for ways to pay less for your needs. You need a phone, but do you need a home phone and a cellphone? Does your family need the super-deluxe cell plan that lets everyone aimlessly text to their heart’s delight, or might you be able to spend $50 less a month with a scaled-back plan? Have you really, seriously done everything to reduce your utility bills? I am talking about the low-hanging fruit of inexpensive insulation, unplugging unused
electronics, replacing burned-out bulbs with energy-efficient CFLs. I know you have heard all of this before. But you sort of filed it away under “someday I really should.” That day is here. I bet you can reduce what you spend on your family’s needs by 10% to 20% if you put your heart into it.
Insure Big Savings
Health insurance, car insurance, and home insurance (including renter’s insurance) are three of the most important “needs” for every family. Without question, they are necessary expenses. But there are great ways to lower your insurance premiums. You are not to reduce your level of coverage, but rather, make sure you have taken advantage of every deal and discount possible.
Raise your deductibles on all your policies. You can save 10% or more if you agree to a deductible of $500 or $1,000 rather than just $250. There’s no need to keep a low deductible when you have a solid emergency savings fund that can cover any out-of-pocket expenses.- Keep your auto and homeowner’s/renter policies with one insurance company. You will be eligible for a 10–20% “multiline” discount.
- Designate one car as your “low mileage” car; if you keep annual mileage below 7,500–10,000 miles, the premium discount can be 10% or so.
- Keep your FICO credit score above 720. Some insurers base the premium rate you are offered on your credit score. The higher your score, the more likely you are to get the best terms on all your insurance.
SITUATION:
Three years ago, you and your partner agreed you would be a stay-at-home mom, but your partner’s commission-based salary has fallen along with the bad economy, so you are stuck putting some expenses on your credit card, knowing you will not be able to pay it off in full.
ACTION:
Base your financial decisions on what you have today, not what you had in the past. If your family can no longer afford to live on one income, you must consider going back to work.
I say that with great understanding of how hard this will be for you to consider. But remember, your long-term financial security requires making the right and honest choices today. And what is right is not always the same as what is easy. Going back to work when you believe it is far more important to be a stay-at-home parent is an emotionally charged and difficult step to contemplate, but in these tough times, it just might be necessary.
You need to focus on what is best for your children. I believe very strongly that financial security
is what’s best for your children. And if you cannot honestly keep your family financially secure—by being out of credit card debt, having a hefty savings fund, and keeping your retirement savings on track—you are not doing what is best for them.
Start by considering whether you (or your partner) can take on part-time work to supplement what is coming in from the one income. That may be a way to make more without having to rely completely on child care. But if that doesn’t close the gap, you must think about taking on a bigger job. If it needs to be full-time, it needs to be full-time. Maybe not forever, but for now. That is not a punishment. It is a powerful choice to take action to build financial security for your family.
SITUATION:
You can’t afford to pay private-school tuition and invest the maximum in your retirement accounts.
ACTION:
It might be time to rethink whether public school is the better move for your entire family. Look, I know this is a huge issue, and I am not suggesting you make a decision in the next 15 minutes about whether you can continue to send your 10-year-old to private school. But I also think it is shortsighted to presume that this expense is untouchable. If you are shortchanging your retirement savings, or if your emergency fund is nonexistent, you really need to think through whether
you are doing the best for your child. If your issue is that you do not think your local public schools provide the quality education you want for your children, I want you to take a deep breath and consider moving to a community with a strong public school system. As I said, this is not a quick or easy decision. But I encourage you to at least start giving this serious consideration. Will home values and property taxes be higher in a town with high-quality schools? Probably. But I seriously doubt it will cost you the $30,000 or more a year it can take to send two children to private school.
SITUATION:
You lost your job and can no longer afford to make the payments on your family’s second car, but you owe more on the loan than you can get at trade-in.
ACTION:
Call up your lender and see if you can get the loan terms modified. Ideally, you don’t want to extend the length of the loan (that will increase your total cost over the life of the loan), but push to see if you can get the interest rate reduced. That will lower your costs. Or perhaps the lender will agree to a temporary period of reduced payments.
SITUATION:
You just want your car to be repossessed already—you’re sick of trying to keep up with the payments.
ACTION:
If you know you can’t afford the car, hand the car back to the lender rather than waiting for repossession. By proactively contacting the lender and giving the car back, you will avoid paying fees charged for repossession. And more important, you will avoid the trauma of having your car towed away from your work or home. You change the dynamic by making an embarrassing act into an act of responsibility.
SITUATION:
You turned the car back in—or it was repossessed—but you were told you still owed the lender money.
ACTION:
You are responsible for the difference between what you still owed on the loan and what the lender can recoup by reselling the car. If you can’t cover that payment, you did not live up to your financial obligation. Whether you turned in the car or it was formally repossessed, failure to pay the balance will stay on your credit report for seven years.
SITUATION:
You want to borrow from your 401(k) to keep up with the car payments.
ACTION:
Do not touch your retirement savings. If you need to keep the car or you want to avoid having a repossession on your credit report, you must find other income sources to make the payment. Go back and review the Household Cash
Flow worksheet at the beginning of this chapter. If you need more cash, find it from spending less. The absolute worst move you can make is to pull money out of your 401(k). As I explain in detail in “Action Plan: Retirement,” it is never wise to touch your retirement savings. Lose your job and your 401(k) loan will need to be repaid within a few months. Where are you going to come up with that money? That is going to create a big tax bill. Most important, money you spend today is money you won’t have in retirement. Please consider every other possible alternative before you ever raid your 401(k) or other retirement savings.
SITUATION:
Your eldest child heads to college next year and you’re feeling like this is the last chance to take a long family vacation, even though it probably means putting $4,000 on your credit card that you won’t be able to pay off immediately.
ACTION:
You will get no argument from me that family time is a high priority. As you may have heard me say, my mantra is “People First, Then Money, Then Things.” But that doesn’t translate to giving you carte blanche to spend whatever you want to create those memories. They are not priceless memories. If you need to run up credit card debt to finance the memories, they have a very steep cost: a 15% interest rate, on average.
This is not about what you and your family deserve. We all deserve vacations. What you and your family need is to be safe. An unpaid credit card balance is not safe. Not having an emergency savings fund is not safe. Same goes for no retirement savings. If you haven’t taken care of those priorities, you can’t afford to take an expensive vacation. Period. That doesn’t mean you can’t spend time with your family and create lasting memories. Take the vacation—just do it at home, or closer to home, this year.