Suze Orman's Action Plan (18 page)

ACTION:
You can, and must, say no. It is absolutely unacceptable to take on any sort of debt to pay for a wedding. No exceptions. I don’t care what anyone dreamed of.

Do you deep down,
honestly
, believe that what you spend is a reflection of your love for your daughter? Do you honestly believe that it is better to take on $20,000 in credit card debt to impress your friends, rather than use that $20,000 for retirement savings? Step back for a moment and put this decision to the Need vs. Want test. What you
and your daughter
want
is a big expensive wedding. But all that is really
needed
is an affordable wedding that is full of love.

ACTION:
As wonderful as it is that you give gifts, you and I both know that your friends and family don’t love you because of the gifts. If you have yet to build an emergency savings fund that can cover eight months of living costs, you must curtail your gift giving so you can give yourself something far more important: security.

Besides, you are never, ever to buy gifts that you can’t afford to pay for immediately. As I explained in “Action Plan: Credit,” an unpaid credit card balance puts you at great risk of falling into a costly vicious cycle you will find it hard to climb out of. Worried what your friends and family will think if they don’t receive an expensive gift this year? Come on. Do you really think anyone who cares about you would feel good if they received a gift with an unspoken price tag that said,
This gift cost $50 that I couldn’t afford and means I will not be able to pay off my credit card bill this month?

ACTION:
Can you give time rather than money this year? I understand how important it is to help those in need. But you have important needs this year too. And it is not selfish to make your financial safety and security a priority. If you need to reduce or suspend your contributions this year to shore up your finances, that’s the right and honest move for you to make.

I realize how hard this is, especially when charities are also feeling the pinch and are stepping up their requests for donations. But you must give only what you can honestly afford. If that means no financial contributions, that is okay. I encourage you to donate your time—or more of your time than you already give—to the causes you support. That is a valuable contribution. And to be honest, I think it can also have a great unintended benefit for you: It can be calming and rewarding to focus on what you can do through your actions to make the world a better place.

Now, that said, I also know how upsetting it can be to curtail helping others in need. Take another hard look at the Household Cash Flow worksheet and see if there are any costs you could pare back to free up a little money to contribute to the
causes most important to you. Challenge yourself: “I want to cut $X a month in savings so I can continue to make charitable contributions this year.” Often, having a specific goal makes it easier to focus on “wants” that you can do without.

ACTION:
If you cannot cover the payments yourself, then you are never to cosign a loan. You need to understand that cosigning makes you legally responsible for the loan; in the event your child can’t make the payment, you are expected to come up with the payment. Failure to do so will hurt your FICO score, not just your child’s.

And let me define what it means to be able to afford to cosign: You have no credit card debt yourself. You are not struggling to make your mortgage and car payments. Even if you can afford to cover the payments, I want you to carefully consider what you are doing. If your child can’t get a car loan on his own, you need to ask yourself why. Is he buying an expensive car when his budget can afford only a moderate-priced car? Is he focusing only on new cars for their “wow” factor, rather than buying a safe, reliable older car that is more affordable? Is there something the lender knows about his credit score that you don’t—such
as the fact that he is already up to his ears in credit card debt? Helping a child who is just getting started is fine, but helping a child who has already abused credit and has no clue how to be financially responsible is not acceptable.

If you decide to go ahead and cosign, I recommend that you be in charge of making the payment. I have seen too many parents cosign and assume their kid is making the payments, only to get a disturbing letter from the lender that the loan is delinquent and everyone’s FICO score has been hurt. I know you are focused on your kid being an independent adult, but if he or she needs your help with a loan, you have every right to oversee the payment.

ACTION:
Find out what you can afford with a maximum loan term of three years. That’s what you can afford. It makes no financial sense to stretch into a more expensive car if you need to extend the loan term to four or five years. That’s a colossal waste of money. What you need to understand is that a car is a lousy investment. It is guaranteed to lose money; the trade-in value will never cover the purchase price or the interest payments on a loan. Therefore, you want to keep your cost as
low as possible by limiting yourself to a three-year loan. At
www.bankrate.com
, you can see what typical car rates are in your area and use the free calculator to figure out your monthly costs.

And I want to be clear, I am talking about a regular loan. No leases. Not now, not ever. With a car loan, you will eventually own the car free and clear and can drive it for five to seven more years without having to worry about your monthly payment. If you lease, you typically fall into a trap where you just keep rolling over into a new lease every three years. So you are always making payments. Given that we just discussed what a lousy investment a car is, why would you ever choose a never-ending cycle of car payments?

Before you start shopping, make sure your FICO credit score is at least 720. There are indeed great deals to be had, but you need to have a high credit score to get a loan with a reasonable rate. In a slowing economy, where lenders are downright scared to lend, they are going to offer reasonable deals only to borrowers with sparkling credit. In November 2009, a FICO score of 720 or better would make you eligible for a 6% car loan rate. If your score was 620–660, the rate was 13.4%.

I also recommend taking a look at certified pre-owned cars; these are used cars that come with a limited warranty. Make sure the warranty is from the manufacturer, not the dealership. Given the huge inventory of repossessed cars, you may be
able to find an especially good deal on a used car. Sure, right now you might also be able to score a great deal on a new car if you have a solid FICO score. But please remember that the goal is to spend the least amount of money for a car that is safe and meets your commuting needs.

T
he fallout continues to course through every neighborhood. Foreclosures and short sales are not only restricted to the markets that saw the craziest gains from the bubble. Stable markets are being smacked hard, too, as spooked lenders impose new rules that make it much harder to qualify for a new mortgage, refinance an existing loan, or simply hold on to a once-sure thing, a home equity line of credit.

I hope you’re not banking on a quick turnaround. There’s actually a backlog of more bad news heading to market. According to First American CoreLogic, $170 billion of interest-only mortgages are scheduled to “reset” between mid-2009 and mid-2011. Another $400 billion will reset after that. Many of those homeowners face sharply
higher monthly payments when their reset occurs, and refinancing their way out of trouble is unlikely given the erosion in home equity. The S&P/Case-Shiller index of home values in 20 large metro areas shed 30% between its 2006 peak and the summer of 2009.

The federal Making Home Affordable mortgage rescue plan launched in the spring of 2009 to help stabilize the markets has been a big disappointment. So far lenders have been slow to extend mortgage modifications and refinancing options to steady the market. Why is that? Well, one factor may be that a recent study by the Federal Reserve of Boston concluded that 40–50% of modified loans end up delinquent again within six months. Those are very sobering statistics for all of us, but particularly for lenders.

While the short-term outlook is anything but rosy, I do have something positive to say: I am still a big believer in homeownership. With one humongous caveat: Homeownership only makes sense if it is based on rational assumptions, not bubble-fueled dreams. That’s what I said before the bubble, it’s what I said during the bubble, and it’s what I have to tell you now. The New Rules for Real Estate are nothing new if you’ve been listening to me all along; they’re the rules and principles that were in place before the madness began.

Then:
No-documentation, no-down-payment
adjustable-rate mortgages with artificially low initial payments offered like candy and taken on the assumption that fast and fat home-value appreciation would allow refinancing before the costly reset arrived.

Now:
An application process that makes an Ivy League admissions process look like a cakewalk. Lenders sifting through reams of documentation of your financial life. Loan values based on what you can actually afford today with a 30-year fixed-rate mortgage instead of an exotic mortgage that requires a cascade of optimistic outcomes to work out okay for the lender and borrower (and not become the headache of the taxpayer).

Then:
A land grab not seen since Manifest Destiny. Renters determined to get their piece of the American dream, owners giddily parlaying their equity riches into bigger and better McMansions or outsized lifestyles charged to their HELOCs. And all of it fueled, financed, and blessed by Wall Street and Washington.

Now:
The steep decline in housing values lays bare another old-school truism: A home is not an insta-ATM or a four-sided retirement fund. Nor is there any financial magic that can transform pools of mortgages into risk-free investments.

But I am not about to write the obituary for homeownership. It is absolutely true that those of you who bought at the height of the craziness will not soon—if ever—see your home’s value fully rebound.
Those prices were artificially and irrationally inflated. There is no argument for a rebound all the way back to what was never real.

But let’s also apply some perspective. The same index of home values that has declined 30% since the 2006 bubble peak is nonetheless nearly 20% higher than in January 2000. That return slightly lags inflation, but is far from a death knell. Add in the value derived from the use of leverage (you pay only a fraction of the purchase price from your personal savings and borrow the remainder) and the mortgage interest tax deduction, and it’s clear there is still a strong argument for homeownership over the long term. Catch that last part?
Long term
. If you haven’t already, drop the flipping dreams right now.

The New Rules for Real Estate require resetting expectations. Understand what your home is (shelter) and isn’t (a liquid investment that banks 10–20% annual appreciation). Recognize that the financial community has hit the reset button and is once again insisting you pass a thorough vetting before qualifying for a mortgage.

For many of you, moving forward in today’s real estate reality will require moving out. That is not easy to contemplate, I know. But if you cannot afford your mortgage, if you have been unable to renegotiate with your lender, if Washington and the banking industry do not arrive at a more effective process for extending assistance, then you
will have no other choice. You start over by first letting go of what you can no longer control. A home should never be a source of stress. It should never be an overreach. If that’s where you are at, it’s time to make your move.

• Push for a mortgage modification or refinance if your current loan is too expensive.
  

• Do not use credit cards or retirement funds to pay for a too-expensive home.
  

• Build a real savings fund; a HELOC should not be your safety net.
  

• Focus on your home’s long-term value, not its price change from month to month.