Suze Orman's Action Plan (22 page)

The best way to figure out how much you can afford is to use an online calculator (go to
www.bankrate.com
) to figure out the base mortgage amount. Then add at least 30% to that amount and ask yourself if you can honestly handle that cost. If not, look to buy a less expensive home. The goal is to afford a home comfortably, not to stretch and gamble.

ACTION:
Through April 30, 2010, if you sell a home and then purchase another primary residence you may be able to collect a $6,500 federal tax credit.

The eligibility rules are the same as with the First Time Homebuyer Credit explained above:

To claim the credit you must be in contract by the end of April, and the deal must close by June 30, 2010. Individuals with income below $150,000 and married couples with joint income below $225,000 are eligible for the credit. The home you purchase must be your primary residence and the purchase price must be below $800,000.

Members of the military who are deployed for at least 90 days outside the United States have until June 30, 2011, to claim the credit.

ACTION:
Your home is not a stock that you buy and sell based on its short-term value. If you enjoy your home, if you can afford your home, and if you don’t need to sell right now, stay put.

Assuming you don’t have to move, why move? Especially when you consider that you’ll have to pay the 6% sales commission along with the cost and hassle of the actual move.

ACTION:
You must have a regular savings account funded with your own cash. You cannot rely on either a HELOC or credit card line of credit to be available in an emergency. When the economy hits a hard stretch, lenders get scared and look for ways to reduce their risk. That’s exactly what happened in 2008 and 2009; as home values fell, lenders reduced or revoked HELOCs. With less equity
in your home, you suddenly look a lot riskier to your HELOC lender.

ACTION:
Fund a savings account from real savings, not by increasing your debt. It is absurd to take on more debt. Don’t tell me you will just use your savings to cover the HELOC payment if you get laid off. Wake up. You will need that money to pay your basic living costs, so why would you want to add to that monthly nut?

If you want to build a real, honest savings account, check out my advice in “Action Plan: Spending,” for ways to find money to put toward your most important goals.

ACTION:
Be grateful market forces didn’t lure you into this bad move. I have never liked it when families increase their housing debt to pay for school. It typically leaves parents severely in debt just at the point when they should be focusing on paying
off their mortgage debt, not increasing it, to prepare for retirement.

Don’t worry, you have solid loan options to cover college costs. Please check out “Action Plan: Paying for College.”

ACTION:
Time to get serious about saving money from your paycheck. As I stated earlier in this chapter, I am still a big believer that your home is a solid long-term investment. But that means it will, on average, rise in value at a pace that is only one percentage point or so ahead of inflation. That’s not going to fill your retirement nest egg.

If you are over 50, make it your goal to take advantage of the extra “catch-up” amounts you are allowed to invest in your 401(k) and IRA. In 2010, you can invest an extra $5,500 in your 401(k) if you are over 50, for a total maximum contribution of $22,000. You can also contribute an extra $1,000 to your IRA in 2010, for a total of $6,000.

Can’t imagine where to come up with extra cash? Make sure you read “Action Plan: Spending.”

ACTION:
Love your home for what it is. Yes, it is an investment, but not one whose value you should be charting on a monthly or annual basis. If you can afford your home today, the best thing you can do is not worry about the current turmoil in the housing market.

Homes remain a solid long-term investment. But let’s review what I mean by solid. The long-term trend—and I am talking decades, not a few years—is that homes on average rise in value at a pace that is about one percentage point better than inflation. One way to look at the massive bursting of the real estate bubble that began in 2007 is that it is in fact a painful correction that brings things back to a level based on a more moderate rate of appreciation.

In the meantime, your home is where you live. It is a refuge, a place where you and your family build memories. It is also a fine tax break.

ACTION:
If you are in a home you plan to live in forever, accelerating your mortgage payments still makes terrific sense. Owning your home free and clear will provide a tremendous sense of financial security in retirement. The only caveat: If you have credit card debt to pay off, make that your priority
before you focus on extra mortgage payments. And always make sure you invest enough in your 401(k) to receive the company match.

If you have all that taken care of, then paying down your mortgage is a smart move. I have always been a proponent of getting rid of mortgage debt before you retire. The best way to ensure that you will be able to afford your home in retirement is to know you own it free and clear and have to use retirement funds only for property tax and maintenance costs.

If you own your home free and clear, you also have the option of borrowing money through a reverse mortgage if you find you need extra income in retirement.

One important note: You are not to use money set aside in your emergency savings fund to pay off your mortgage. Emergency cash is for an
emergency
. Don’t raid the savings to pay off the mortgage, or for any other goal for that matter.

ACTION:
A federal law passed in May 2009 provides important protection for renters of foreclosed properties. Unless the new owner of the
property intends to live in the home, the renter must be allowed to stay in the property through the end of the lease. And even if the renter is to be evicted, there must be 90 days’ advance notice given. This federal law will remain in effect through 2012. If your state or municipality has regulations in place that offer more protections for renters, those rules will apply.

ACTION:
Be very careful here. Many of you looking to buy vacation homes or investment real estate may not be looking at the big picture, and that could get you in trouble. If you need to rent out this property in order to make the mortgage payments, then I would say do not touch this “opportunity” with a 10-foot pole. Why? Because if something happens and your tenants cannot pay the rent, how are you going to pay the mortgage? You need to know that you can afford the payments month in and month out, regardless of rental income. Remember, too, that during periods of economic turmoil, more vacation-home owners are apt to want to rent out their properties, and that’s bad for you. More competition, that is, for fewer potential renters.

And at the risk of repeating myself, let me say yet again: If you have one penny of credit card debt, if you do not have retirement savings, if you do not have an emergency savings fund that can cover your living costs for at least eight months, if you are still paying off your primary mortgage or have an outstanding HELOC balance, you cannot afford a vacation home. Denied!

I
n the wake of the financial crisis, the already daunting task of financing your children’s college education has shifted from hard to “are you kidding me?”

The value of 529 college savings plans was battered during the bear market, dropping more than 20% on average. The sad fact is that many families were caught holding way too much stock in their portfolios with their kids just a few years away from freshman orientation. More to the point, many families found out too late that the age-based target funds they had relied on to set the proper mix of stocks and bonds for them were in fact invested too aggressively for students just a year or two away from freshman year.

Meanwhile, you are rethinking your internal
financial calculus. With the dawning reality that you need to save a lot more for retirement—and soon—you lay awake at night wondering where the money for the 401(k) and IRA will come from. Even your backstop has disappeared; though I never advocated tapping home equity to pay for college, I know many of you thought of your home as your “in case of emergency” option if the savings and aid didn’t cover what was needed. Now that option, too, is off the table for many of you.

And it’s not likely schools will be able and willing to fill your financing void. We’ve all seen the headlines about the losses and lack of liquid investments affecting private college endowments. Public schools, too, have been reeling from state budgets cuts and massive revenue declines.

The New Rules for Saving for College dictate that tuition is a family project. You must recognize that retirement does indeed move to the front of the class in terms of where you direct your savings. You’ve no doubt heard me say this before: There are loans for college, but no loans for retirement. With less saved up for college, you and your child will need to study up on the smartest loans for school. As you contemplate the cost of those loans, it is necessary and honorable to sit down and talk through what school is the best fit. This is not just about choosing the best education and the perfect campus fit. Making sure you find an affordable financial fit is also important. You must
think long and hard about how much debt you are comfortable taking on to send your kid to school.

Any amount, you say? You just flunked your first college finance quiz. If you borrow so much that you will be hard-pressed to make the payments and forced to cut corners on other goals, then you have to question your approach. A college degree is unequivocally smart. A college degree that leaves you and your child with bone-crushing debt is not acceptable. According to
finaid.org
, two-thirds of college students now graduate with debt, and the average amount owed is more than $23,000. This when the average salary for recent graduates fell 1.7% in 2009—that is, for the grads lucky enough to get a job.

I want to reiterate that I am not questioning the value of a college degree. I am asking that you and your children together become savvy shoppers. Quality of education matters. A campus that feels right matters. Just promise yourself you will make the cost factor part of the decision too.

• If your child is heading to college within four years and your college savings are in the stock market, you should begin to phase it out of the market, so that you are 100% out by the time he or she is 17.
  

• Make federal Stafford loans your first option when loan shopping.
  

• If Stafford loans are not enough, parents should consider a PLUS loan. Significant changes to this program make this a viable option for many more families.
  

• Stay away from private student loans at all costs.
  

• If you are graduating from college with student loan debt, know your repayment options.