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  1. 1. Orma_9780385530934_4p_all_r1.indd viiiOrma_9780385530934_4p_all_r1.indd viii 12/3/08 9:30:55 AM12/3/08 9:30:55 AM
  2. 2. SUZE ORMAN’S 2009 ACTION PLANis available in paperbackwherever books are sold
  3. 3. Orma_9780385530934_4p_all_r1.indd iOrma_9780385530934_4p_all_r1.indd i 12/3/08 9:30:52 AM12/3/08 9:30:52 AM
  4. 4. a l s o b y s u z e o r m a nWomen & MoneyThe Money Book for the Young, Fabulous & BrokeThe Laws of Money, The Lessons of LifeThe Road to WealthThe Courage to Be RichSuze Orman’s Financial GuidebookThe 9 Steps to Financial FreedomYou’ve Earned It, Don’t Lose ItOrma_9780385530934_4p_all_r1.indd iiOrma_9780385530934_4p_all_r1.indd ii 12/3/08 9:30:54 AM12/3/08 9:30:54 AM
  5. 5. SUZEORMAN’S2009ACTION PLANS P I E G E L & G R A UNew York2009Orma_9780385530934_4p_all_r1.indd iiiOrma_9780385530934_4p_all_r1.indd iii 12/3/08 9:30:54 AM12/3/08 9:30:54 AM
  6. 6. This book is designed to provide accurate and authoritative in-formation about personal finances. Neither the author nor thepublisher is engaged in rendering legal, accounting, or other pro-fessional services by publishing this book. If any such assistance isrequired, the services of a qualified financial professional shouldbe sought. The author and publisher will not be responsible for anyliability, loss, or risk incurred as a result of the use and applicationof any of the information contained in this book.While the author has made every effort to provide accurate tele-phone numbers and Internet addresses at the time of publication,neither the publisher nor the author assumes any responsibilityfor errors or for changes that occur after publication.A Certified Financial Planner® is a federally registered markowned by the Certified Financial Planner Board of Standards, Inc.Copyright © 2008 by Suze Orman, a Trustee of theSuze Orman Revocable TrustAll Rights ReservedPublished in the United States by Spiegel & Grau, an imprintof The Doubleday Publishing Group, a division of RandomHouse, Inc., New Yorkwww.spiegelandgrau.comSPIEGEL & GRAU is a trademark of Random House, Inc.Book design by Chris WelchCataloging-in-Publication Data is on file withthe Library of CongressISBN 978-0-385-53093-4PRINTED IN THE UNITED STATES OF AMERICA1 3 5 7 9 8 6 4 2First EditionOrma_9780385530934_4p_all_r1.indd ivOrma_9780385530934_4p_all_r1.indd iv 12/3/08 9:30:54 AM12/3/08 9:30:54 AM
  7. 7. CONTENTS1 2009: The New Reality 12 A Brief History of How We Got Here 83 Action Plan: Credit 21!" Falling credit lines!" Rising interest rates!" FICO scores under pressure!" Repayment plan!" Debt consolidation!" Borrowing from 401(k)!" Borrowing from home equity lineof credit!" Bankruptcy!" Collection agencies4 Action Plan: Retirement Investing 45!" The case for stocks!" Allocation strategiesOrma_9780385530934_4p_all_r1.indd vOrma_9780385530934_4p_all_r1.indd v 12/3/08 9:30:55 AM12/3/08 9:30:55 AM
  8. 8. !" 401(k) loan/early withdrawal!" IRA rollover!" Retiree income strategy!" Roth IRA conversion5 Action Plan: Saving 84!" FDIC insurance!" Money market deposits!" Eight-month emergency fund!" Credit squeeze6 Action Plan: Spending 101!" Expense/income worksheet!" Finding ways to save!" Needs vs. wants!" Insurance saving tips!" Car loans!" Difficult choices!" A challenge from Suze for 20097 Action Plan: Real Estate 126!" Mortgage-modification options!" Short sales!" Foreclosure!" Home equity line of credit!" Home values!" First-time-buying tips!" Pre-retirement strategy!" Vacation homes8 Action Plan: Paying for College 160!" 529 allocation strategy!" What you can afford!" Federal loan strategyOrma_9780385530934_4p_all_r1.indd viOrma_9780385530934_4p_all_r1.indd vi 12/3/08 9:30:55 AM12/3/08 9:30:55 AM
  9. 9. !" Stafford student loans!" PLUS parent loans!" HELOC loans/401(k) loans!" Private student loans!" Repayment!" Consolidation9 Action Plan: Protecting Your Family andYourself 185!" Job-loss strategies!" Hope for the best, prepare for the worst!" Health insurance!" Life insurance10The Road Ahead 207Orma_9780385530934_4p_all_r1.indd viiOrma_9780385530934_4p_all_r1.indd vii 12/3/08 9:30:55 AM12/3/08 9:30:55 AM
  10. 10. Orma_9780385530934_4p_all_r1.indd viiiOrma_9780385530934_4p_all_r1.indd viii 12/3/08 9:30:55 AM12/3/08 9:30:55 AM
  11. 11. SUZEORMAN’S2009ACTION PLANOrma_9780385530934_4p_all_r1.indd ixOrma_9780385530934_4p_all_r1.indd ix 12/3/08 9:30:56 AM12/3/08 9:30:56 AM
  12. 12. Orma_9780385530934_4p_all_r1.indd xOrma_9780385530934_4p_all_r1.indd x 12/3/08 9:30:56 AM12/3/08 9:30:56 AM
  13. 13. 112009:The New RealityIbet you are scared. Angry, too. And confused.These are absolutely rational and appropriate re-sponses to the global credit crisis that eruptedin 2008 and continues to send tremors throughevery household in America. And I do mean everyhousehold. No matter how conscientious you havebeen with managing your money, the events of2008 have battered us all.The one in 10 homeowners who are at risk offacing foreclosure on their homes are obviouslyscared, but so too are the 9 out of 10 homeownerswho can afford their mortgage but are watchingplummeting home values jeopardize their finan-cial security.It’s not just the overreaching Wall Street firmswho are paying the price for those risky invest-ments. Every U.S. taxpayer is now on the hook forOrma_9780385530934_4p_all_r1.indd 1Orma_9780385530934_4p_all_r1.indd 1 12/3/08 9:30:56 AM12/3/08 9:30:56 AM
  14. 14. 2 SUZE ORMAN’S 2009 ACTION PLANa massive bailout—a bailout engineered by thesame players in the federal government that hadturned their back on regulating the very practicesat the root of today’s financial crisis. Angry? Youshould be.But wait—it gets worse: The colossal miscalcu-lations on Wall Street have contributed to a mas-sive decline in the value of your 401(k) and IRA.Years of diligent saving have been wiped out, andyou are afraid that your retirement accounts willnever fully recover.Early predictions that the fallout in the con-sumer credit markets would be limited to sub-prime lending to borrowers with low credit scoresproved terribly wrong. The truth is that creditlines are being reeled in and home equity lines ofcredit are being rescinded across the board asbanks worry that their clients—even those withsolid payment histories—won’t be able to keepup with the bills if the current crisis turns into adeep recession. A sparkling FICO credit score isno longer a guarantee that you will land a mort-gage or car loan with decent terms. Right nowlenders are more interested in keeping any avail-able cash on their books, rather than out on loan.There is also a growing sense that repercussionsfrom the credit crisis will turn what might havebeen a moderate economic slowdown in 2009 intoan especially deep recession. If that scenario playsout, businesses will likely announce more and big-Orma_9780385530934_4p_all_r1.indd 2Orma_9780385530934_4p_all_r1.indd 2 12/3/08 9:30:56 AM12/3/08 9:30:56 AM
  15. 15. 2009: The New Reality 3ger layoffs than we saw in 2008, when unemploy-ment rose from 4.9 % to 6.5 % at the end of October.In 2009, your job may be on the line as your em-ployer, or your own business, struggles with thefallout from the credit crisis.That’s a daunting platter of problems to contendwith. Did I say daunting? What I meant was over-whelming.As the economic outlook grew more troubling,I came to the realization that I had to write thisbook and get it published quickly. You want to dowhat’s right, but it’s no longer clear what right isanymore. Or perhaps you are someone who al-ways figured you had time to deal with the moneyissues in your life later. The credit crisis has wokenyou up; later is now—but where do you start?This book’s title is a promise. This is my ActionPlan for every important financial move you needto make in 2009. Follow the advice here and youwill know exactly what you need to do to adapt tothe new post-meltdown reality. Just as important,you will know what not to do. In times of greatstress, it is natural to react by making decisionsand taking actions that bring instant relief. Whenit comes to financial matters, often the decisionsthat calm us amid tumult are actions that can im-peril our long-term security. In the pages that fol-low, I will tell you when to act and when to leave itbe—which will, in some cases, require a little bitof faith and nerves of steel, but I promise I willOrma_9780385530934_4p_all_r1.indd 3Orma_9780385530934_4p_all_r1.indd 3 12/3/08 9:30:56 AM12/3/08 9:30:56 AM
  16. 16. 4 SUZE ORMAN’S 2009 ACTION PLANnever steer you wrong or put your dreams of a se-cure future in peril. You can count on me.Accent on ActionI want to be very clear about something that iscentral to my Action Plan: You must commit toactually taking action. This is not a book to beread and pondered. Or filed away under “Nice toknow; I’ll get to it.” If you care about financialsecurity for yourself and your family, if you wantto do everything in your power to protect your-self and your future, you will not get there withwishful thinking or procrastination. You cannotsit this one out, hoping that the storm will passand everything will be just fine. If you do nothing,I am sorry to say you may be in even deeper troublein 2010. The fact is, the new reality requires newstrategies. They will not necessarily be wholesalechanges in every aspect of your financial life, buttactical actions to make sure you do not let thecredit crisis knock you off course.Some of the most crucial actions require push-ing yourself to stay committed to all the smartmoves you have already made but may now bequestioning. I know many of you are thinkingthere is no point in continuing to invest for retire-ment as long as the markets are down. Big, bigmistake. Now is an incredibly smart time to investfor retirement, because the markets are down—Orma_9780385530934_4p_all_r1.indd 4Orma_9780385530934_4p_all_r1.indd 4 12/3/08 9:30:57 AM12/3/08 9:30:57 AM
  17. 17. 2009: The New Reality 5assuming, of course, you have at least 10 yearsuntil you will need that money. Same goes for your529 college savings plan for a young child.There is to be no curling up in a fetal position onthe couch in 2009 hoping that when you emergethe crisis will have passed. No assuming that thereis a government bailout or Wall Street rally rightaround the corner that will fix everything for youwithout any effort on your part. You will have toget off the couch and take control of your finan-cial life in 2009. Make that commitment this yearand you will build a solid financial foundation thatyou can stand on when everything around you iscrumbling and that you can build on when thegood times return.We Will SurviveAs we continue to claw our way out of the creditcrisis while contending with an economic reces-sion, I need you to be able to see the big picture:Though these are rocky times, our economy willbe fine. Our markets will recover. We will all sur-vive. That said, I want to be very clear: The recov-ery is not going to be quick or easy.Our economy is like a patient who was rushedto the hospital in critical condition. After monthsof aggressive intervention (by the Federal Reserve,the Department of Treasury, and Congress), thepatient is still in the Intensive Care Unit, but theOrma_9780385530934_4p_all_r1.indd 5Orma_9780385530934_4p_all_r1.indd 5 12/3/08 9:30:57 AM12/3/08 9:30:57 AM
  18. 18. 6 SUZE ORMAN’S 2009 ACTION PLANprognosis is that eventually there will be a full re-covery. In time, the patient will move into a reha-bilitation facility and start to get back on his or herfeet. Before too long, the patient will be stableenough to go home, though it might be years be-fore he or she is back to full health.When exactly will that be? That’s impossible tosay with any certainty. My sense is that we couldbe in for a long, slow period of recovery and itwill be 2014 or 2015 before the economy is backin robust good health. Between now and then, wecould see parts of our economy get better fasterthan others, and certainly some regions will starttheir housing rebound before others. I also ex-pect there could be large market rallies through-out a rocky recovery. It is also important tounderstand that the stock market is very differentthan the economy. Just because the market rallies,it doesn’t mean the economy is healthy. But interms of when we will see a lasting and consistentreturn to growth, well, I wouldn’t be surprised ifthat takes five years or more.So if we’re not going to see a quick turnaroundof the economy in 2009, why am I insisting thatyou take action? Precisely because we are in fortough times. You need to protect what you have.Protect your family. And protect your chancesof still reaching your long-term goals. Let’s faceit, in the past you didn’t really have to work toohard at building financial security. You plowedOrma_9780385530934_4p_all_r1.indd 6Orma_9780385530934_4p_all_r1.indd 6 12/3/08 9:30:57 AM12/3/08 9:30:57 AM
  19. 19. 2009: The New Reality 7money into your 401(k) and IRA in the 1990s andyou watched the market post an annualized gainof 18 %. At that rate, you figured early retirementwas a distinct possibility. Then, in 2000, the realestate bubble began and you got used to annualprice gains of 10 % or more. It was easy to feel likeyou had it made.And yet here we are. The major stock marketbenchmark indexes have fallen back to where theywere in 1998. Home values, on average, have al-ready slid back to their 2004 levels, and I expectwe have more downside to get through beforereal estate stabilizes. My point is, you just can’tshow up and expect easy market gains to get youwhere you want to go. The days of easy money arelong gone.But, my friends, haven’t I always said thatwhen it comes to your money, it’s not about doingwhat’s easy—it’s about doing what’s right? Theplan in this book is going to help you do what’sright. You can read this book cover to cover, godirectly to the topic that worries you the most, orskip around as you see fit. No matter how youapproach it, the goal is for you to make the rightmoves in 2009 to alleviate the stress, fear, andanger you’re feeling and replace it with the securesense that you have done what it takes to protectyourself, the money you have worked so hard for,and the ones you love.Orma_9780385530934_4p_all_r1.indd 7Orma_9780385530934_4p_all_r1.indd 7 12/3/08 9:30:57 AM12/3/08 9:30:57 AM
  20. 20. 82A Brief Historyof How We Got HereBy now you probably have some sense thatback in 2007 the financial crisis began be-cause a sizable number of homeownersstarted to fall behind on their mortgage payments.But you may be wondering how it is that a rela-tively small portion of people who failed to maketheir mortgage payments could bring the globaleconomy to its knees.The short answer, in my opinion, is greed. Toomany people were more interested in making aquick buck than making sound financial decisions.Mortgage lenders stopped caring whether borrow-ers were actually qualified to buy a home and gaveout loans to practically anyone who applied. WallStreet banks and hedge funds stoked the lendersto give out those loans so they could then turnaround and make tons of money off of them withOrma_9780385530934_4p_all_r1.indd 8Orma_9780385530934_4p_all_r1.indd 8 12/3/08 9:30:58 AM12/3/08 9:30:58 AM
  21. 21. A Brief History of How We Got Here 9newfangled investing schemes. And while someborrowers were indeed too confused or clueless tounderstand their mortgages, others knew exactlywhat they were doing and didn’t care that theywere buying homes they couldn’t afford. Plenty ofgreed to go around.It wasn’t always this way. Not all that long ago,if you wanted to get a mortgage you showed up atthe bank armed with a few years of tax recordsand pay stubs to verify your income, as well asproof that you had enough savings to make a downpayment of 20 %. The lender then took time to re-view your finances carefully, making sure therewas indeed plenty of income to comfortably coverthe mortgage, property tax, and insurance, andthat you were not overly burdened with other debtpayments. The only choice you had was a 15-yearfixed-rate mortgage or a 30-year fixed-rate mort-gage. There was no guesswork about what wouldhappen to your interest rate in the future, no suchthing as an adjustable-rate mortgage (ARM); ifa lender agreed to give you a mortgage, you bothknew what your payments would be for the life ofthat loan. If the loan was approved, the bank wasbetting that you would have the ability to repayit on time for the duration of the mortgage. If alender didn’t think you were likely to keep payingthe mortgage for 30 years (or until you sold thehome), you were denied the mortgage. It was thatsimple. This protected the bank, and it protectedOrma_9780385530934_4p_all_r1.indd 9Orma_9780385530934_4p_all_r1.indd 9 12/3/08 9:30:58 AM12/3/08 9:30:58 AM
  22. 22. 10 SUZE ORMAN’S 2009 ACTION PLANthe borrower from taking debt they could notafford.The relationship between the bank and the bor-rower began its seismic shift in the early 1980s.This is where Fannie Mae and Freddie Mac comeinto our story. Fannie was created in 1938 andFreddie followed in 1970; both were government-sponsored enterprises (GSEs)—they weren’t full-blown federal agencies, but they had the auraof being government-backed. Both GSEs had astraightforward mandate: to increase the amountof money available for mortgages. They did thisby buying mortgages from lenders so the lenderswould then have more money to lend. Fannie andFreddie packaged loans that they held in their ownportfolios, as well as guaranteeing mortgages thatWall Street could then package and sell to inves-tors. This entire process is what spurred homebuy-ing, because the lenders had more money to lendto potential homebuyers, which allowed more andmore people to buy homes.At this point it became increasingly likelythat the original lender would not hold on to themortgage, but would instead sell it to a loan pack-ager such as Fannie or Freddie (or their less-well-known cousin, Ginnie Mae) and Wall Street firms.Still, mortgage-backed securities had a very goodreputation—they were new income products thatwere backed by solid mortgages. Lenders werestill careful to make loans only to borrowers whoOrma_9780385530934_4p_all_r1.indd 10Orma_9780385530934_4p_all_r1.indd 10 12/3/08 9:30:58 AM12/3/08 9:30:58 AM
  23. 23. A Brief History of How We Got Here 11could meet their high standards. It is important tonote that the business of packaging mortgages—what’s known as securitization—in itself is notbad. It is, in fact, an important and positive inno-vation for financial markets. The problem beganaround the beginning of the twenty-first century,when Wall Street and greedy lenders cooked up ascheme that took a good idea and turned it into atoxic time bomb, with a major assist from the Fed-eral Reserve.Once the technology stock bubble began to de-flate in early 2000, Federal Reserve chairmanAlan Greenspan attempted to keep the economyfrom slipping into a severe recession by slashingthe Federal Funds Rate. From 2000 to 2004, therate fell from above 6 % to 1%. In such a low-rateenvironment, Wall Street set out to create an in-vestment that was perceived to be safe and wouldoffer higher yields than basic bank CDs andmoney markets were offering. The too-smart-for-our-own-good minds of the financial sector settheir sights on the quiet and somewhat staid worldof mortgage-backed securities. Rather than onlypackaging plain-vanilla mortgages that had beentaken out by well-qualified borrowers, they real-ized there was a lot more money to be made byexpanding the market to include mortgages thathad been made to people who were not well quali-fied. Mortgages made to people without goodcredit were known as subprime mortgages. WallOrma_9780385530934_4p_all_r1.indd 11Orma_9780385530934_4p_all_r1.indd 11 12/3/08 9:30:58 AM12/3/08 9:30:58 AM
  24. 24. 12 SUZE ORMAN’S 2009 ACTION PLANStreet insisted it had come up with a way to pack-age subprime mortgages with solid mortgages thatwould give investors a higher yield, but with noadded risk. Wall Street bundled the prime and sub-primemortgagestogetherinoneinvestment,calleda Credit Default Obligation (CDO). Mortgage-backed CDOs were supposed to be low-risk be-cause of how they pooled and divided the risk ofthe underlying mortgages.But Wall Street wasn’t done with its greatmortgage-backed money grab. It also startedchurning out massive amounts of Credit DefaultSwaps (CDS) tied to mortgages. The CDS wereinsurance that promised investors in mortgage-backed securities that they would be paid even ifan underlying investment (your mortgage) wentinto default. Wall Street was also able to makemassive bets on mortgages using CDS.Now I need to take a quick detour and mentionanother important player in this crisis: leverage.Not only was Wall Street allowed to create thesecredit default swaps and other so-called safe in-vestments, they also were allowed to leveragethose investments to create more and more moneyfor themselves. When you leverage, you are bor-rowing money in order to have more money to in-vest. Here’s an example: Say you have $1 of yourown, but someone gives you $2 so you have $3 toinvest. If your investment pans out, you simply re-turn the $2 with interest, but you get to keep allOrma_9780385530934_4p_all_r1.indd 12Orma_9780385530934_4p_all_r1.indd 12 12/3/08 9:30:58 AM12/3/08 9:30:58 AM
  25. 25. A Brief History of How We Got Here 13the profits from your $3 investment. That’s a lotmore profit than if you had just invested $1. WallStreet has used leverage for years, but during thismortgage craziness, it talked federal regulatorsinto allowing it to borrow up to $30 or more forevery dollar it actually owned. And Wall Streetfirms leveraged themselves to the hilt to make bigbets on mortgage-backed securities and all sortsof schemes, including credit default swaps.With their ingenious moneymaking scheme inplace, the only remaining obstacle for Wall Streetand the lenders was how to ramp up the numbersof subprime borrowers. This is when we startedseeing an array of unconventional mortgages, suchas interest-only mortgages, negative-amortizationmortgages, payment-option ARMs, and 1-yearARMs with artificially low initial payments.(Interest-only mortgages and payment-optionmortgages, two of the riskiest and insane types ofARMs, grew from 2 % of the mortgage market in2003 to 20 % in 2005.) And all you needed to qual-ify was a heartbeat. No down payment? No prob-lem. Nor did borrowers need to cough up taxreturns or pay stubs to verify their income. Thatwas so twentieth century; this was the new worldwhere NINJA loans ruled. No Income, No Job,No Assets. No problem, you still qualify!Mortgage lenders were happy to make theserisky loans, because they knew it wouldn’t betheir problem if the borrower eventually ran intoOrma_9780385530934_4p_all_r1.indd 13Orma_9780385530934_4p_all_r1.indd 13 12/3/08 9:30:59 AM12/3/08 9:30:59 AM
  26. 26. 14 SUZE ORMAN’S 2009 ACTION PLANtrouble keeping up with the payments. Why? Be-cause these loans would quickly be sold off to in-vestors, and the investors were happy to do thedeal because they were being told that they had“insurance” against mortgage defaults from thecredit default swaps. Oh, happy days.Lenders couldn’t lend money fast enough tosatisfy the appetite of Wall Street investors andborrowers were encouraged to take out the big-gest mortgage possible. Everyone wanted theirpiece of the American Dream as home values sky-rocketed.But the cracks began to appear in late 2006and early 2007. Borrowers who had taken out anadjustable-rate mortgage a few years earlier facedtheir first rate adjustment. Many were shocked bynew payments that were far beyond what theycould afford. Refinancing into a more affordablemortgage wasn’t an option for many people, be-cause the Federal Reserve at that time had nowbeen raising the Federal Funds Rate, which bymid-2006 was above 5 %. This meant that adjust-able-rate mortgages—many of which are affectedby changes in the Federal Funds Rate—would bemore expensive now that the rate was so muchhigher. At the same time, real estate values startedto stagnate in many areas, and many ARM bor-rowers simply didn’t have enough equity built upin their homes to be able to refinance, no matterwhat the interest rate. Remember, too, that manyOrma_9780385530934_4p_all_r1.indd 14Orma_9780385530934_4p_all_r1.indd 14 12/3/08 9:30:59 AM12/3/08 9:30:59 AM
  27. 27. A Brief History of How We Got Here 15people were able to buy a home for no moneydown so they never had equity to begin with.By 2007, there were suddenly a whole lot ofhomeowners who couldn’t afford their mortgages,couldn’t refinance, and couldn’t sell at a price thatwould cover their mortgage because real estateprices had begun to slide. And lenders were in nomood to strike any deals. That’s when the foreclo-sure rate started to rise. Far from being a problemconfined to subprime borrowers in over theirheads, foreclosures soon sent home values plum-meting everywhere. If your neighbor’s home wasin foreclosure, that was bad news for you too.Since the 2006 peak, home values have droppedmore than 20 % on average, and twice as much insome markets that were once considered to beamong the hottest. Many people owe more ontheir homes than what they could sell them for to-day. In fact, as I write this an estimated one in sixhomeowners have a mortgage that exceeds thevalue of their home in today’s market—a situationthat is known as being under water.As foreclosures began to spread—Moody’sEconomy.com estimates nearly 2.5 million homeswere lost in 2007 and 2008 and another 3.5 mil-lion could be lost in 2009 and 2010—the damagehit Wall Street. This is where leverage reenters thepicture. Remember all that borrowing I mentionedearlier? Well, a lot of it was used to invest in allsorts of mortgage-related securities. When thoseOrma_9780385530934_4p_all_r1.indd 15Orma_9780385530934_4p_all_r1.indd 15 12/3/08 9:30:59 AM12/3/08 9:30:59 AM
  28. 28. 16 SUZE ORMAN’S 2009 ACTION PLANinvestments began to fall apart because so manyof the underlying mortgages that were the basis ofthose bets were now in foreclosure, investors facedthe ugly downside of leverage: They had borroweda lot of money and now had no money to pay itback. At 30:1 leverage, a Wall Street player couldmake bets with a value of $300 million even if ithad just $10 million of its own money backing thatbet. If the bet didn’t pay off, the bank or hedgefund had no way to make good on the $300 mil-lion. And the supposed “insurance” from CDS wasjust an empty promise. No one had the money tomake good on those deals.To review: We had lenders making loans thatborrowers couldn’t afford, borrowers happy to geta mortgage they couldn’t afford, and Wall Street,egging on lenders and borrowers, telling us that itwas all okay because they insisted they had a bril-liant way to insulate investors (and their own trad-ing operations) against the risk in making highlyleveraged bets, because in the unlikely event bor-rowers actually fell into trouble, the credit defaultswaps would save the day.That, of course, is a very basic explanation, andthere are many, many other elements that cameinto play. But I want to cut to the real issue here:We are in trouble today because everyone was happyto lie, or happy to believe lies that any sane personcould see right through.Orma_9780385530934_4p_all_r1.indd 16Orma_9780385530934_4p_all_r1.indd 16 12/3/08 9:30:59 AM12/3/08 9:30:59 AM
  29. 29. A Brief History of How We Got Here 17I cannot overstate my wrath at mortgage lend-ers that pushed toxic loans on borrowers, know-ing there was little chance they could honestlyafford those loans. While some borrowers weresimply too confused to understand what theywere getting into, I cannot absolve those whochose to drink the Kool-Aid that they could buya $350,000 house on an income that could realis-tically pay for only a $150,000 one. Nor do I havemuch patience for borrowers who tell me the prob-lem is that real estate prices stopped going up, sothey got stuck without enough equity to refinanceor sell. Buying a house based on the expecta-tion that price gains were a given and would con-tinue to rise at an annual pace that was doubleand triple the historical norm is not just foolish,it’s greedy! Borrowers chose to believe what theywanted to believe.And don’t get me started on the levels of dishon-esty perpetrated by the banks and hedge fundsthat came up with this can’t-miss scheme and thegovernment policy that did little to provide theregulation that might prevent a meltdown. Or thefact that Fannie Mae and Freddie Mac also got inon the act and lowered their underwriting stan-dards so they could participate in the boomingloan market.It was a wild, drunken party of dishonesty andgreed on a national scale.Orma_9780385530934_4p_all_r1.indd 17Orma_9780385530934_4p_all_r1.indd 17 12/3/08 9:30:59 AM12/3/08 9:30:59 AM
  30. 30. 18 SUZE ORMAN’S 2009 ACTION PLANThe Honest Way OutWhile the mortgage crisis is the most vivid exam-ple of how dishonesty and greed leads to financialdestruction, it is by no means the only example. Ifyou have a credit card balance that will remainunpaid at the end of this month, you are partici-pating in your own brand of dishonesty becauseyou are living beyond your means. If you have noemergency savings fund, you are not being honestabout considering and preparing for all the possi-bilities life may throw at you. Leasing a car ratherthan buying a car that is affordably financed witha standard three-year loan is, in my opinion, aform of financial deception. Thinking you didn’tneed to invest in your 401(k) or IRA because youcould count on steep appreciation in your hometo fund a comfortable retirement is irresponsible,wishful thinking. If you keep spending like crazyon the kids because, well, they expect you to, eventhough you have unpaid bills, that’s a huge slice ofdishonesty. If you are tapping your home equity topay for vacations you can’t really afford, you arecheating yourself out of financial security.The lies need to stop. Just think about whereall this dishonesty leaves you. In credit card debt.Without a savings safety net if something goeswrong. With no security.You know that I have never thought this behav-ior made any sense. Those of you who have beenOrma_9780385530934_4p_all_r1.indd 18Orma_9780385530934_4p_all_r1.indd 18 12/3/08 9:31:00 AM12/3/08 9:31:00 AM
  31. 31. A Brief History of How We Got Here 19watching The Suze Orman Show on CNBC, or fol-lowing my advice elsewhere, know that I have for-ever advised against these acts of dishonesty. I findit incredibly gratifying to have helped so many ofyou change course. But I also know there are manymore people who have yet to mend their ways orfigured they had time to turn over a new leaf. Well,your time is up. If you don’t get your act togetherin 2009, you will be in more trouble than you canimagine.The reality you need to grasp is that the ruleshave changed. Credit card companies once giddyto help you pour on debt are now going to penalizeyou harshly if you are in debt or look like youmight overload soon. A loan, be it a mortgage, carloan, or student loan, is much harder (and moreexpensive) to come by now. Nor can you rely ona credit line or HELOC in the event you are laidoff in 2009 and need cash to keep your house-hold running; the odds are that if you tap eithercredit source you will trigger a series of unin-tended consequences that can put you in evenworse financial shape.There is a way out: Honesty. With yourself.With your partner. With your children. If you areready to face up to what you can honestly afford, ifyou are willing to live within your means, notwithin your dreams, you can turn this around. Ifyou are ready to commit to an action plan thatmakes sure there is enough money left over at theOrma_9780385530934_4p_all_r1.indd 19Orma_9780385530934_4p_all_r1.indd 19 12/3/08 9:31:00 AM12/3/08 9:31:00 AM
  32. 32. 20 SUZE ORMAN’S 2009 ACTION PLANend of the month to pay every bill and save moneytoo, you are on your way to living a life of financialsecurity.But you have to be willing to get honest aboutevery facet of your financial life.My 2009 Action Plan gives you every honestanswer you will need to navigate the treacherousfinancial situation we face today, but even moreimportant, it will put you and your family on thepath to safety and security, this year and everyyear.Orma_9780385530934_4p_all_r1.indd 20Orma_9780385530934_4p_all_r1.indd 20 12/3/08 9:31:00 AM12/3/08 9:31:00 AM
  33. 33. 213ACTION PLANCreditThe New RealityThe banking industry is running scared. Theythink you won’t be able to keep up with yourcredit card payments in 2009 as the nationcontinues to work its way through this economicmeltdown. Of course, that’s a justifiable concernwhenever the economy slows down, jobs are lost,and unemployment rises. But what’s different in2009 is that banks are already reeling from themortgage-default crisis that has triggered bankfailures and shotgun marriages between weakbanks and less-weak banks. Banks aren’t exactlyin great shape these days and they are painfullyaware of a Category 3 hurricane about to beardown on them: National credit card debt is at astaggering $970 billion, 50 % higher than whenthe last economic slowdown hit in 2000. That’sOrma_9780385530934_4p_all_r1.indd 21Orma_9780385530934_4p_all_r1.indd 21 12/3/08 9:31:00 AM12/3/08 9:31:00 AM
  34. 34. 22 SUZE ORMAN’S 2009 ACTION PLANwhat happens in an era of “easy” money wherebanks irresponsibly hand out multiple credit cardsto anyone with a pulse, regardless of income, andconsumers are all too eager to play along.The game, however, is up, my friends. Creditcard companies have reversed course. They arenow looking for ways to lend less money, espe-cially on accounts they deem risky: consumerswith high unpaid balances and poor FICO creditscores. Reducing credit card limits, closing downaccounts with no warning, and abruptly increas-ing interest rates are just some of the aggressivetactics the card companies are implementing rightnow to shore up their business. That means seri-ous repercussions for you throughout 2009. YourFICO score may drop—not because you changedyour financial behavior, but because the creditcard companies changed the rules on you.The best way to insulate yourself is to get out ofcredit card debt once and for all. If you pay offyour balance, you don’t have to worry about theinterest rate on your card. If you pay off your bal-ance, you are less likely to have your credit cardlimit reduced; and even if it is reduced, it will nothave a negative impact on your FICO score.If you pay off your credit card balance, youcan focus on building an emergency savings fund.That’s especially important in 2009. The days ofusing your credit card as a de facto emergencyfund are over. If you tap too much of your creditOrma_9780385530934_4p_all_r1.indd 22Orma_9780385530934_4p_all_r1.indd 22 12/3/08 9:31:00 AM12/3/08 9:31:00 AM
  35. 35. ACTION PLAN: Credit 23card line, it is likely you will see the line reduced,your interest rate rise, and, yes, potentially haveyour card closed down—and there goes yourFICO score. Unpaid balances in 2009 will put youin the middle of a vicious cycle. You must get outof card debt now. It is the number one action totake in 2009.What you must do in 2009!" Make it a priority to pay off your credit cardbalances.!" Read every statement and all correspondencefrom your credit card company to make sure youare aware of any changes to your account, suchas skyrocketing interest rates.!" Work to get your FICO credit score above720.!" Be very careful where you turn to for help withcredit card debt. Debt consolidators are often averybaddeal.TheNationalFoundationforCreditCounseling is a smarter choice.!" Resist the temptation to use retirement savingsor a home equity line of credit to pay off creditcard debt.Your 2009 Action Plan: CreditSITUATION: You always pay the minimum amountdue on your credit card bill and are never late, butyour credit card limit was just reduced.Orma_9780385530934_4p_all_r1.indd 23Orma_9780385530934_4p_all_r1.indd 23 12/3/08 9:31:01 AM12/3/08 9:31:01 AM
  36. 36. 24 SUZE ORMAN’S 2009 ACTION PLANACTION: Paying the minimum in 2009 is notgood enough. Credit card companies are antici-pating that as the recession plays out, consumerswill be hard-pressed to keep up with their bills.So even if you have paid on time in the past, theyare worried about what will happen in the future.And the fact that you pay just the minimum is ahuge warning signal to your credit card company.It’s a tip-off that you may already be on shakyground.Paying just the monthly minimum due signifiesto a credit card company that you may fall behindon payments in a severe recession and that you arealso more likely to let your balance grow if you hithard times. And that’s the last thing they want in2009. To keep you from doing just that, they cutyour credit limit.SITUATION: Youareworriedthatalowercreditlimitwill hurt your FICO credit score.ACTION: Pay off your balance every month andyour FICO credit score will not be affected. YourFICO credit score is based on a series of calcula-tions that measure how good a credit risk you are.One of the biggest factors in your credit score—accounting for about 30 % of your score—is howmuch debt you have. There are a few ways thatthis specific calculation is done, but one of thechief ways it’s determined is the debt-to-available-Orma_9780385530934_4p_all_r1.indd 24Orma_9780385530934_4p_all_r1.indd 24 12/3/08 9:31:01 AM12/3/08 9:31:01 AM
  37. 37. ACTION PLAN: Credit 25credit ratio. Debt is how much money you owe onall your credit cards. Available credit is the sum ofall the credit lines that have been extended to you.The higher your debt, the worse it is for your FICOscore. And your debt-to-credit ratio will look muchworse if your credit limit is cut.Let’s say you have only one credit card that hasa $2,000 balance on it. Last year your credit limiton that card was $10,000. So your debt-to-creditratio was 20 % ($2,000 is 20 % of $10,000). Nowyou find out that your credit card company hasreduced your credit line to $5,000. That meansyour ratio shoots up to 40 % ($2,000 is 40 % of$5,000). That will indeed have a negative impacton your FICO score.The only way to keep your FICO score unaf-fected by a credit-limit reduction is to get out ofcredit card debt and pay off your bills in full eachmonth.SITUATION: The credit card company canceledyour account. Do you still have to pay the remainingbalance?ACTION: Of course you do! When your account iscanceled, it is because the credit card companyhas labeled you a high-risk cardholder. What isbeing canceled is your ability to use that card inthe future. But you are still responsible for everypenny of your existing balance.Orma_9780385530934_4p_all_r1.indd 25Orma_9780385530934_4p_all_r1.indd 25 12/3/08 9:31:01 AM12/3/08 9:31:01 AM
  38. 38. 26 SUZE ORMAN’S 2009 ACTION PLANSITUATION: Your credit card has been canceledand you are worried it will hurt your FICO score.ACTION: Focus on getting the balance paid off;the lower the balance, the less it will damage yourFICO score if your card is canceled.There are two issues that come up when a card iscanceled: how it affects your debt-to-credit-limit ra-tio and what happens to the interest rate on yourunpaid balance. In most cases, when a card that hasa balance on it has been revoked or canceled, thecredit card company will immediately raise your in-terest rate to about 30 %. When this happens, if youcontinue to pay only the minimum monthly pay-ment, you may never get out of debt on that card.SITUATION: You thought the interest rate on yourcredit card was fixed at5%, but it just shot up to30%!ACTION: There is no such thing as a permanentfixed interest rate on your credit card. The rate isfixed only until the credit card issuer decides itisn’t. It’s a marketing ploy. And credit card com-panies have all sorts of reasons (embedded in theagreement you accepted when you opened thecard) to raise your rate.In 2009, you better believe more and morecredit card companies are going to jump to in-crease a low rate on a credit card if you makeOrma_9780385530934_4p_all_r1.indd 26Orma_9780385530934_4p_all_r1.indd 26 12/3/08 9:31:01 AM12/3/08 9:31:01 AM
  39. 39. ACTION PLAN: Credit 27them nervous in any way. And just to be clear: Anunpaid balance makes them nervous. Paying theminimum makes them nervous. Seeing you fallbehind on another debt payment or missing a pay-ment makes them nervous big-time.If you want to steer clear of being hit with a gi-ant rate hike, you have two options: don’t run up abalance in the first place; or, if you do have an un-paid balance, get it paid off. When you have a zerobalance, what do you care about the interest rate?SITUATION: You have a low-interest-rate creditcard you never use—it is just there in case of emer-gency. Now you’re worried that if you have to use it,your interest rate will go up.ACTION: Build a real emergency savings account.Relying on your credit card to bail you out ofemergencies is too dangerous in 2009. (See “Ac-tion Plan: Saving” for advice on where to open asavings account and “Action Plan: Spending” foraction steps on how to come up with more moneyto put toward a savings fund.)If you use a credit card for an emergency ex-pense in 2009 and you can’t pay off the balance,you will set off a vicious cycle. An unpaid balancewhere there once was none makes a credit cardcompany nervous. It can also make other creditcard companies you have accounts with nervous.That could cause the credit limits on all your cardsOrma_9780385530934_4p_all_r1.indd 27Orma_9780385530934_4p_all_r1.indd 27 12/3/08 9:31:02 AM12/3/08 9:31:02 AM
  40. 40. 28 SUZE ORMAN’S 2009 ACTION PLANto be cut. And if that causes your FICO creditscore to drop, then you can expect the interestrate on your credit card to rise.The only solution is to stop thinking of yourcredit card as a safety net if you run into trouble.The only true safety net is a savings account.SITUATION: YouhaveaFICOcreditscoreabove720but your interest rate just shot up. What’s the bestway to pay off your credit card debt?ACTION: See if you can apply for a balance trans-fer to a low-rate card. Because you have a highFICO score, you may be in luck. But lenders aren’texactly rolling out the welcome mat right now, sothis may not be feasible.Go to cardtrak.com and use the Search tool toshop for balance-transfer offers. The idea is tomove your money to a card with a low introduc-tory rate and then push yourself to get the balancepaid off before the low rate expires. This can betricky in 2009. You have the added risk that evenif you do everything right with your new card, youcould still have the introductory rate rescinded be-cause something out of your control happened onone of your other accounts, such as having yourcredit limit reduced. In “Action Plan: Spending,” Iexplain how to reassess your family’s income andexpenses to find more money to put toward payingdown credit card debt.Orma_9780385530934_4p_all_r1.indd 28Orma_9780385530934_4p_all_r1.indd 28 12/3/08 9:31:02 AM12/3/08 9:31:02 AM
  41. 41. ACTION PLAN: Credit 29SITUATION: You have a low FICO credit score, butyou are current on allyour accounts. How should youdeal with your debt?ACTION: Here’s how:!" Pay the minimum amount due on every cardeach month. That’s your only shot at keepingyour FICO score from falling further. It will alsolower the odds that your credit card companywill close your account.!" Line up your cards and put the card that chargesthe highest interest rate at the top of the pile.That’s the card you focus on paying off first.Send in as much money as you can each monthto get that balance down to zero.!" Once the first card is paid off, focus on the sec-ond card in your pile: the card with the next-highest interest rate.!" Keep up with this system until you have all thecards paid off.Of course, the big challenge is finding extramoney every month to put toward paying off yourcredit card debt. In “Action Plan: Spending,” Ihave suggestions about how to “find” more moneyin your month by reducing your expenses.Orma_9780385530934_4p_all_r1.indd 29Orma_9780385530934_4p_all_r1.indd 29 12/3/08 9:31:02 AM12/3/08 9:31:02 AM
  42. 42. 30 SUZE ORMAN’S 2009 ACTION PLANSITUATION: You are behind on your credit card pay-ments, but you want to know the best payment strat-egy for improving your FICO score.ACTION: Focus on paying the most you can onaccounts that are the least late. The longer unpaiddebt has been on your credit reports, the less ef-fect it has on your FICO score. So if you can makecurrent an account that is past due by only 60days, it will help your FICO score far more thanpaying off your balance on an account you havebeen past due on for three years. I want you toorganize your credit card statements into twopiles: cards that are past due for less than one yearand those that are past due for more than one year.Start with the first pile: Pay off the account that isclosest to being current first, then move to the nextcard in that pile. Once you have paid off the cardsin the first pile, I want you to use the strategy Icovered in the action step above for paying offcards that you are more than one year behind on.SITUATION: You want to use your HELOC to pay offyour credit card debt.ACTION: Do not do this. Even if you still haveenough equity to keep your HELOC open, this isa dangerous mistake. You are putting your houseat risk. When you borrow from your HELOC,Orma_9780385530934_4p_all_r1.indd 30Orma_9780385530934_4p_all_r1.indd 30 12/3/08 9:31:02 AM12/3/08 9:31:02 AM
  43. 43. ACTION PLAN: Credit 31your home is the collateral. Let’s say you get laidoff in 2009—not exactly impossible, given theway the economy is struggling—and suddenly youcan’t keep up with the HELOC payments on topof all your other bills. Fall behind on the paymentsand you could lose your house.As much as I want you to pay off your creditcard debt, you need to understand that credit carddebt is “unsecured” debt. There is no collateralthat a credit card company can easily force you tohand over to settle your debt. So it makes no senseto transfer your unsecured debt into a secureddebt—a HELOC—where you run the risk of los-ing your home if you can’t make the payments.SITUATION: You want to take out a loan from your401(k) to pay off your credit card debt.ACTION: Do not do this. I know it is tempting, butit is such a dangerous move. Anyone who has beenlistening to my advice over the years knows I havenever approved of 401(k) loans because you endup paying tax twice on the money you borrow. ButI can understand that if you are staring at an inter-est rate of 30 % on your credit card, you figure thetax penalty is worth paying.Given what has happened to the economy, Ionce again must say no. First, we are in the midstof a severe recession. That increases the possibilitythat you will lose your job. I don’t care how valuedOrma_9780385530934_4p_all_r1.indd 31Orma_9780385530934_4p_all_r1.indd 31 12/3/08 9:31:02 AM12/3/08 9:31:02 AM
  44. 44. 32 SUZE ORMAN’S 2009 ACTION PLANan employee you are. No one is safe when a com-pany is losing money, or can’t keep operating be-cause the credit crisis makes it impossible for thefirm to do business. We are all vulnerable in timeslike these. And if you have an outstanding loanagainst your 401(k) when you are laid off, you typ-ically must pay off the loan within a short period oftime. Fail to do that and it becomes a withdrawal;that means you owe tax on the entire amount im-mediately and a 10 % early-withdrawal penalty ifyou are under age 55 in the year you left service.And tell me exactly where you will get the moneyfor that. Not your credit card, that’s for sure.An even bigger issue is that you need your 401(k)for tomorrow. Use it today and what will you havein retirement? Can’t think about that right now?Excuse me, you can’t afford not to think about that.And that brings me to the issue of bankruptcy. Icertainly hope this never happens to you, but inthe event you must declare bankruptcy, one silverlining is that any money you have in a 401(k) orIRA is protected. That is, you will not be requiredto use your retirement savings to settle your debts.It is a permanent asset for you. Don’t blow it byusing the money to pay off your credit card debt.SITUATION: You have heard that credit card com-panies may be willing to reach a settlement for a re-duced payment. Who’s a likely candidate?Orma_9780385530934_4p_all_r1.indd 32Orma_9780385530934_4p_all_r1.indd 32 12/3/08 9:31:03 AM12/3/08 9:31:03 AM
  45. 45. ACTION PLAN: Credit 33ACTION: You must be seriously behind in yourpayments and have a sizable lump sum of cash atthe ready to have any shot at working out a settle-ment that reduces what you owe.The only way the credit card company will for-give a portion of your unpaid balance is if you canmake a lump-sum payment that covers some ofthe money you owe. Let’s say you have $20,000 incredit card debt that the credit card company iswilling to reduce to $10,000. You need to be ableto pay cold cash to cover the remaining $10,000immediately. This is not about getting your bal-ance lowered and then promising to be a good BoyScout or Girl Scout who will stick to a monthlyrepayment plan. To get a settlement requires hav-ing enough cash at the ready to pay off the entireremaining (reduced) balance. If you don’t havethat money, you aren’t likely to be offered a settle-ment deal.SITUATION: Youwonderifnegotiatingasettlementwill hurt your FICO credit score.ACTION: If you don’t want your FICO score to godown, do not ask for a settlement. A settlementmeans you failed to live up to your obligation topay the full amount of debt you were responsiblefor. It will indeed have a negative impact on yourcredit score. That said, in certain rare instances—if you’ve previously had a stellar record, haveOrma_9780385530934_4p_all_r1.indd 33Orma_9780385530934_4p_all_r1.indd 33 12/3/08 9:31:03 AM12/3/08 9:31:03 AM
  46. 46. 34 SUZE ORMAN’S 2009 ACTION PLANsuffered a job loss or medical catastrophe, and theoutstanding debt isn’t huge—you may be able toconvince the card issuer not to report the settle-ment. Be prepared to document your case.SITUATION: You just received a tax document fromthe credit card company that says it reported theamount of your settlement to the IRS.ACTION: Be prepared to pay income tax on theamount of the forgiven credit card debt.By law, the credit card company is required tosend you and the IRS a 1099-C form that showsthe amount of the forgiven debt, which is indeedmoney that you will owe income tax on. Sorry,there is no tax break for credit card settlements.(An exception is if you are insolvent, meaningthe amount of all your liabilities is more than thevalue of all your assets. If the forgiven debt isreported to the IRS on a Form 1099, you shouldattach a note to your tax return explaining the in-solvency—otherwise, the IRS will likely initiatean automatic audit, since the income reported onthe 1099 does not appear on your return. Be pre-pared with good documentation to back up yourclaim that at the time the debt was forgiven,your liabilities exceeded the fair market value ofyour assets. I recommend you work with a tax ad-visor to help you navigate this situation.)Orma_9780385530934_4p_all_r1.indd 34Orma_9780385530934_4p_all_r1.indd 34 12/3/08 9:31:03 AM12/3/08 9:31:03 AM
  47. 47. ACTION PLAN: Credit 35SITUATION: You hold a credit card from a bankthatfailed. What’s going to happen to your account?ACTION: The best protection is a strong FICOscore. When one bank fails, another bank takes onits existing credit card accounts. But you need torealize that the new bank is not required to keepoffering you that card. It will investigate your ac-count and decide if you are a good credit risk. Andlet’s be honest here: If your bank failed in part be-cause it was too lenient about extending credit, itstands to reason that the acquiring bank may notwant to keep your business. Bottom line: If you area credit risk, your credit card could be shut down.If you have a strong FICO score, you will no doubtbe welcomed by the new bank with open arms.SITUATION: You hold a credit card from a bankthatfailed. Do you still need to pay off your balance?ACTION: Of course you are still responsible forthe debt. People, there is no shortcut around per-sonal responsibility. You made the charges, so youare responsible for the debt you ran up.Keep sending in your payments. Print a copy ofthe canceled check or e-payment and keep it in asafe place. Chances are the transition to your newbank will be seamless, but you never know. I thinkit is wise to keep a printed record for at least sixOrma_9780385530934_4p_all_r1.indd 35Orma_9780385530934_4p_all_r1.indd 35 12/3/08 9:31:03 AM12/3/08 9:31:03 AM
  48. 48. 36 SUZE ORMAN’S 2009 ACTION PLANmonths after your bank has been taken over byanother bank.SITUATION: You have a FICO credit score of 660,but you were just turned down for a car loan.ACTION: Improve your score to 720 if you want aloan with decent terms.Lenders are no longer eager to lend money topeople with just so-so credit. That’s true of anytype of loan: mortgages, car loans, private studentloans. In the past (the days of irresponsible, sub-prime lending, circa 2007 and earlier), it was fairlyeasy for anyone to get a loan of any type. If you hada great FICO score over 720, you got the bestterms. But if you had a low FICO score, you couldstill get a loan, though you’d pay a higher interestrate and maybe higher fees. Now a low score canmean no loan. It’s the same issue we have beentalking about over and over: Lenders are runningfor safety. They are very cautious about whom theywill lend to. A FICO score below 700 is likely go-ing to make it very hard to qualify for a loan in2009, or you will have to pay a steep risk penalty:much higher interest rates and fees than you mighthave paid with the same score two years ago.SITUATION: You want to improve your FICO creditscore, but you aren’t sure what to do.Orma_9780385530934_4p_all_r1.indd 36Orma_9780385530934_4p_all_r1.indd 36 12/3/08 9:31:03 AM12/3/08 9:31:03 AM
  49. 49. ACTION PLAN: Credit 37ACTION: Know what matters to FICO and makethe necessary changes in your financial life.Fair Isaac is the parent company that is respon-sible for the FICO credit score. You actually havethree FICO scores, one from each of the threecredit bureaus: Equifax, Experian, and Trans-Union. Credit scores range from 300 to 850. Ayear ago, I would have told you that a score of 720or better was all you needed to get the best loanoffers. But the fallout from the credit crisis hasmeant that the top tier has actually been pushedhigher; some mortgage lenders reserve their bestrates for individuals with FICO scores above 760.Unless you plan on buying a house in 2009, Iwouldn’t worry as long as your score is at least720. That’s still plenty good enough to keep mostcreditors happy.If your score is below 720, here’s what you needto do to make it better:!" Pay bills on time. This accounts for 35% of yourcredit score. If you are late on payments—notjust credit card payments, but bills of any kind,it will pull down your score. Pay on time, even ifit is just the minimum due, and it will help yourscore.!" Reduce what you owe. We already covered thisearlier in the chapter. The less you owe on yourcards and other debt, the less “risky” you lookOrma_9780385530934_4p_all_r1.indd 37Orma_9780385530934_4p_all_r1.indd 37 12/3/08 9:31:04 AM12/3/08 9:31:04 AM
  50. 50. 38 SUZE ORMAN’S 2009 ACTION PLANto potential lenders. How much you owe relativetoyouravailablecreditandotherdebtsaccountsfor 30% of your score.!" Hold on to cards with a long credit history. Thelonger your credit record, the more data FICOhas to assess whether you are a good credit risk.This accounts for 15% of your score. Make sureyou keep your card with the longest history ingood shape; you don’t want it to be canceled.!" Limit your credit applications. The more newcredit you ask for, the more nervous you makelenders. New credit accounts for 10% of yourFICO score. If your record shows you have ap-plied for multiple credit cards and a new car loanat the same time, it will pull down your score.!" Aim for a mix of different types of credit. I knowthissoundscrazyafterexplaininghowyoudon’twant to have too much credit, but lenders do infact like to see that you have a few differenttypes of credit. It’s a sign you have experiencejugglingdifferentobligationswithdifferentloanterms. So having a credit card and a car loan isactually better than having just a credit card.That said, your credit mix accounts for just 10%of your FICO score. And my advice for 2009 is toignore this factor. If you have only credit cards, Iam not going to suggest you sign up for a storecard or take on some other debt.Orma_9780385530934_4p_all_r1.indd 38Orma_9780385530934_4p_all_r1.indd 38 12/3/08 9:31:04 AM12/3/08 9:31:04 AM
  51. 51. ACTION PLAN: Credit 39SITUATION: You are considering hiring a debt-consolidation company to help you with your creditcard debt.ACTION: Don’t fall for the come-ons. These offersare often rip-offs and can do serious damage toyour credit score and leave you in more debt thanyou started with.I know how tempting it sounds when you hearan ad that tells you the Super Duper Debt Consoli-dation Co. is standing by to make all your creditcard debt stress go away. What they don’t explainis that they typically charge you 10 % or so of whatyou owe to take on your case, and in the event theywork out a settlement with your creditors, they aregoing to want another 10 % or more of the amountthey “saved” you. And I promise you, these debt-consolidation companies aren’t going to spend a lotof time explaining to you that any settlement theynegotiate for you will ruin your FICO credit scoreand may end up costing you income tax on theamount of debt that is forgiven.Most troubling is the growing number of com-plaints in 2008 that debt-consolidation firms col-lected their initial fee and then did nothing for theconsumer. Not only were the clients out their fee,their FICO scores were hurt even more becausethe debt-consolidation firm told them they wereOrma_9780385530934_4p_all_r1.indd 39Orma_9780385530934_4p_all_r1.indd 39 12/3/08 9:31:04 AM12/3/08 9:31:04 AM
  52. 52. 40 SUZE ORMAN’S 2009 ACTION PLANtaking care of the payments and the settlement.In reality, nothing was being done, so the amountowed ballooned as interest rates were raised andpenalty fees piled up.There is no easy way out of debt. Anyone prom-ising to magically make everything all better iseither lying to you or not explaining the financialand credit costs of what they are doing.SITUATION: You don’t know where to turn for hon-est help in dealing with your credit card debt.ACTION: Contact the National Foundation forCredit Counseling. This is a network of nonprofitagencies with trained counselors who will help youassess your situation and lay out the most logicaland realistic steps for you to follow. They are notmiracle workers; as we just discussed, there are nomiracles to be had when it comes to your creditcard debt. But the NFCC are the “good guys” youcan trust. Go to nfcc.org or call 800-388-2227.SITUATION: You visited an NFCC-network creditcounselor in 2008, but you still can’t afford a repay-mentplan with creditcard interestratesat19%—andhigher.ACTION: Don’t give up. In 2009, you may havemore options. As I write, the NFCC has beenworking with the top ten card issuers on a plan toOrma_9780385530934_4p_all_r1.indd 40Orma_9780385530934_4p_all_r1.indd 40 12/3/08 9:31:04 AM12/3/08 9:31:04 AM
  53. 53. ACTION PLAN: Credit 41standardize a Debt Repayment Plan (DMP) byMarch 31, 2009 that would offer interest rates lowenough so consumers could pay off their enrolledbalances (with a fixed payment of 2 % or a hard-ship payment of 1.75 %) within five years. Checkmy Web site or nfcc.org for updates.SITUATION: You feel the walls caving in and fearbankruptcy is your only option.ACTION: Contact the NFCC and get honest helpin assessing your options. If you aren’t eligible fora DMP, the counselor will try to find a workablealternative to bankruptcy. Only about 10 % oftheir clients have ended up in bankruptcy.That said, if in fact you owe more than whatyou make; if you have tried every which way topay your bills, including working a second or evena third job; if your debt keeps growing and you arebeing charged 32 % interest and you can’t see anyway out, then bankruptcy may, sadly, be an optionfor you. Just remember that bankruptcy will de-stroy your FICO credit score, but then again, ifyou have been behind in payments your FICOscore is probably already pretty low. Bankruptcyis really a last resort when you have tried every-thing else. This drastic step requires the mostcareful consideration. You will want to find a rep-utable attorney who can explain the current law,the pros and cons of filing, and the different kindsOrma_9780385530934_4p_all_r1.indd 41Orma_9780385530934_4p_all_r1.indd 41 12/3/08 9:31:05 AM12/3/08 9:31:05 AM
  54. 54. 42 SUZE ORMAN’S 2009 ACTION PLANof bankruptcy. For a good overview of the subjectvisit the credit.com Web site at: www.credit.com/slp/chapter8/Bankruptcy.jsp.SITUATION: You keep getting calls saying that youowe money on a credit card, but you have no ideawhat the collection agency is talking about.ACTION: First of all, verify the debt. Debt collec-tion agencies can pursue old debts that have neverbeen paid off, hoping you will pay money to stopthe calls. But plenty of times the debts are false—the result of identity theft, clerical errors, or creditreports that have not been updated. Sometimesa debt is so old it’s passed the time period when adebt collector could legally sue to collect (see be-low). Within 30 days of being contacted, send thecollector a letter (be sure to send it certified mail,return receipt requested) stating you do not owethe money, and requesting proof the debt is valid(such as a copy of the bill you supposedly owe). Ifthe collection agency doesn’t verify the debt within30 days, it can no longer keep contacting you andcannot list the debt on your credit report. Remem-ber your best shot at avoiding these “zombie”debts that erroneously resurface is by staying ontop of your credit report. In these credit-crunchedtimes, no one can afford a single inaccuracy thatcould lower a credit score. Go to annualcreditreport.com to get your free credit report. Each ofOrma_9780385530934_4p_all_r1.indd 42Orma_9780385530934_4p_all_r1.indd 42 12/3/08 9:31:05 AM12/3/08 9:31:05 AM
  55. 55. ACTION PLAN: Credit 43the three credit bureaus, Equifax, Experian, andTransunion, are required to provide you with onefree report a year.SITUATION: You haven’t been able to pay yourcredit card bills for some time and your cards wereshut down five years ago, but you are still gettingcalls saying you owe money.ACTION: Check out your state’s statute of limita-tions on debt collection. In every state, the statueof limitations for credit card debt begins to tickfrom the date you failed to make a payment thatwas due—as long as you never made another pay-ment on that credit card account. (You can findthe list of state statutes at http://www.fair-debt-collection.com/SOL-by-State.html#15.) One wayto prove the statute applies to your debts is to geta copy of your credit report. It will list the datesyou were delinquent as reported by your creditors.So if your state’s statute of limitations on creditcard debt is five years, and your last payment wasdue on April 12, the statute of limitations on thatdebt will run out five years from that April 12,assuming you haven’t made another payment.(Please note: statutes will vary for different typesof debt. The statutes of limitations are different forcredit card accounts than for mortgages and autoloans.) Also important to note: If you are con-tacted by a collection agency and you make aOrma_9780385530934_4p_all_r1.indd 43Orma_9780385530934_4p_all_r1.indd 43 12/3/08 9:31:05 AM12/3/08 9:31:05 AM
  56. 56. 44 SUZE ORMAN’S 2009 ACTION PLANpromise to send in a check or you actually do sendin a small amount of money, it is possible that thestatute of limitations starts all over again.SITUATION: You are being harrassed at work bycalls from collection agencies.ACTION: The Fair Debt Collection Practices Act(FDCPA) restricts tactics that debt collectionagencies may use. They cannot call you at work ifthey know your employer prohibits such calls.Once you tell them this, they have to stop thecalls; it’s wise to follow up with a letter. Show youknow your rights by informing them that underprovision 15 of the U.S. Code, section 1692b-c,the letter constitutes formal notice to stop allfuture communications with you except for thereasons specifically set forth in the federal law.Collectors also cannot phone your home so oftenas to constitute harassment and they cannot callbefore 8 A.M. or after 9 P.M. You can learn moreabout your rights under the FDCPA at http://www.credit.com/credit_information/credit_law/Understanding-Your-Debt-Collection-Rights.jsp#2.Orma_9780385530934_4p_all_r1.indd 44Orma_9780385530934_4p_all_r1.indd 44 12/3/08 9:31:05 AM12/3/08 9:31:05 AM
  57. 57. 454ACTION PLANRetirementInvestingThe New RealityAfter watching your 401(k) and IRA invest-ments lose 30 % or more last year, you areconsumed with fear and doubt. You fearthat your losses are so steep you will never be ableto afford a comfortable retirement. And you doubtthat you will ever be able to recover those losses,especially if you stick with stocks. I completelyunderstand why you would feel that way.But I have to tell you, the biggest risk to yourretirement security is giving in to your emotions.When fear and doubt are in control, you may makedecisions that feel “right” for 2009, but they willhurt your long-term retirement strategy. That’sOrma_9780385530934_4p_all_r1.indd 45Orma_9780385530934_4p_all_r1.indd 45 12/3/08 9:31:06 AM12/3/08 9:31:06 AM
  58. 58. 46 SUZE ORMAN’S 2009 ACTION PLANwhat makes retirement investing so tough: Youneed to have the resolve and confidence to lookpast what is happening this month, this quarter,and this year, and focus instead on the correctactions to take today that will serve you well inretirement.For many of you, the toughest thing I will askof you in 2009 is not to change a thing. As I willexplain, sticking to your long-term strategy in2009 is more important—and has the potential tohave the greatest payoff down the line—than inany other year.At the same time, those of you who are within10 years or so of retiring may need to make bigchanges to your retirement strategy. I’ve heardfrom so many near-retirees, panicking now be-cause they had the bulk of their money invested instocks. As I will explain in detail in the ActionPlan that follows, that was never a good idea. Asyou near retirement, you need to begin shiftinggreater and greater portions of your money intobonds and stable-value accounts.I cannot stress enough how important it is to becareful about retirement investing in 2009. Rashactions are not the right actions. Trust me, youcannot afford to get this wrong. So please readwhat follows carefully. Whether you are 25 or 65,I have laid out the actions you need to take to stayon course, starting now.Orma_9780385530934_4p_all_r1.indd 46Orma_9780385530934_4p_all_r1.indd 46 12/3/08 9:31:06 AM12/3/08 9:31:06 AM
  59. 59. ACTION PLAN: Retirement Investing 47What You Must Do in 2009!" Make sure you have the right mix of stocksand bonds in your retirement accounts givenyour age.!" Do not make early withdrawals or take loansfrom retirement accounts to pay for non-retire-ment expenses.!" Convertanold401(k)toarolloverIRAsoyoucaninvest in the best low-cost funds, ETFs, andbonds.!" If eligible in 2009, consider moving at least a por-tion of a 401(k) rollover into a Roth IRA. Or waituntil 2010 to convert to a Roth, when everyone,regardless of income, will be able to make thismove. Just be aware of the tax due at conversion.Your 2009 Action Plan:Retirement InvestingPLEASE NOTE: When I refer to 401(k)s through-out this chapter, the advice is also applicable to403(b)s and other tax-deferred accounts.SITUATION: You don’t plan on retiring for at least10 years, but after watching your retirement accountlose 30% in 2008you’ve had it with stocks. You wantto stop investing in the stock market, at least untilyou see stocks going up again.Orma_9780385530934_4p_all_r1.indd 47Orma_9780385530934_4p_all_r1.indd 47 12/3/08 9:31:06 AM12/3/08 9:31:06 AM
  60. 60. 48 SUZE ORMAN’S 2009 ACTION PLANACTION: Resist the temptation to stop investingin stocks. If you have time on your side—and thatmeans at least 10 years, and preferably longer, be-fore you need money—you want to keep a largeportion of your retirement money in stocks.As noted above, the hardest part of retirementinvesting is staying focused on your long-termgoal, rather than getting overwhelmed by what ishappening day-to-day. And if your goal is indeed10, 20, or 30 years off in the future, then I have totell you that now looks like a great time to keepinvesting in stocks. I know that’s hard to fathomwhen stock prices are so low, but it’s because theyare much lower that the long-term prospects arefor better performance. You remember the firstcommandment of investing—buy low, sell high?Well, right now you can definitely buy at lowerprices. I am not suggesting that you will be able tosell higher next year or even the year after. That’snot likely. But it is also irrelevant, because we arefocusing on the opportunity to buy today and holdfor 10, 15, 20 years or more. Buy low today anddown the road it’s likely you will be able to sell atmuch higher levels.SITUATION: You keep hearing that the best thingyou can do is to keep investing in your 401(k), but itjust makes no sense to you, given that 2009 is sup-posed to be a rocky year in the markets.Orma_9780385530934_4p_all_r1.indd 48Orma_9780385530934_4p_all_r1.indd 48 12/3/08 9:31:06 AM12/3/08 9:31:06 AM
  61. 61. ACTION PLAN: Retirement Investing 49ACTION: Focus on how many shares you can buyin 2009 and forget about the value of those shares.If you have time on your side, and by that Imean at least 10 years until you intend to tap yourretirement savings, your concern should not be somuch what your retirement accounts are worthtoday but what they might be worth in the future.I understand the desire to shift all your moneyinto a stable-value fund or money market fund of-fered in your 401(k). But that is a short-term salvethat could leave you weaker in the long run. Why?Because once you move your money out of stocks,you give up any chance to make back your losses.Sure, the stable-value fund will inch along with a3 % to 4 % gain each year, but chances are that’s notenough to help you reach your long-term investinggoals; the return of a stable-value fund will barelykeep up with the rate of inflation. If you told meyour account was already large enough that simplykeeping pace with inflation was all you needed,then I would be the first to say: Move everythinginto the stable-value fund. But that’s not the situa-tion most people are in; they need larger gains overtime to build a big enough retirement pot to retirecomfortably. Only stocks offer the potential for in-flation-beating gains over the long term.As I write in mid-November 2008, many of themajor stock indexes are down 40 % over the pastyear. While there could definitely be additionallosses as we work our way out of the credit messOrma_9780385530934_4p_all_r1.indd 49Orma_9780385530934_4p_all_r1.indd 49 12/3/08 9:31:07 AM12/3/08 9:31:07 AM
  62. 62. 50 SUZE ORMAN’S 2009 ACTION PLANand economic recession, I believe we have proba-bly seen the worst of the damage. I do not expectus to be down another 40 % from here.SITUATION: You have more than 10 years beforeretirement, but you just can’t stand to watch your401(k) go down every month. You want to put yourmonthly contributions in a safe place within your re-tirement account.ACTION: You have to understand that at today’slower prices, the money you continue to invest inyour 401(k) will buy more shares. And what youwant right now is to gather as many shares as youcan. Now, I am not a wishful thinker; I certainlyexpect more instability in the markets in 2009 thatcould push stock prices even lower. So why wouldI tell you to keep buying in 2009? Because it is go-ing to pay off for you in 2019 and 2029 and 2039.Let’s walk through a simplified hypothetical ex-ample. Let’s say you invested $200 in your 401(k)’sstock fund. The share price was $20, so your $200bought 10 shares. One month later, let’s say thatthe share price has fallen to $10 a share. Thatmeans your $200 can buy you 20 shares.If, however, you decided to give up on the stockmarket after that one month of investing and putyour $200 contribution into a stable-value fund,you would still own your 10 shares and have $200in cash in your 401(k).Orma_9780385530934_4p_all_r1.indd 50Orma_9780385530934_4p_all_r1.indd 50 12/3/08 9:31:07 AM12/3/08 9:31:07 AM
  63. 63. ACTION PLAN: Retirement Investing 51On the other hand, if you decided to keep in-vesting your $200 contribution that month intothe stock fund at $10 a share, you would now have30 shares—the 10 you bought the first month andthe 20 you bought the second.Now, for the purposes of this exercise, let’s as-sume that the stock fund went back up to $20 ashare one month after you did this.In the first example, where you stopped invest-ing in the stock market, your 10 shares at $20would now be worth $200 and you would stillhave $200 in the stable-value fund. So in totalyou would have $400 in your account. Youbroke even.In the second scenario, if you kept investing,you would now have 30 shares of the stock fund inyour 401(k) that is now worth $20 a share. Youwould now have $600 in your account—a gain of$200 over what you invested.In the first example, you are just back to whereyou started. In the second, you are up 50 % on yourmoney.I realize this is an extreme example—there isno chance your stock investments will completelyrebound in one month—but I wanted to make thepoint clearly that the right action to take over timeis invest, invest, invest. As long as you have at least10 years until you need this money, I am tellingyou to try to relax and have a long-term perspec-tive when you open your statement and the valueOrma_9780385530934_4p_all_r1.indd 51Orma_9780385530934_4p_all_r1.indd 51 12/3/08 9:31:07 AM12/3/08 9:31:07 AM
  64. 64. 52 SUZE ORMAN’S 2009 ACTION PLANof your account has gone down. The more it goesdown, the more shares you get to buy; the moreshares you buy now, the bigger the payoff whenthe market goes back up. Please do not stop invest-ing now. Don’t change your strategy—just changeyour point of view.SITUATION: Your plan is to get out of stocks whilethey continue to go down, then shift your moneyback to stocks when things get better.ACTION: What you are trying to do is “markettiming.” In the short term, you may feel as if youare doing the right thing, but it will backfire onyou over the long term. And retirement investingis all about the long term.The big problem with market timing is that ifyou are out of the stock market, you run the veryreal risk that you will not be back in the marketwhen it rallies; there is no way you will ever makeup for your losses if you miss those rallies.Listen, I get where you’re coming from: It wouldbe so great if we could sell before the markets godown and buy before the markets go back up, butit is nearly impossible to have perfect timing be-cause there is no telling when the big rallies willcome. For example, one day in an extremely wildperiod in October 2008, the Dow Jones IndustrialAverage lost nearly 700 points. Let’s say you gotout of stocks that day because you had had enough.Orma_9780385530934_4p_all_r1.indd 52Orma_9780385530934_4p_all_r1.indd 52 12/3/08 9:31:07 AM12/3/08 9:31:07 AM
  65. 65. ACTION PLAN: Retirement Investing 53Well, two trading days later the Dow Jones Indus-trial Average skyrocketed more than 900 points.So you missed the rally that wiped out the lossesfrom a few days earlier. Of course, that is a veryrare and dramatic example; it’s not often we getsuch huge swings in the space of a few tradingdays. But the point is clear: If you try to time themarkets, you risk missing out on rallies.I know it is not fun or easy, but a long-term buy-and-hold strategy in a diversified mutual fund orexchange-traded fund (ETF) is what works best.Here’s some evidence to consider:Let’s say you invested $1,000 in 1950 and thenhad perfect market timing and managed to missthe 20 worst months between 1950 and June 2008.Your $1,000 would have grown to more than$800,000, according to Toreador Research &Trading. But it’s not as if there is some public cal-endar that tells us exactly when to get in and out.So let’s take a look at what happens if you missedthe 20 best months for stocks during that stretch—that is, you were in cash when the market rallied.Well, your $1,000 would have grown to just$11,500. If, instead, you had invested your $1,000and left it in the market through good and badtimes, you would have ended up with more than$73,000. Sure, that’s a lot less than $800,000. Butit’s also a lot more than $11,500. Granted, none ofus think in terms of a 57-year time horizon, butplease know that myriad studies similar to thisOrma_9780385530934_4p_all_r1.indd 53Orma_9780385530934_4p_all_r1.indd 53 12/3/08 9:31:07 AM12/3/08 9:31:07 AM
  66. 66. 54 SUZE ORMAN’S 2009 ACTION PLANone come to the same conclusion over shorter timespans too. Buy and hold is the sweet spot betweenelusive perfect market timing and tragic poormarket timing.SITUATION: You have time on your side, but youstill don’t trust history this time. You just can’t shakethe feeling that this time is different, that buy-and-hold investing is not the way to go.ACTION: Push yourself to keep the faith. But if atthe end of the day you can’t function because youare so worried, then perhaps it is best for you toget out of stocks. However, you need to under-stand the serious trade-off you will make.Let’s start by stripping away your emotions fora moment. My best financial advice is for you tostay invested. I know what we are going throughright now is incredibly scary. But we have hadscary times before.On the next page are the 10 most recentbear markets (periods of major losses when thestock market indexes go down at least 20 %) priorto 2008.So this is not the first (or last) scary time. What’scrucial to understand is that despite all those badtimes, patient investors did fine. More than fine,actually. From 1950 through 2007, the annualizedgain for the S&P 500 stock index was more than10 %. The big takeaway: There are bad times andOrma_9780385530934_4p_all_r1.indd 54Orma_9780385530934_4p_all_r1.indd 54 12/3/08 9:31:08 AM12/3/08 9:31:08 AM
  67. 67. ACTION PLAN: Retirement Investing 55there are good times, and history tells us that overtime, the good times outweigh the bad.So now you know my best financial advice: Staythe course. That is what I would do if it were mymoney. But it’s not my money. It’s your money.And no one will ever care about your money asmuch as you do. So if you know that the only wayyou can get through these tough times is to pullyour money out of stocks and into a stable-valuefund or a money market, then you need to do that.I just ask that you consider everything you read inthis Action Plan. From a financial point of view,you are putting yourself at the risk of never mak-ing up the losses and not making big enough gainsBEAR MARKET LOSSAugust 1956–October 1957 –21.6%December 1961–June 1962 –28%February 1966–October 1966 –22%November 1968–May 1970 –36%January 1973–October 1974 –48.2%September 1976–March 1978 –19.4%January 1981–August 1982 –25.85August 1987–December 1987 –33.5%July 1990–October 1990 –19.9%March 2000–October 2002 –49.1%Source: The Vanguard Group; Standard & Poor’sOrma_9780385530934_4p_all_r1.indd 55Orma_9780385530934_4p_all_r1.indd 55 12/3/08 9:31:08 AM12/3/08 9:31:08 AM
  68. 68. 56 SUZE ORMAN’S 2009 ACTION PLANto beat inflation. Perhaps you can strike a compro-mise with yourself: How about you move a smallpercentage of your money out of stocks and into astable-value fund? That will make it easier to getthrough the rocky times, but it will keep a portionof your retirement funds invested in stocks.I respect the emotional component of invest-ing—something that too many professionals dis-miss. All I ask of you in 2009 is to try as hard asyou can not to let your emotions completely derailyour long-term strategy. Compromise could be theticket for you: By moving a portion of your moneyinto a stable-value fund—say, no more than athird or so—you should be able to sleep better to-day without derailing your chances of sleepingwell in retirement too.SITUATION: You want to stop contributing to your401(k), even though your company matches yourcontribution, so you will have more money to pay offyour credit card debt.ACTION: Don’t do it. If you work for a companythat matches your contribution, I don’t care howmuch credit card debt you have or how messy yourfinancial life may be. You cannot afford to missout on a company match. Do you hear me?When your employer matches a dollar of yourmoney with a 25-cent matching contribution orOrma_9780385530934_4p_all_r1.indd 56Orma_9780385530934_4p_all_r1.indd 56 12/3/08 9:31:08 AM12/3/08 9:31:08 AM
  69. 69. ACTION PLAN: Retirement Investing 57gves you 50 cents for a dollar invested that is toogood a deal to pass up.SITUATION: You want to stop contributing to your401(k) after you reach the maximum employer matchso you will have more money to pay off your creditcard debt.ACTION: Do it. Once you get to the point whereyou have maxed out your employer’s matchingcontribution (ask HR to help you figure out themax you need to contribute to collect the full com-pany match), then you absolutely should stop con-tributingsoyouhavemoremoneyinyourpaycheckto put toward paying off your credit cards. As Iexplain in “Action Plan: Credit,” reducing yourcredit card balances is not only smart in 2009, it isnecessary.SITUATION: You plan on retiring in five years andare wondering if it makes more sense to keep con-tributing to your 401(k) or use the money to pay offyour mortgage.ACTION: If you intend to live in your home for-ever, then I recommend you focus on paying offthe mortgage. With one big caveat: If you get acompany match on your 401(k), you must keepinvesting enough to qualify for the maximum em-Orma_9780385530934_4p_all_r1.indd 57Orma_9780385530934_4p_all_r1.indd 57 12/3/08 9:31:08 AM12/3/08 9:31:08 AM
  70. 70. 58 SUZE ORMAN’S 2009 ACTION PLANployer match. That is a great deal you are not topass up. But I wholeheartedly recommend scalingback your contribution rate just to the point of thematch so that you’ll have more money in your pay-check to put toward paying off your mortgage be-fore you retire. Yes, I realize this means you willhave less saved in your 401(k), but you will alsoneed a lot less because you will no longer havea mortgage payment to deal with in retirement,and for most retirees that is the biggest incomeworry.SITUATION: You can’t afford your mortgage andwant to borrow or withdraw money from your 401(k)to make the payments.ACTION: Don’t do it. Too many people these daysare making this huge mistake. I understand thatyou are desperate to hang on to your house andwill do anything to avoid foreclosure, but I defi-nitely do not want you to take a withdrawal. Youwill pay income tax and may also be hit with a10 % penalty for money taken out before you are59½. And then, six months later, you will findyourself back in the same hole: All the money fromyour 401(k) will be gone and once again you willfall behind on your mortgage.A 401(k) loan carries a ton of risk, too. If youare laid off, you typically must pay back the loanOrma_9780385530934_4p_all_r1.indd 58Orma_9780385530934_4p_all_r1.indd 58 12/3/08 9:31:09 AM12/3/08 9:31:09 AM
  71. 71. ACTION PLAN: Retirement Investing 59within a few months. The current economic out-look predicts a rise in layoffs in 2009. So if youtake out the loan, get laid off, and can’t pay themoney back ASAP, you will run into another taxproblem: The loan is treated as a withdrawal andyou’ll be stuck paying tax—and possibly a 10 %early-withdrawal penalty. A loan is also dangerousbecause the markets may rally during the timeyou have taken out the loan, which means you willhave missed an important period to recoup someof your losses.It’s also important to know that money youhave in a 401(k) or IRA is protected if you everhave to file for bankruptcy. You get to keep thatmoney no matter what.My preference is that you scour every part ofyour financial life to find other income sources forcovering your mortgage. See “Action Plan: Spend-ing” for advice on how to squeeze more savingsout of your current income.SITUATION: Your credit card account was closeddown and your interest rate on the remaining bal-ance was increased to 32%. You want to take a401(k)loan to wipe out the credit card debt.ACTION: As noted above, it is just too risky totake out a loan from your 401(k) in 2009, giventhe heightened possibility of layoffs. I understandOrma_9780385530934_4p_all_r1.indd 59Orma_9780385530934_4p_all_r1.indd 59 12/3/08 9:31:09 AM12/3/08 9:31:09 AM
  72. 72. 60 SUZE ORMAN’S 2009 ACTION PLANthe damage a 32 % credit card interest rate can do,but I want you to resist the temptation to raid your401(k). Please review “Action Plan: Spending” formy advice on how to seriously tackle your ex-penses to find savings you can then put towardimportant financial goals, such as paying off high-rate credit card debt.SITUATION: You have been laid off and need themoney in your 401(k). Can you withdraw it withoutpaying the 10% penalty?ACTION: Yes, if you are 55 years of age or olderin the year you were laid off. You will, however,still have to pay ordinary income tax on what youwithdraw. I want to be clear: I am not recom-mending that you take money out of your retire-ment accounts at such a young age, but I recognizethat some of you are in a very tough situation. I’masking that you please do everything you can toavoid tapping your retirement money today.SITUATION: You are under 55 in the year you werelaidoff.Youdesperatelyneedthemoneyinyourretire-ment account just to make ends meet. Is there a wayyou can withdraw it without having to pay the 10%penalty?ACTION: Yes. But it is tricky. Look into setting upa withdrawal plan that allows you to take out sub-Orma_9780385530934_4p_all_r1.indd 60Orma_9780385530934_4p_all_r1.indd 60 12/3/08 9:31:09 AM12/3/08 9:31:09 AM
  73. 73. ACTION PLAN: Retirement Investing 61stantial and equal periodic payments (SEPP) fromyour retirement account without paying the 10 %penalty. Please check with your tax advisor so heor she can tell you exactly how it works—it is cov-ered by Rule 72t in the IRS code—and make sureyour advisor is an expert in this area, because it isvery complicated. This applies to all kinds of re-tirement accounts, not just 401(k)s and 403(b)s asthe situation above does. And I need to repeat whatI said above: Taking money out of your retirementaccount at an early age is obviously not ideal. Soplease do everything possible to leave your retire-ment money untouched.SITUATION: You are worried that your companymay go bankrupt and that you will lose all the moneyin your 401(k).ACTION: Confirm that your money was sent fromyour employer to your 401(k) plan and you havenothing to worry about. Money you invest in a401(k) is your money, not your employer’s. Youremployer hires a third party—typically a broker-age, fund company, or insurance company—torun the 401(k), and that company in turn segre-gates your money in a separate account that is allyours; even if that brokerage or fund company gotinto trouble.Orma_9780385530934_4p_all_r1.indd 61Orma_9780385530934_4p_all_r1.indd 61 12/3/08 9:31:09 AM12/3/08 9:31:09 AM
  74. 74. 62 SUZE ORMAN’S 2009 ACTION PLANSITUATION: You have employer matching contribu-tions that are not fully vested and you are concernedthat you may lose this money if your company goesbankrupt.ACTION: That could indeed happen. Money thatis not vested is not yet yours. So in the event yourcompany goes under, it is not legally obligated toleave the unvested portion of your match in youraccount. The money you contribute to your 401(k)is always 100 % yours.SITUATION: Your employer announced it willsuspend its 401(k) matching contributions in 2009.Should you keep contributing to your 401(k)?ACTION: Because you are not going to get thematching contribution, you want to be strategicabout how best to use your money. If you have creditcard debt, suspend your 401(k) contributions soyou have more money in your paycheck to put to-ward paying off your credit card balance. If you donot have credit card debt but you do not have aneight-month emergency fund, make sure you cre-ate a savings fund before you do anything else. Ifyou have no credit card debt and you have an eight-month emergency fund, then I suggest you suspendyour 401(k) contributions in 2009 and instead—ifyou qualify—invest in a Roth IRA account. If youOrma_9780385530934_4p_all_r1.indd 62Orma_9780385530934_4p_all_r1.indd 62 12/3/08 9:31:10 AM12/3/08 9:31:10 AM
  75. 75. ACTION PLAN: Retirement Investing 63don’t qualify, invest in a traditional IRA. If you al-ready have funded your Roth or IRA, then justkeep taking that extra money to pay down themortgage on your home if you plan to stay in thathome forever or keep contributing to your 401(k);even without the company match, it remains asmart way to save tax-deferred for your retirement.SITUATION: You have money in an old employer’s401(k) and wonder if you should leave it where it is,transfer it to your new employer’s plan, or do an IRArollover.ACTION: Do an IRA rollover. Rather than be re-stricted to the handful of mutual funds offered inyour 401(k), you get to pick the funds, exchange-traded funds (ETFs), and stocks or individualbonds to invest in when you do an IRA rollover.That puts you in total control and allows you tochoose the best low-cost investments for your re-tirement money.SITUATION: You want to do an IRA rollover, but youdon’t know how.ACTION: Choose the financial institution youwant to move your money to (that’s the rolloverpart) and that company will help you switch themoney from the 401(k) into your new IRA ac-count. I believe keeping your costs as low as pos-Orma_9780385530934_4p_all_r1.indd 63Orma_9780385530934_4p_all_r1.indd 63 12/3/08 9:31:10 AM12/3/08 9:31:10 AM
  76. 76. 64 SUZE ORMAN’S 2009 ACTION PLANsible is vitally important, so I recommend discountbrokerages or no-load fund companies that alsohave a low-cost brokerage arm for your bond andETF investing. Once you pick the firm you wantto move your money to, all you will need to do iscomplete an easy rollover application form andchoose the option for a direct rollover; that meansyour new firm will contact your old 401(k) directlyand get your money moved. Once your IRA is inplace, set up an automated monthly investment(from a bank account) for the growth portion ofyour retirement portfolio. I highly recommendmaking monthly investments rather than big,once-a-year lump-sum investments. Periodic in-vestments are a way to dollar cost average, a smartinvestment strategy for stock investing.SITUATION: You want to do an IRA rollover but arenot sure ifyou should roll it over into a traditional IRAor a Roth IRA.ACTION: If you are eligible to roll over into a RothIRA in 2009, you have to consider it. There is onebig caveat, though: When you convert any moneyinto a Roth IRA that was in either a 401(k) or atraditional IRA, you will owe taxes. So you needto consider carefully how you will come up withthe cash to cover a tax bill. One strategy is to con-vert just a small portion at a time, so you aren’t hitwith a staggering tax bill. I also highly recommendOrma_9780385530934_4p_all_r1.indd 64Orma_9780385530934_4p_all_r1.indd 64 12/3/08 9:31:10 AM12/3/08 9:31:10 AM
  77. 77. ACTION PLAN: Retirement Investing 65you consult a tax advisor with expertise in Rothconversions to make sure you choose a strategythat does not put you in a tax bind.But here is what you need to understand: Themoney in your 401(k) is, in most instances, tax-deferred. That means when you eventually with-draw money from it in retirement, it will be taxedat your ordinary income tax rate. If you roll it overinto a traditional IRA, the system stays the samefor tax purposes.A Roth IRA is different: You invest money thatyou have already paid tax on and then in retire-ment you get to take out all the money in yourRoth without paying any tax on it. So the smartthing to do with your 401(k) is to roll it over firstinto an IRA rollover. Then, depending on howmuch money you actually have in your IRA roll-over, you would either convert it to a Roth IRAlittle by little or do it all at once. Remember, youwill owe taxes on whatever amount of money youconvert. But if you go through this effort there is anice payoff: The growth on the money in yourRoth IRA will be tax-free if you leave it untoucheduntil you are 59½ and have owned the Roth for atleast five years. You can learn more about Rothconversions at http://www.fairmark.com/rothira.SITUATION: You want to convert to a Roth IRA butwere told your income is too high.Orma_9780385530934_4p_all_r1.indd 65Orma_9780385530934_4p_all_r1.indd 65 12/3/08 9:31:10 AM12/3/08 9:31:10 AM
  78. 78. 66 SUZE ORMAN’S 2009 ACTION PLANACTION: Roll your 401(k) into a traditional IRAin 2009 and then convert that IRA into a RothIRA in 2010, when everyone, regardless of income,will be allowed to convert to a Roth.In 2009, you must have modified adjusted grossincome (MAGI) below $100,000 on your federaltax return to be eligible for a Roth conversion.That’s $100,000 whether you are single or you filea joint tax return. But the income limit vanishes in2010; everyone and anyone will be allowed to con-vert their rollover 401(k) or traditional IRA into aRoth IRA in 2010. A nice bonus of waiting until2010 is that any tax due on your conversion can bepaid over two years.SITUATION: You converted to a Roth IRA in 2008,but you are kicking yourself now because your ac-count is down 20% and you owe tax on the amountthat was originally converted.ACTION: Do a recharacterization. In a rare act ofleniency, the IRS allows for do-overs of IRA con-versions. If you convert a traditional IRA to aRoth and then regret it, you get to reverse yourdecision.The advantage of doing this during a down mar-ket is that you can then reconvert back into theRoth IRA and your new tax bill will be based onthe current value of the account at the time of thesecond conversion.Orma_9780385530934_4p_all_r1.indd 66Orma_9780385530934_4p_all_r1.indd 66 12/3/08 9:31:10 AM12/3/08 9:31:10 AM

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