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Monday, January 19, 2009

Chapters 7 - 14 , Read Suze Ormans new 2009 Book Here !

Real Estate
The New Reality
Fallout fr om the mortgage crisis has aff ected
every home in America. Th is is no longer a
problem confi ned to the subprime market of
reckless borrowers and the irresponsible lenders
who egged them on. No one was left untouched.
Even if you have a mortgage you can aff ord and
a home you love, the fact is your home is likely
worth less than it was just a few years ago, and
that puts a huge crimp in your fi nancial planning.
You convinced yourself that your home would continue
to appreciate at a double-digit annual rate
forever, with no possible downside. You baked
those high values into your future fi nancial plans
and that made you fee l richer than you actually
were. But your bubble-induced sense of security
led you to spend more and save less because you
ACTION PLAN: Real Estate 127
were so sure your mountain of home equity would
pay for retirement or the kids’ college tuition or
the new room addition.
But it isn’t playing out the way you imagined.
Home values have plummeted back to 2004 levels
and are still falling as I write this in November
2008. Suddenly, you must face the fact that your
home is not going to fund all those capital expenses
you were planning. Th at not only aff ects
your long-term outlook, it could also endanger
your short-term security . Th e newest housing
trend swee ping the country is banks rescinding
home equity lines of credit because falling home
values make those open credit lines too risky . Any
family that has relied on a HELOC as an emergency
cash fund could be in trouble in 2009; your
bank may remove your safety net.
And let’s face it, 2009 is shaping up to be the
worst year in decades to sell a home, even if you
have equity . Th ere is a 10-month backlog of homes
on the market; that’s more than double the level
fi ve years ago. A fl ood of bank-foreclosed homes,
or homes up for a short sale (when what your home
sells for is less than your remaining mortgage balance,
and the bank forgives the diff erence), are a
big factor in the market glut, but so is the fr ozen
lending market. Banks do not want to lend money
right now; the only borrowers they will even consider
must jump through the highest qualify ing
hoops in more than a decade. Th at reduces the
pool of prospective buyers of your home—including
buyers who must turn around and sell their
home in the same fr ozen market.
Renters are not immune either. Tens of thousands
of renters have bee n kicked out of their
homes since 2007 as their landlords fell behind on
their mortgage payments and the bank foreclosed
on the property . Th ese were renters who wrote the
check on time every month and had no clue that
their home was at risk until they had an offi cial
note tacked to the fr ont door telling them they had
30 days to vacate.
Th ere will be no magical turnaround in 2009.
Th e best we can hope for is a slowing of homes that
fall into foreclosure. I have a moral problem with
bailing out homeowners and lenders who had no
right to do the deals they did. I certainly do not support
a bailout of people who bought a home that
was never aff ordable under any rational assessment,
but I do think we are obliged to help those who,
with moderate assistance today, can aff ord to stay
in their home. Kee ping those homeowners in their
homes is the most eff ective way to stabilize the
housing market. And let’s be clear: Th ere will be no
widespread stabilization in our fi nancial markets
until the housing markets stabilize; home foreclosures
are the epicenter of the credit crisis.
As I write, some major lenders have fi nally
stepped up their eff ort to modify loans for some
homeowners. And I expect we will see more and
ACTION PLAN: Real Estate 129
greater eff ort by lenders and the federal government
to slow down the pace of foreclosures in
2009. Still, we should all expect that this year will
continue to be a very tough time for real estate.
WEB SITE ALERT: Th is book went to press in
November 2008. I will post updated information on
my Web site throughout the year whenever there are
new mortgage-relief programs to share with you. Go
What you need to do in 2009
¡ Push for a "mortgage modifi cation" if your current
loan is too expensive.
¡ Do not use credit cards or retirement funds to
pay for a too-expensive home.
¡ Stay informed about new programs, from lenders
and the government, in the months ahead that
aim to keep more homeowners out of foreclosure.
¡ Build a real savings fund; a HELOC should not be
your safety net in 2009.
¡ Focus on your home’s long-term value, not its
price change from month to month.
Your 2009 Real Estate Action Plan
SITUATION: You can’t afford the cost of your adjustable
rate mortgage (ARM) since it reset, but you don’t
know what your options are.
ACTION: Start by contacting your lender and asking
if there is any chance you can renegotiate (modify
) your mortgage so your payments are more
aff ordable. Please do this as soon as you think you’re
in trouble—over half of those whose homes are
foreclosed never speak to their lender prior to foreclosure,
according to the National Foundation for
Consumer Credit Counseling (NFCC). Th is was
far fr om easy throughout most of 2008, but as the
severity of the crisis dee pened, some lenders stepped
up their willingness to modify loans for borrowers
they dee med could aff ord their homes with a moderate
level of assistance. When you call, right away
ask for a loan-mitigation or workout specialist. Be
prepared to document your fi nancial hardship as
well as your ability to aff ord the modifi ed loan. You
can get advice about how to talk to your lender at Click on "Guide to Avoiding Foreclosure."
Bett er yet, the NFCC has HUD-approved
housing counselors who can advise you and will act
as an advocate with your lender for the best resolution
for your situation. Call 866-557-2227—you’ll
be automatically connected to the agency closest
to you—or visit their Homeowner Crisis Resource
Center at
SITUATION: You contacted your lender fi ve months
ago and were told there was no way the lender would
modify your loan to make it more affordable.
ACTION PLAN: Real Estate 131
ACTION: Try again. Lenders who were saying no
for a long time are now soft ening up and agree ing
to modify loans. To be honest, this may be your best
shot, rather than the government programs in their
current forms. In October 2008, Bank of America
announced an agree ment with a group of state attorneys
general to modify up to 400,000 subprime
mortgages the bank acquired when it bought Countrywide
earlier in the year. Also in October, JP
Morgan Chase announced its intention to modify
as many as 400,000 mortgages to more aff ordable
terms in an eff ort to reduce foreclosures. And in
mid-November, Citigroup had announced it was
halting the foreclosure process for loans in its portfolio
and would try to modify terms for as many as
500,000 of its distressed borrowers.
WEB SITE ALERT: I anticipate we will see more
lender and government programs in 2009 to slow
down the pace of foreclosures; vis it www.suzeorman.
com for up-to-date information.
SITUATION: The banks and Wall Street are getting
help, but what programs exist to help homeowners?
ACTION: First of all, contact your lender; they
are best equipped to tell you what assistance you
may be eligible for. Th e pace of lenders off ering
their own programs is picking up (though the
banks were woefully slow to off er such assistance
through much of 2008).
You are supposed to be able to get government
assistance sizing up whether you are a good candidate
for a mortgage modifi cation by calling the
Hope Now alliance coordinated by the Department
of Housing and Urban Development. Call
888-995-HOPE, or get more information at www. Be prepared to be patient; though
you can reach a live operator with ease, you may
be told there is no counselor available and that you
will nee d to call back later. And don’t expect miracles;
this is merely to help you size up your situation.
Moreover, if the Hope Now counselor can’t
ascertain who actually owns your mortgage—an
all-too-common problem given the millions of
mortgages that were packaged with other mortgages
and sold off as securities—you aren’t going
to be able to get past fi rst base.
Given that lenders have bee n less than impressive
in stepping up to the plate to help people stay
in their homes, I want you to know what federal
programs are available. But please be aware that
these programs—limited and late in coming—
may change in both scope and detail once the new
administration is in place. Adding to the uncertainty
is the problem of consumers whose loans,
many of them subprime, have bee n sold in packages
to outside investors worldwide; there is still
disagree ment over whether mortgages sold into
these pools can be modifi ed. With such a fl uid
and evolving situation, please periodically check
ACTION PLAN: Real Estate 133
my Web site for updates on the changes: www.
Here are the programs in place as of mid-
November 2008:
Th e original FHASecure program, launched in
August 2007, was limited to helping homeowners
with good credit (translation: not subprime) refi -
nance into a fi xed-rate mortgage if they would be
unable to kee p up with the reset of their ARMs.
Th e one big catch was that you couldn’t already be
behind in your mortgage payments, thereby shutting
out the very people in nee d of help.
In July 2008, Congress passed the Housing and
Economic Recovery Act, which eff ectively made
FHASecure a viable option for subprime borrowers
too. You can be eligible for a mortgage refi -
nance as long as you have made at least 9 of your
past 12 mortgage payments on time. Th e goal of
the program is to help homeowners who are nearly
able to cover the cost of a fi xed-rate mortgage. It is
not meant to bail out homeowners who took out
an option-payment ARM that had an initial rate
that was 50 % less than what the fully amortizing
(regular) cost would have bee n without the insane
teaser rate. At most, the plan is expected to off er
refi nancing relief to 400,000 homeowners. Th at
sounds like a lot of help—until you realize that
Moody’s forecasts that 3.5 million
homes may be lost to foreclosure and short sales in
2009 and 2010.
Th e big $700 billion bailout bill that passed in
October 2008 amended the federal program Hope
for Homeowners that was passed in July and put
into eff ect in October. Under this program, homeowners
who bought a house before 2008 and
have a monthly mortgage payment that excee ds
31 % of their gross income may be eligible to refi -
nance into a 30-year, fi xed-rate mortgage based
on 90 % or higher of the home’s current value,
thereby reducing the monthly mortgage payment.
In return for rewriting the mortgage, the FHA
agree s to insure the mortgage. Th e program is
currently scheduled to end on September 30, 2011.
Th ree big caveats: Lenders do not have to participate
in Hope for Homeowners, and it is not clear
if many will, given that the program requires
lenders to write down the value of modifi ed mortgages,
meaning they have to be willing to take a
big loss. Morever, borrowers will face heft y fee s
and charges. And only mortgages under $550,440
are eligible. Th e FHA in November 2008 was projecting
13,300 borrowers would be helped in its
fi rst year. Go to and ty pe "Hope for
Homeowners" in the search box.
Another initiative scheduled to begin December
15, 2008, is the "Streamlined Modifi cation
Program," aimed at mortgages owned or guarantee
d by Fannie Mae and Freddie Mac. Homeowners
who have missed at least three loan payments,
are not in bankruptcy, and can prove a hardship
ACTION PLAN: Real Estate 135
or change in fi nancial circumstances, could qualify
for a streamlined workout designed to reduce
monthly mortgage payments to 38 % of monthly
income. To get to that level, the lender can use one
or more of these options: extending the term of
the loan to 40 years; lowering the interest rate
temporarily or permanently; or excluding part of
the loan balance when calculating the monthly
payment—an option called "principal forbearance."
It means the amount you owe won’t change,
but gets paid back when you sell or refi nance the
house. Participating servicers will send lett ers to
eligible borrowers; you can also call your servicer
to see if you qualify .
WEB SITE ALERT: Pleas e check www.suze for the most up-to-date information on
government programs to as sis t homeowners with unaff
ordable mortgages. As this book went to press, the
FDIC was pushing for a more comprehensive mortgage
modifi cation program, but had not yet garnered
the backing of the Treas ury Department.
SITUATION: Your mortgage has become too expensive,
but you don’t want to lose your home and upset
your family.
ACTION: If you can’t negotiate a lower payment
with your lender and none of the programs mentioned
above can help you, then I am so sorry to
tell you that you must try to sell your home sooner
rather than later. I know it is excruciatingly painful
to consider, but it is also a simple decision. You
cannot stay in a home you cannot aff ord. Remember,
the right moves in 2009 are honest moves.
SITUATION: You’re thinking that if you can just hold
on to your home for another year, the market will recover
and you will be able to refi nance your mortgage.
ACTION: Do not base your decisions today on the
magical hope that somehow everything will work
out if you can just wait for the big rebound.
I have to tell you, it’s not coming. At least not in
2009. If you are in an area that has bee n hard hit,
I think it is far more likely you could see another
10 %–15 % drop in home values in 2009 than a
10 %–15 % rise.
My best-case scenario for home values in 2009
and probably into 2010 is that eff orts to address
the credit crisis and the wave of foreclosures begin
to take hold and that leads to a gradual stabilization
of real estate values. If you think graphically,
imagine the capital lett er L. Your home’s value
tw o years ago was at the top of the L. Since then it
has bee n sliding straight down in value. In 2009–
2010, you should be relieved if what we see is that
the downstroke stops and we move to the right—
that is, prices stop going down. I wish I could tell
you that home prices will be more like the lett er V:
Aft er the big fall, they will quickly bounce back to
ACTION PLAN: Real Estate 137
where they were. But I, too, am committ ed to being
honest. And honestly, there is no chance we
will see that. In fact, in the hardest-hit markets it
could be years before we see a rebound that brings
prices close to their 2006 highs.
If the only way you can hang on depends on a
fast and dramatic rebound, your honest move in
2009 is to try and sell your home.
SITUATION: When you bought your home three
years ago, the lender steered you into an ARM and said
that you would be able to refi nance before the fi rst rate
adjustment. But now you’re being told you can’t refi -
nance because you have no equity in the home.
ACTION: Make sure to check in with the lender to
see if you can qualify for a loan modifi cation. As I
mentioned earlier, there is a growing eff ort by lenders
to help "qualifi ed" borrowers stay in their homes
rather than being foreclosed on. But if you are
turned down for a loan modifi cation and you will
not be able to aff ord the mortgage when your interest
rate resets, then I am so sorry to say it is bett er
to try to sell your home sooner rather than later.
SITUATION: To eke by and make the mortgage payment,
you have resorted to using your credit card to
cover more expenses. You credit card balance is now
ballooning out of control.
ACTION: Again, push to see if your mortgage can
be modifi ed. If not, you must consider selling, because
using your credit card is not a good solution to
this diffi cult problem. You nee d to look a few months
into the future and realize that sooner rather than
later you will have reached your card’s credit limit.
Th en what? You will have a ton of credit card debt
and a mortgage you still can’t aff ord. All you have
done is delay the inevitable, and in the process you
have added thousands of dollars in credit card debt.
For those of you who are stubborn and want to
use your credit cards to help you stay in your house,
I nee d you to review what I explained in "Action
Plan: Credit." I have never advocated piling on
credit card debt, but doing so in 2009 is doubly
dangerous. Credit card companies are dealing
with their own new reality : Th ey risk massive
losses if consumers fall on hard times during the
credit crisis and economic recession. Th ey are especially
wary of anyone who see ms to be heading
for trouble; a rising unpaid balance will set off
warning bells at the credit card company. It can
result in your credit limit being cut, your account
being shut down (you won’t be able to make new
charges, but you will still be responsible for your
existing balance), and your interest rate could sky -
rocket. Please don’t compound your mortgage
problem with a credit card problem.
I know this is hard to consider, but if you really
ACTION PLAN: Real Estate 139
can’t aff ord the mortgage today, it is bett er to
move than to go dee per into debt trying to hold
on. Of course, I am assuming you have done absolutely
everything possible to come up with the
money to pay the mortgage. In "Action Plan:
Spending," I have suggestions about how to cut
your expenses so you have more money left to pay
the mortgage or address other fi nancial goals.
SITUATION: You want to make a withdrawal from
your 401(k) and use the money to help you keep current
with your mortgage payments.
ACTION: Don’t do it. If you use up your retirement
money today, what will you live on in retirement?
I see so many people making this huge mistake
these days. I understand the thinking: You are
desperate to hang on to your house and will do
anything not to fall into foreclosure. So you empty
out your 401(k), paying income tax on the withdrawal
and may also be hit with a 10 % penalty for
money taken out before you are 59½. But then, six
months later, you fi nd yourself back in the same
hole: You have used up all the money you withdrew
fr om your 401(k) and you are once again
falling behind on your mortgage. So all you have
done is delay the inevitable: that you can’t really
aff ord this mortgage. But in the process you have
wiped out any retirement savings. For nothing.
It’s also important to know that money you have
in a 401(k) or IRA is protected if you ever have to
fi le bankruptcy. You get to kee p that money no
matt er what. Th is isn’t a pleasant scenario to ponder,
but let’s think about what happens in a really
dire situation: You have $20,000 in your 401(k)
that you withdraw. Aft er tax and the 10 % penalty ,
you are left with about $15,000. Th at helps pay the
bills for another few months, but once you have
used it up, you are back where you started: You
can’t aff ord the home. So you lose the home. And
now you have no retirement savings.
If instead you kept the $15,000 invested for another
10 years and it earned even a conservative
5 % return, you would have nearly $25,000 saved
up. And that money will never be taken away in a
SITUATION: You want to take a loan from your
401(k) and use the money to help you keep current
with your mortgage payments.
ACTION: A loan is no bett er than a withdrawal in
this situation. Don’t do it. You probably know I
am not a big fan of this move. Taking out a loan
means you end up being taxed tw ice on the money
you withdraw. And there’s the risk that if you are
laid off you ty pically must pay back the loan within
a few months. We all know that the current eco-
ACTION PLAN: Real Estate 141
nomic weakness makes it likely that we could see
even more layoff s in 2009. So if you take out the
loan, get laid off , and can’t pay it back ASAP, you
will run into another tax problem: Th e loan is
treated as a withdrawal and you are stuck paying
the 10 % early-withdrawal penalty (if you are under
59½) as well as income tax.
SITUATION: You can’t afford your mortgage payments,
but what you owe on your mortgage is more
than the house will sell for.
ACTION: Push your lender to agree to a short sale.
In a short sale, the lender accepts whatever you
can sell your house for in today’s market, even if
that is less than the outstanding balance on your
mortgage. Th e lender is agree ing that once you hand
over all procee ds fr om the sale, your mortgage will
be considered sett led; any shortfall betw ee n the sale
price and your balance will be forgiven.
Lenders may be open to this arrangement if
they believe what they can get fr om the short sale
is more than the cost they will incur if they foreclose
on your home. Th at said, it is by no means
easy to get lenders to agree to a short sale. But it is
worth asking. Th e impact on your FICO credit
score is no diff erent fr om what it would be if you
went through foreclosure (see details below), but
it is a less traumatic way to walk away.
SITUATION: You are worried a short sale will hurt
your FICO score.
ACTION: It will, but it is bett er to be honest now
than hang on and make your fi nancial life (and
credit score) even worse by trying to stay in an
unaff ordable home.
Th e mortgage you took out was a legal contract
in which you agree d to repay the amount you borrowed
(the principal) plus interest. In a short sale,
you are allowed to repay less than the amount you
borrowed. You did not live up to your end of the contract,
and that is going to hurt your FICO score. A
short sale will stay on your credit report for 7 years
(though you won’t see the term "short sale" on your
credit report; lenders use diff erent terms, sometimes
describing short sales as "sett led"), the same as a
foreclosure. Th e impact of a short sale (and foreclosure)
on your FICO score lessens as time goes by.
If you anticipate you will go through a short sale
in 2009, it becomes extra important to kee p your
credit card balances paid off . I know this is diffi cult,
given the fact that you are dealing with serious fi -
nancial issues, but you nee d to make this a priority ,
because once your FICO score drops because of
the short sale, your credit card company may get
nervous and that ty pically leads to raising your interest
rate. And the last thing you can aff ord is a
credit card balance with a 32 % interest rate.
ACTION PLAN: Real Estate 143
SITUATION: You have heard that if you agree to a
short sale you will have a big tax bill from the IRS,
and you don’t have the money to pay for that.
ACTION: Relax. You will not owe income tax on
the amount of the debt that is forgiven, as long as
the short sale occurs before 2012. Originally, the
Mortgage Debt Relief Act of 2007 waived the income-
tax rule on forgiven debt through 2009, but
it was extended to 2012 in the big $700 billion
bailout bill of 2008. Up to $2 million in forgiven
debt is shielded fr om income tax for married couples
fi ling a joint tax return ($1 million for individuals).
SITUATION: You were turned down for a short sale.
Is foreclosure your only option?
ACTION: Probably. Your only other option is a
"dee d in lieu of foreclosure," where you hand over
the dee d to your home to the lender, who then
takes the house without going through the formal
foreclosure process. While this is an option, it is
not widely off ered by lenders. Short sale or foreclosure
is a more likely alternative if you cannot
agree to a loan modifi cation and nee d to let go of
the house.
SITUATION: Will you have to move out immediately
when the bank starts the foreclosure process?
ACTION: Foreclosure law varies by state. Lenders
will ty pically start the foreclosure process once
you are three months behind in payments.
In about half the states, foreclosures must go
through the court system; the other half use procedures
that don’t require judicial action. For example,
some states allow for what is known as a
"power of sale," in which mortgage companies—
or whoever is empowered under the mortgage
document—can handle the foreclosure process.
In either ty pe of foreclosure, you will receive noti-
fi cation fr om the foreclosing party that the foreclosure
process has started; ty pically you will have
fr om a few wee ks to a few months (depending on
your state’s laws) to reinstate the loan by paying up
what you owe. (For a roundup of state’s foreclosure
statutes, see Stephen Elias’s Foreclosure Survival
Guide, Nolo Press, 2008; updates to the list will be
published in the legal updates area on
If you do not get current on your mortgage in
the allott ed time, the foreclosure procee ds, and
your home is sold or the lender takes possession.
Th ough you have the right to remain in your home
until you are ordered out by a court aft er the foreclosure
sale, many lenders encourage foreclosed
owners to leave by making a "cash for keys" off er,
ACTION PLAN: Real Estate 145
money paid for your leaving voluntarily instead of
requiring the new owner to obtain a court eviction
order. A good overview of the foreclosure process is
at htt p://
SITUATION: You’ve been contacted by a foreclosure
"rescue specialist" who promises to help you
avoid foreclosure for a fee.
ACTION: Don’t fall for this. Legitimate foreclosure
consultants do not see k you out; you go to
them. Th e huge number of at-risk borrowers has
created a whole new opportunity for scam artists
who can easily fi nd victims by scouting public records
for notices of default. Th e most common
ploy: Th ey’ll off er to negotiate a deal with your
lender if you pay the fee fi rst; once you pay, they’re
gone. An even nastier scam involves gett ing you to
sign documents for a new loan that will supposedly
make your existing mortgage current, but
instead you’ve bee n tricked into surrendering title
to the scammer in exchange for a "rescue" loan.
If you’re facing foreclosure, get help you can
trust. Start with the National Foundation for
Consumer Credit Counseling, which will put you
in touch with a housing counselor in your area:
call 866-557-2227. More information on foreclosure
scams is available at their Homeowner Crisis
Resource Center,, and at the
FTC site, www.ft
credit/cre42.shtm. If you think you’ve bee n a victim
of foreclosure fr aud, contact the Federal Trade
Commission at ft or call 1-877-FTC-HELP,
or your state att orney general’s offi ce.
SITUATION: You are worried that going through a
foreclosure means you will never be able to buy another
ACTION: You will be eligible to buy a house in the
future if you take steps today to start rebuilding
your FICO score. Th ere is no sugarcoating this: A
foreclosure, as well as a short sale, will be a big
negative mark on your FICO credit score. But it is
not a permanent stain. Th e foreclosure stays on
your credit report for seven years; each year its impact
on your FICO credit score lessens. Th is is no
diff erent fr om a short sale.
Because you will likely see your FICO score
drop, you want to do your best to reduce any unpaid
credit card balances if you anticipate going
through foreclosure in 2009. I know this is going
to be hard to pull off , given that you are obviously
dealing with some serious fi nancial challenges.
But please do your best to kee p your credit card
balance low. When your FICO score goes down in
2009, your credit card company may become nervous
that you are in trouble. Th at might result in
the card company’s lowering your credit line. And
ACTION PLAN: Real Estate 147
as we discussed in "Action Plan: Credit," that
starts a vicious cycle that can lead to a huge increase
in your interest rate.
SITUATION: With real estate prices falling, you are
wondering if it’s a good time to buy a home.
ACTION: I still believe that over time a home can
be one of the most satisfy ing investments you can
make, but you have to make sure you can aff ord it.
By "aff ord it" I mean not just being about to mee t
the monthly mortgage payments and expenses, but
you have to be able to make those payments for at
least eight months if you don’t have income coming
in. Why eight months? Because if by chance
you were to lose your job, it could take many
months to fi nd a new one. I certainly hope you
would fi nd a great new job quickly, but if we fi nd
ourselves in a dee p, slow recession, it could take
longer to fi nd a job than you anticipate. I want you
to be in a position to know you have savings set
aside to cover the mortgage while you job-hunt.
As for timing: I recommend buying in 2009
only if you intend to stay put for at least fi ve years.
I don’t care what sort of deal you think you can
get, it makes no sense to buy a home today if you
suspect you might move in a few years. Th is housing
recovery is going to be slow (remember the L
scenario I mentioned earlier). If you buy today,
prices may not go up much over the next few years;
in fact, in some areas they could still go down.
And it’s important to remember that when you go
to sell you will be responsible for paying an agent
a sales commission of 5 %–6 %. Th at could wipe
out any appreciation you might see over the next
year or tw o . . . or three , depending on how hard
hit your area is.
And don’t even think about buying if you have
yet to save up at least 10 % of the purchase price
for a down payment. Did I say 10 %? I should add
that 20 % is even bett er. Th ough there are some
government programs that require smaller down
payments, the new reality is that the only way
many homeowners will qualify for a regular mortgage
is if they can make a solid down payment.
Th e last requirement I have for potential buyers
is that you can buy your home with a standard 30-
year, fi xed-rate mortgage. Instead of "bett ing" on
an adjustable-rate loan, or that you will have
enough equity in three or fi ve years to refi nance, I
think it is smarter to stick with a 30-year fi xedrate
so you never have to worry about your payment
SILVER LINING: Th e Housing and Economic
Recovery Act (July 2008) gives a credit of up to $7,500
for fi rst-time buyers who purchas e a home betw ee n
April 9, 2008, and July 1, 2009. Individuals with income
below $75,000 and married couples with income
below $150,000 are eligible for this program.
Th e credit is actually an interest-fr ee loan. You claim
ACTION PLAN: Real Estate 149
it on your federal tax return and then repay the
amount of your credit over a 15-year period.
SITUATION: You want to take advantage of the low
real estate prices in your area, but there’s no way you
can afford a 10% down payment.
ACTION: If you can’t aff ord a 10 % down payment,
then you probably can’t aff ord to buy in 2009.
Th ough there are some federal loan programs
that require down payments of less than 5 %, if
you want a conventional mortgage, lenders this
year are going to insist on down payments of 10 %,
and in many instances you will nee d to have 20 %
to be off ered the best interest rates.
Th e days of no-down-payment loans are gone,
and with any luck they will never return. You have
to realize that if the millions of homeowners who
bought a house with no down payment during the
housing boom had bee n required to make a down
payment, we would not be in this mess right now.
Without the down payment, those people would
not have bee n allowed to buy in the fi rst place.
And I have always said that if you can’t aff ord
to make a down payment, it’s a sign you can’t afford
a home.
SITUATION: You don’t know what purchase price
you can afford for a house.
ACTION: First-time buyers must understand that
paying $1,000 in monthly rent does not mean you
can aff ord a mortgage of $1,000 a month. In addition
to the base mortgage, you will also have to pay
property tax, home insurance, and, if your down
payment is less than 20 %, private mortgage insurance.
You also have to be ready to pay for repairs
and maintenance costs—you’re the landlord now!
If you add up all those other non-mortgage costs,
your monthly bill can be 30 % to 40 % more than
the basic mortgage. So if you were to take on a
$1,000 mortgage, your monthly housing costs
could actually be closer to $1,300–$1,400 a month.
Yes, it is true that you will get a tax break as a homeowner;
the interest on your mortgage payments
is tax-deductible. Th at’s a help, but not a solution.
Th e best way to fi gure out how much you can
aff ord is to use an online calculator (go to www. to fi gure out the base mortgage
amount. Th en add at least 30 % to that amount
and ask yourself if you can honestly handle that
cost. If not, look to buy a less expensive home. Th e
goal is to aff ord a home comfortably, not to stretch
and gamble.
SITUATION: You bought your house 10 years ago
and have a lot of equity, but you wonder if you should
sell now and just rent.
ACTION PLAN: Real Estate 151
ACTION: Your home is not a stock that you buy
and sell based on its short-term value. If you enjoy
your home, if you can aff ord your home, and if you
don’t nee d to sell right now, stay put.
I have to tell you, the time to sell was about
three years ago during the market peak. It’s no
diff erent fr om my advice for how to look at investing.
If you have time on your side, be patient. If
you will nee d cash fr om the sale within the next
year or tw o, then that’s a diff erent matt er. We
could indee d see prices fall farther fr om current
levels before the housing market stabilizes. Assuming
you don’t have to move, why move? Especially
when you consider that you’ll have to pay
the 6 % sales commission along with the cost and
hassle of the actual move.
SITUATION: Your son and daughter-in-law are in
mortgage trouble. You are retired and are considering
using some of your savings to help them through
this rough patch.
ACTION: If you can aff ord to help, then of course
help. But that’s a serious issue you nee d to carefully
ponder. If helping them out today in any way
puts your own retirement security at risk, then
you simply cannot aff ord to help. Th at’s not being
selfi sh, it’s actually looking out for your kids. You
nee d to think through how this could play out.
You help the kids out now, but that means your
retirement account runs dry in 15 years instead of
lasting the 25 or 30 years you were counting on.
And let’s say you have the good fortune of living a
very long life. Only problem is, you nee d to turn to
your kids for help because you no longer have any
money left .
You have the valuable assets in this situation.
You probably own your own home outright and
you have a nice retirement fund. Do not put those
at risk. If your kids are in a house they can’t aff ord,
it may be best for them to let go. If they live nearby,
you can off er to have them move in while they regroup.
Or if they are determined to stay in the
house, how about you off er to take a more active
role helping with the grandkids on the wee kends
so they can take on part-time work—or extra
projects at their job—to bring in the income they
nee d.
SITUATION: Two years ago, you took out a HELOC
that you never used but kept in case you ran into an
emergency. Your lender just told you it was revoking
your HELOC.
ACTION: You must have a regular savings account
funded with your own cash in 2009; you cannot
rely on either a HELOC or credit card line of
credit to be available in an emergency. Home equity
lines of credit are being rescinded (or reduced)
ACTION PLAN: Real Estate 153
because of falling home values. With less equity in
your home, you suddenly look a lot riskier to your
HELOC lender.
SITUATION: You have an open HELOC and are wondering
if you should tap it now and put the money
into a savings account to serve as your emergency
savings fund.
ACTION: Fund a savings account fr om real savings,
not by increasing your debt. It is absurd to
take on more debt in 2009, given the likelihood
that in a recession you have an increased risk of
losing your job. Don’t tell me you will just use your
savings to cover the HELOC payment if you get
laid off . Wake up. You will nee d that money to pay
your basic living costs, so why would you want to
add to that monthly nut?
If you want to build a real, honest savings
account, check out my advice in "Action Plan:
Spending," for ways to fi nd money to put toward
your most important goals in 2009.
SITUATION: You planned on using a HELOC to help
pay for your child’s college costs, but with home values
down so much you doubt you will be able to pay
for school with a HELOC.
ACTION: Be grateful market forces didn’t lure you
into this bad move. I have never liked it when fam-
ilies increase their housing debt to pay for school.
It ty pically leaves parents severely in debt just at
the point when they should be focusing on paying
off their mortgage debt, not increasing it, to prepare
for retirement.
Don’t worry, you have solid loan options to
cover college costs. Please check out "Action Plan:
Paying for College."
SITUATION: You were counting on booming home
prices to help pay for your retirement.
ACTION: Time to get serious about saving money
fr om your paycheck. As I stated earlier in this
chapter, I am still a big believer that your home is
a solid long-term investment. But that means it
will, on average, rise in value at a pace that is only
one percentage point or so ahead of infl ation.
Th at’s not going to fi ll your retirement nest egg.
If you are over 50, make it your goal to take
advantage of the extra "catch-up" amounts you
are allowed to invest in your 401(k) and IRA. In
2009, you can invest an extra $5,500 in your
401(k) if you are over 50, for a total maximum
contribution of $22,000. You can also contribute
an extra $1,000 to your IRA in 2009, for a total of
Can’t imagine where to come up with
extra cash? Make sure you read "Action Plan:
ACTION PLAN: Real Estate 155
SITUATION: You can afford your home, but you
worry that you have made a lousy investment.
ACTION: Love your home for what it is. Yes, it is
an investment, but not one whose value you should
be charting on a monthly or annual basis. If you
can aff ord your home today, the best thing you
can do is not worry about the current turmoil in
the housing market.
Homes remain a solid long-term investment.
But let’s review what I mean by solid. Th e longterm
trend—and I am talking decades, not a few
years—is that homes on average rise in value at a
pace that is about one percentage point bett er
than infl ation. I think that when the real estate
market stabilizes—and yes, it is a matt er of when,
not if—it is certainly reasonable to expect that
housing will return to a more ty pical (lower) appreciation
rate. One way to look at the massive
bursting of the real estate bubble is that it is in
fact a painful correction that brings things back
to a level based on a more moderate rate of appreciation.
In the meantime, your home is where you live.
It is a refuge, a place where you and your family
build memories. It is also a fi ne tax break.
SITUATION: You are near retirement age and
planned on paying off your mortgage ahead of schedule.
You’re not sure that still makes sense.
ACTION: If you are in a home you plan to live in
forever, I think 2009 is a fabulous time to accelerate
your mortgage payments. Th e only caveat: If
you have credit card debt to pay off , make that
your priority in 2009. And always make sure you
invest enough in your 401(k) to receive the company
If you have all that taken care of, then paying
down your mortgage makes plenty of sense. I have
always bee n a proponent of gett ing rid of mortgage
debt before you retire. Th e best way to ensure
that you will be able to aff ord your home in retirement
is to know you own it fr ee and clear and have
to use retirement funds only for property tax and
maintenance costs.
If you own your home fr ee and clear, you also
have the option of borrowing money through a reverse
mortgage if you fi nd you nee d extra income
in retirement.
ACTION PLAN: Real Estate 157
SITUATION: You rent a home and have always paid
your landlord on time, but you just found out you
have to move out because the landlord did not pay
the mortgage and the bank is foreclosing on the
ACTION: You nee d to push very hard for your
rights. While there was increased awareness as
2008 progressed that renters were innocent victims
of the foreclosure crisis, the solutions to date
are not ironclad laws that ensure every renter is
safe. Th e $700 billion bailout bill included a provision
that "where permissible" will allow renters
who are current on their rent to remain in a property
that is taken over by one of the federal bailout
plans. But that’s only if the loan becomes part of
the federal bailout and it doesn’t run afoul of existing
state laws. Th ere is also some vague language
in the same bill that says the Treasury Department
can lean on lenders see king federal assistance
to not evict renters who are on time with
their payments.
I encourage you to be very aggressive and relentless
in pushing to stay in your home. Th e National
Low Income Housing Coalition has an online chart
of what protections exist for tenants in the various
states; its evolving research is available at htt p:// I
wish there were somewhere I could send you for the
best local resources, but alas, none exists. So you
nee d to start calling and e-mailing like crazy to fi nd
out what is going on in your state and county . Start
with a local government or nonprofi t tenant advocacy
organization. If you have a local legal aid of-
fi ce or a housing assistance program, check in with
them. Th e bott om line, unfortunately, is that you
nee d to be your own most vocal advocate. But in
the down market of 2009, there may be some opportunity
to convince a lender to honor a lease, so
the rental unit remains occupied.
SITUATION: You are in good shape fi nancially, with
enough money to put down 20%. You wonder if 2009
is the right time to get a good deal on a vacation
home so you can rent it out and make some money.
ACTION: Be very careful here. Many of you looking
to buy vacation homes or investment real estate
may not be looking at the big picture, and
that could get you in trouble. If you nee d to rent
out this property in order to make the mortgage
payments, then I would say do not touch this "opportunity
" with a 10-foot pole. Why? Because if
something happens and your tenants cannot pay
the rent, how are you going to pay the mortgage?
You nee d to know that you can aff ord the payments
month in and month out, regardless of
rental income. Remember, too, that in times like
these more vacation-home owners are apt to want
ACTION PLAN: Real Estate 159
to rent out their properties, and that’s bad for you.
More competition, that is, for fewer potential
And at the risk of repeating myself, let me say
yet again: If you have one penny of credit card
debt, if you do not have retirement savings, if you
do not have an emergency savings fund that can
cover your living costs for at least eight months, if
you are still paying off your primary mortgage or
have an outstanding HELOC balance, you cannot
aff ord a vacation home. In 2009 or any year.
Paying for College
The New Reality
Gone are the days when all you had to do to
save money for your kids’ education was to
put money every single month into a 529
plan, sit back, and watch it grow. Also gone are
the days when you could consider taking out a
home equity line of credit or taking a loan fr om
your 401(k) to cover college costs when a litt le extra
help was nee ded.
So what exactly happened that makes all these
options obsolete? Simple: Real estate and stock
values have decreased dramatically in a very short
period of time, leaving many of you high and dry
when it comes to paying for college. But that’s not
all. While the real estate and stock markets were
in turmoil, the United States economy was also
experiencing a credit crisis.
ACTION PLAN: Paying for College 161
While this crisis had and is still having a devastating
eff ect on the world’s economy, resulting in a
series of Treasury bailouts capped by the $700 billion
rescue plan, it is also having a tremendous effect
on you, the individual. Suddenly, money you
were going to use to pay for college just isn’t there,
and the credit crunch has you worried you won’t
be able to take out college loans to make up for
your shortfall. But I am here to tell you that sometimes
even an economic crisis of this magnitude
comes with a silver lining.
Th e good news that came out of this credit
crunch is that Congress passed emergency legislation
in May 2008 that got the student loan market
fl owing again. Th is new legislation includes signifi -
cant changes that increase the amounts students
can borrow fr om the federal government and ease
the terms of repaying these loans. So out of all the
bad economic news comes this piece of great news:
In 2009, most families will be able to bypass expensive
and risky private loans altogether and pay for
college using loans fr om the federal government.
However, how to procee d is not quite so simple.
Your plan of action depends on a variety of factors,
including your age and the age of your children
and how much, if any, money you have to put toward
a college education. As you read on below
and devise your own 2009 college fund Action
Plan, I ask that you be ruthlessly honest about
what you can and cannot aff ord.
What you must do in 2009
¡ If your child is heading to college within four
years and your college savings are in the stock
market, you should begin to phase it out of the
market, so that you are 100% out by the time he
or she is 17.
¡ If you have a child who will enter college in
2009–2010, look into getting a Stafford loan.
¡ If Stafford loans are not enough, parents should
consider a PLUS loan. Signifi cant changes to
this program last year make this a viable option
for many more families.
¡ Stay away from private student loans at all
¡ If you are graduating from college in 2009 with
student loan debt, know your repayment options.
Your 2009 Action Plan:
Paying for College
SITUATION: Your child is set to go to college next
year. Given the shaky state of the stock market,
you want to stop putting money in your 401(k) and
use those funds to pay for your child’s education.
Should you?
ACTION: No, no, no. Your retirement account
must come fi rst.
ACTION PLAN: Paying for College 163
Th is year, there is nothing—and I mean nothing
—that takes precedence over locking in shortterm
security (in the form of an eight-month
emergency savings account) and providing for
long-term security by continuing to invest for your
I am not insensitive to the importance you place
on providing the opportunity for your children to
achieve and realize their greatest potential in life.
And I am aware that it is not an easy thing to do to
ask that your children share the cost of college by
taking out student loans. But it is necessary—
especially now. It could be years before the stock
market fully recovers. Your 401(k) has taken a
beating, but as counterintuitive as it may see m, I
am asking you to kee p buying shares of the investments
that you have in your 401(k) plan. I am
assuming that your money is invested in goodquality
funds and that you are diversifi ed. I’m also
assuming that you have 10 years or longer until
retirement. Here’s why it makes sense to kee p
contributing to your plan: Th e more the market
goes down, the more shares you will be able to buy
of the mutual funds you are invested in, and the
more money you will make when the stock market
comes back.
Most important to kee p in mind is that you
nee d that money waiting for you in retirement. If
it’s not there, you could end up being a fi nancial
burden for your kids. If you fail to save today, what
will you have to live on in retirement? Now, don’t
worry, I am not suggesting you leave your kids
high and dry. As I explain in the following pages,
both your child and you can take out federal loans
to help pay for school.
SITUATION: Your college savings fund took such a
hit, you want to borrow from your 401(k) to cover the
college bills.
ACTION: Don’t you dare. It is never smart to touch
your retirement savings to pay for another expense.
And in 2009 it is doubly risky , given the possibility
of increasing layoff s; if that happens, any outstanding
loan must be repaid within a few months
or the loan is considered a withdrawal. Th at will
trigger income tax on the entire amount you withdrew
and ty pically a 10 % early-withdrawal penalty
if you are not 55 or older when you are laid off .
If you nee d to come up with money for college,
federal loans are the best option.
SITUATION: You want to use IRA savings to pay for
your child’s college tuition.
ACTION: As I said earlier, raiding your retirement
funds to pay for college is not ideal. What will you
live on in retirement? Another potential problem
is that taking an early distribution fr om an IRA
can aff ect your child’s fi nancial aid eligibility ; the
ACTION PLAN: Paying for College 165
withdrawal will be treated as parental income,
and that is a major factor in determining aid. My
advice: Don’t touch your IRA to pay for college.
For those of you who refuse to follow this advice,
I do want to point out that if you withdraw
money early fr om your IRA to pay for college
costs you will not owe the 10 % early withdrawal
penalty ty pically charged by the IRS on withdrawals
made before age 59½. You may, however, owe
income tax on the withdrawn money. Withdrawals
of money you contributed to a Roth IRA will
not be taxed, though earnings may be taxed.
Money withdrawn fr om a traditional IRA may be
subject to income tax.
SITUATION: You told your child you would send her
to a private college, but you lost your job and now
you can’t afford it.
ACTION: Times have changed and so must you.
You have to be more realistic and honest with your
kids than ever before. I want all parents to seriously
rethink what they can aff ord to spend on
college, be it through loans or out-of-pocket savings.
Th e best school for your child is one that provides
a solid education and doesn’t put the family
$150,000 to $200,000 in debt. I have no patience
for anyone who tells me "cost is not the issue—a
quality education is more important." People, cost
is a huge is sue. You can’t aff ord to take on debt that
kee ps you fr om being able to pay your bills or to
save for your retirement. Nor does it make sense
to let your child pile up $100,000 in private student
loans. Student loan debt, in most cases, is not
forgiven in bankruptcy. It is the Velcro of debt;
you cannot shake loose fr om it. Student loan debt
will make it that much harder for your children to
build their own fi nancial security aft er they graduate.
When you have a lot of student loan debt, it
makes it harder to qualify for a mortgage or a car
loan. And I cannot tell you how many smart, wellintentioned
young adults tell me they had no idea
how much their monthly payments would be and
they cannot aff ord to pay them at all.
Kee p an open mind: Look for aff ordable schools,
starting, of course, with your in-state college system.
A quality education is not dependent on price.
You can fi nd a great fi t for your child and your fi -
nances if you make it a priority . Go to Kiplinger.
com and under "Your Money" click on "Best College
SITUATION: You have no credit card debt and your
retirement savings is on track, so you want to start a
college savings fund, but you are not sure about the
best way to invest.
ACTION: A 529 Savings Plan is one of the easiest
and smartest ways to save for future college costs.
Money you invest in a plan grows tax-deferred,
ACTION PLAN: Paying for College 167
and eventual withdrawals will be tax-fr ee if they
are used for "qualifi ed" college costs. Th ere is also
no income-eligibility requirement; all families can
set up a 529, and contributions can come fr om
parents, grandparents, aunts, uncles, fr iends. In
addition to 529 plans, there are indee d other savings
options, such as Coverdell Educational Savings
Accounts and U.S. savings bonds. I highly
recommend you check out the Web site www.; it is hands-down the most
informative site for parents who want to save for
their kids’ future college costs.
SITUATION: You have been putting money into a
529 plan every month since your little one was born.
The stock market scares you these days, so you’re
thinking you should move your money out of your
plan’s stock fund choice and into bonds or cash offered
by the 529 plan. Good idea?
ACTION: Nooo. If you have at least 10 years until
you nee d your money, you have time on your side
to ride out volatility in the stock market. You don’t
want to stop investing in stocks, or pull out of
stocks when you have time on your side; the smart
move is to invest more in your 529 plan’s stock
fund in 2009. Your money will buy more shares of
that fund when prices are low (as they are now).
Th e more shares you accumulate now, the more
money you will make when stocks rebound. If
your child is fi ve years old, you have time on your
side to wait for that rebound.
SITUATION: Big losses in your 529 have you so
worried you want to quit the 529 and move all the
money into a safe bank account.
ACTION: Do not do this, because it can have signifi
cant tax consequences. Money you leave in a
529 that is eventually used to pay for college expenses
is fr ee of federal tax and state income tax
too (except in Alabama, should you use a non-
Alabama 529). But if you pull the money out, you
can be hit with a 10 % penalty tax on any earnings
on that account. Below you will fi nd my recommendations
for the right mix of stocks and bonds
in your 529, based on your child’s age. If you fee l
you simply can’t stand to remain invested in stocks,
then shift the money into a stable-value account
within the 529.
Th at said, I recognize some of you may still fee l
compelled to close the account and withdraw the
money. If you’ve had a heft y loss, there may be a
way for you to deduct nearly all of that fr om your
taxable income, but you will want a trusted tax
advisor guiding you on this. Th e tax break involves
deducting your 529 losses as a miscellaneous itemized
deduction on your income tax return—but
you can deduct those only to the extent that they
excee d 2 percent of your adjusted gross income.
ACTION PLAN: Paying for College 169
Because of the complexity involved in doing this—
especially if your state allowed partial or full income
tax deductions on your contributions, and
the workings of the alternative minimum tax—I
can’t emphasize enough how important it is to get
good advice if you choose to go this route.
SITUATION: Your child starts college in two years
and your 529 is 100% in stocks, so it has taken a big
hit. You don’t know if you should move out of stocks
now to avoid further losses.
ACTION: You should have started moving out of
stocks a few years ago. When your child is within
a year or tw o of fr eshman year, you no longer have
time on your side. You are going to have to start
using that money sooner rather than later, so you
nee d to make sure your money is safe and sound
in the 529 plan’s bond or money market fund. My
recommendation is that you slowly shift money
out of stocks and into bonds starting at age 14.
You goal should be that you are completely out of
stocks by the time your child is fi ve years fr om
senior year in college—ty pically, that is age 17.
Under age 14: 100 % stocks
Age 14: 75 % stocks
Age 15: 50 % stocks
Age 16: 25 % stocks
Age 17: 0 % stocks
If your current allocation excee ds those targets,
I recommend you rebalance your portfolio ASAP.
I wish I could tell you to wait for a nice big rebound
in your portfolio, but you do not have time
on your side. Th ere is no guarantee that the rebound
will come betw ee n now and when you have
to begin writing the checks for college.
Th ose of you who have opted for a fund in your
529 plan that automatically changes its allocation
as your child gets closer to college still nee d to pay
att ention and understand how much you will have
invested in stocks when your child hits 14, 15, 16,
17, and 18. I have see n plans with up to 50 % in
stocks a year or tw o before the child will enter
school. Th at’s unacceptable at any time, and it is
especially risky in 2009, when we have to anticipate
more market volatility .
If you fi nd your target fund overloads on stocks
close to college, I recommend moving out of the
target option, fi nding the best low-cost stock and
bond fund options off ered by the plan, and putt ing
your money in both those funds according to the
strategy above.
SITUATION: You have time on your side, but after
watching your child’s college fund plummet, you just
can’t stomach keeping the entire portfolio invested
in stocks.
ACTION PLAN: Paying for College 171
ACTION: It’s fi ne to move up to 20 % into bonds. A
small amount of bonds will reduce your portfolio’s
overall loss in a bear market, and if that helps you
stay committ ed to investing and helps you slee p
bett er, then it is the right move for you.
SITUATION: You tried to move money out of your
529 plan’s stock fund and into the bond fund option,
but you were told you had to wait until next year.
ACTION: Understand that an IRS rule requires
529 plans to limit participants to rebalancing their
portfolio just once a year. Th e reasoning is that
you can’t be trusted to be a patient long-term investor,
so this rule was meant to kee p you fr om
day-trading your kid’s college fund. As if.
So if you have already rebalanced your portfolio
for 2009, you may have to wait until 2010 to
make your switch out of stocks. Because of this
rule, it is imperative to get your asset allocation
right so you don’t nee d to make any midyear corrections.
As I explain above, once your child is 14
you nee d to start dialing down how much of your
college fund is invested in stocks.
SITUATION: Your family doesn’t qualify for fi nancial
aid (or the aid package isn’t as much as you expected),
but you don’t have money to pay the college
bills this year.
ACTION: First, you nee d to take a dee p breath. I
know it is stressful. I know it is upsett ing. But you
do have options. One of the great misconceptions
is that federal loans are only for students and families
that mee t certain income-eligibility rules.
Th at is absolutely incorrect. In addition to the
many forms of aid and loans that are incomebased,
there are also aff ordable loans available for
students and parents regardless of family wealth
or income. If you fi nd that your school’s fi nancial
aid package for 2009–2010 is not enough to cover
all your costs, you can supplement that aid with
non-income-based loans.
Th e fi rst step is for your child, the student, to
apply for both subsidized and unsubsidized Stafford
loans. Yes, your child borrows fi rst, not you.
Staff ords are the cheapest loan options. If you
want to make a side agree ment with your child
that you will help with the repayment of the Staffords,
that’s fi ne. But please get over any concern
or guilt about having your child borrow fi rst.
If you mee t income-eligibility rules, your child
may qualify for a subsidized Staff ord loan. (It is
ty pically part of a fi nancial aid package you receive
fr om the school.) Subsidized means the federal
government pays the interest on the loan
while your kid is in school. Th e interest rate for a
subsidized loan is 6 % for the 2008–2009 school
year and 5.6 % for the 2009–2010 school year. But
here’s what so many people fail to understand:
ACTION PLAN: Paying for College 173
Anyone, regardless of income, can apply for an unsubsidized
Staff ord. Th e interest rate is fi xed at
6.8 % and interest payments are the responsibility
of the student. Th e student can opt to not pay interest
while in school and have it added to the loan
balance. Here’s a suggestion: If Grandma and
Grandpa want to know how they can help with
school, ask them to cover the Staff ord interest
payments so their grandchild can graduate with a
lower loan balance. If that’s not an option, your
child can work during school and make the interest
payments him- or herself.
SITUATION: How much can you borrow on a Stafford
loan in 2009?
ACTION: Th anks to the emergency federal legislation
mentioned earlier, the amount you can borrow
on a Staff ord (combined subsidized and
unsubsidized) has bee n increased by $2,000 a
year beginning in the 2008–2009 academic year.
Freshmen can now borrow $5,500; sophomores
$6,500; and juniors and seniors $7,500. Children
who are not claimed as dependents by their parents
are eligible for higher amounts.
SITUATION: Your child qualifi es for a subsidized
loan, but you need more money.
ACTION: Make sure your child applies for an un-
subsidized Staff ord, too. Aft er maxing out on the
subsidized loan, your child is eligible for up to another
$2,000 a year in an unsubsidized Staff ord.
Your school’s fi nancial aid offi ce should automatically
alert you to this, but the sad fact is that many
families leave Staff ord money on the table every
year because they don’t understand the rules about
unsubsidized loans.
SITUATION: What do you have to do to apply for
Stafford loans?
ACTION: Th ere is one big requirement for Staff ord
loans (and school fi nancial aid): You must complete
the Free Application for Federal Student
Aid (FAFSA). No FAFSA, no Staff ords. It is not
a fun form to fi ll out, but spending a few hours
wading through all the fi nancial disclosure is
worth it, trust me. Check with the school’s fi nancial
aid offi ce; they are set up to help you navigate
this process.
SITUATION: You have applied for subsidized and
unsubsidized Stafford loans, but you need even more
ACTION: Apply for a Parental PLUS loan, another
federal loan program. Th e parent, not the student,
is the borrower. Th ere is no income limit, and you
can borrow up to the full amount of college costs
ACTION PLAN: Paying for College 175
minus any aid and other loans. Th e interest rate is
a fi xed 8.5 % for most borrowers. (It is 7.9 % if the
school is part of a program that has you borrow
directly fr om the federal government, rather than
using a third-party lender. Only 20 % or so of
schools are part of the Federal Direct Loan program.)
But I want to be clear: You apply for a
PLUS only aft er your child has maxed out on the
Staff ords. A PLUS is a very good deal, but Staff ords
are even bett er given their lower interest rates.
Staff ords fi rst. PLUS second.
SITUATION: You applied for a PLUS loan in 2007,
but you were turned down. Should you apply again?
ACTION: Yes! If you investigated a PLUS loan a
few years ago and didn’t like the terms—or if you
were turned down—I encourage you to take a
fr esh look for 2009. Th e emergency legislation in
May 2008 brought about some very big changes
designed to make PLUS loans a more viable and
aff ordable option.
Th rough December 31, 2009, parents will be
eligible for a PLUS loan as long as they are no
more than 180 days delinquent on a mortgage
payment on their primary residence or medical
bill payments. Previously, the limit was 90 days or
more late on any debt.
Th ere is no FICO credit check per se to obtain a
PLUS loan, but your credit history is reviewed to
check for any "adverse" actions on your credit pro-
fi le. Families that have declared bankruptcy in the
past fi ve years are not eligible for a PLUS loan. In
the past, you also nee ded to be "current" on your
other debt payments (not including mortgage and
medical bills), but recognizing the stress families
are under to juggle expenses in this rough economy,
the emergency legislation gives PLUS lenders more
lee way in forgiving debt-payment slipups. Another
reason I prefer PLUS loans over private loans is
that in the event the parent dies or is permanently
disabled, the debt is forgiven; private lenders are
not required to forgive debt.
SITUATION: You want to take out a PLUS loan, but
you know you can’t afford to pay it back immediately.
ACTION: Don’t worry—you don’t have to. Another
helpful piece of the 2008 legislation is that
parents no longer have to start repaying a PLUS
loan within 60 days of receiving the money. You
can now defer repayment until your child graduates.
Th at means you won’t have to make loan
payments during the four years when you are most
likely using some of your monthly income to pay
for school costs. Th e delay also means that families
can make repayment of the PLUS a family
aff air: Legally, the parent is responsible for repayment
of the loan, but having your child help with
repayment will ease the burden.
ACTION PLAN: Paying for College 177
SITUATION: You want to help with a PLUS loan, but
you are worried about handling the payments over
the long term.
ACTION: Before you agree to take out a PLUS
loan, you must have a serious talk with your child
about how much you expect them to contribute to
the eventual repayment of the PLUS. Th at is an
important and honest conversation to have ahead
of school. It may spur your child to push extra
hard to earn the most money possible during the
summer (or work part time during school) to build
up some reserves. It might also put the cost for
spring break in Cabo—defi nitely a "want," not a
"nee d"—into perspective.
SITUATION: Your child wants you to cosign a private
student loan.
ACTION: Forget private loans and use a PLUS if
you plan to help your kid pay for school.
As a result of the credit crisis, student loan lenders
have become a lot tighter with their money.
Th is is the same issue we discussed in "Action
Plan: Credit." Lenders are now focused on reducing
their risk. So while it used to be easy for students
to take on tens of thousands of dollars in
private student loan debt with litt le (or no) credit
check by lenders, that no longer works. In 2009
(and for the foresee able future), students who
want a private student loan nee d to have a FICO
score of at least 680. Few tee nagers have a FICO
score. So lenders are now insisting that the student
get a cosigner on the loan, and that person
nee ds to have a strong FICO score.
Rather than cosign a private loan, you are far
bett er off applying for a Parental PLUS loan and
making it clear to your child that she is expected
to repay some or all of the loan once she graduates.
Part of my reason for relying on the PLUS program
is a simple practical matt er: Private loans
will not be easily available in 2009 if lenders continue
to have a hard time raising money in the
troubled credit markets. But even if the storm
passes, the private loan skies part, and lenders
start plying your kids with off ers for easy private
loans, I want you to say no. PLUS loans are usually
a bett er choice over private loans. Private student
loans have variable rates, and those rates can
be 1 % to 10 % more than a benchmark index. Even
if you initially qualify for a competitive interest
rate (you’ll nee d a FICO score above 720 to even
have a shot), you run the risk of future rate hikes.
I’ll take the 8.5 % fi xed rate on the PLUS loan,
thank you very much.
ACTION PLAN: Paying for College 179
SITUATION: You just lost your job and you are in no
position to help your kids with their college tuition.
What do you do?
ACTION: Contact the fi nancial aid offi ce at each
school immediately and let them know about the
layoff . Th ere may be more money—aid or loans—
based on your changed fi nancial status. But I want
to be clear: No school is a bott omless pit, and the
sad fact is that many schools—especially public
universities—are fee ling the economic pinch too.
But chances are you may get some extra help fr om
the school. And just to reiterate: Please make sure
your child has maxed out on all available Staff ord
loans. At a maximum fi xed rate of 6.8 %, it is an
aff ordable way to borrow for school.
You can also obtain a PLUS loan, assuming you
are current on your bills, and you can defer payment
until your child graduates. By then you
should be back at work and your child can also
contribute to the PLUS repayment. But I want to
be very clear here: You must limit what you borrow
to what you can truly aff ord. I encourage you
to go to the College Board’s Web site and use its
online calculator to see what PLUS loans you take
out today will cost to repay: htt p://apps.collegeboard.
com/fi ncalc/parpay.jsp It is crucial that you
go through this exercise with your newfound com-
mitment to honesty fr ont and center. If you will
not be able to handle the repayment, do not take
out the loan.
If not taking on debt is honestly what is best for
you, you must not beat yourself up that you cannot
continue to pay for school. I wish I could tell you
to "do whatever is necessary" to kee p your kid in
school right now. But I don’t traffi c in wishful
thinking; I am focused on the realistic actions you
must take to ensure your long-term fi nancial security
. So here’s the bott om line during this very
tough economic time: You may nee d to tell your
kids you can’t kee p paying for school now that
your personal economic situation has changed. If
that means your child nee ds to transfer to a less
expensive school or take a year off to earn money
to cover the costs himself, that is what nee ds to
I understand how diffi cult that is to consider,
but hard times require making hard choices. Taking
on debt you can’t aff ord is never smart; in today’s
world, with the economic outlook so bleak,
you must not take on more than you can realistically
SITUATION: You’re about to graduate and you
doubt you’ll get a job that will pay enough to cover
your student loan payments.
ACTION PLAN: Paying for College 181
ACTION: If you have federal loans, there are a variety
of programs you may qualify for that can
make repayment more aff ordable. And beginning
in July 2009, there is also a new repayment plan
for federal student loans (though not PLUS loans):
Th e Income-Based Repayment Plan will make repayment
aff ordable for graduates who pursue caree
rs in traditionally lower-paying fi elds such as
teaching and public service. Th e best move you
can make is to show up for the exit interview
with your fi nancial aid offi ce and learn about
your options.
Th e worst thing any recent graduate can do is
assume they can "hide" or "ignore" their student
loan debt until they get sett led into a job and have
the cash fl ow to handle payments. Big, big mistake.
Fall behind on your student loans and you
will ruin your credit profi le. You nee d to understand
that student loans are debt, and if you don’t
pay your debts it gets reported to the credit bureaus.
Faster than you can say, "Wow, I am so
screwed," you have a FICO score below 700. In
my book, it’s never okay to have a low FICO score,
but in 2009 it is fl at-out dumb. Yes, dumb. In the
past, even if you had a lousy FICO score you could
still get what you wanted. Th e only hassle is that
you would have to pay more for everything—a
higher deposit for the cell phone, for example, or a
higher rate for a car loan. But in 2009, a lousy
FICO score means big trouble. Lenders, landlords,
and even employers simply won’t want to do business
with you. In a world where everyone is trying
to reduce their risk, a lousy FICO score brands
you as a high risk.
And just to drive home this point: Even if you
declare bankruptcy, your student loan debt in
most cases will not be forgiven. Th is is debt you
can’t outrun.
SITUATION: The job market is terrible and you can’t
fi nd a job, even with your brand-new degree. You
have no clue how you will be able to start repaying
your student loans.
ACTION: With federal loans, you can apply for
an unemployment deferment; if you are working
less than 30 hours a wee k, you will not have to
start repayment. But again, you must apply for
this deferment. If you simply don’t pay, it is going
to start showing up on your credit reports as a delinquency.
If you have a subsidized federal loan,
interest will not continue to build up during this
deferment. If your loan is unsubsidized, interest
does accrue. Your fi nancial aid offi ce can walk
you through all your federal loan repayment options.
You can also can get help at the fi
Web site.
ACTION PLAN: Paying for College 183
SITUATION: You graduated with debt from various
student loans and you wonder if you should consolidate
or not.
ACTION: Consolidating your federal loans is
smart. Th e main advantage is that you can pile together
all your loans fr om the four years of school
into one mega-loan that requires just one monthly
payment. Th is will likely kee p your FICO score in
good shape, because you will fi nd it easier to stay
on top of things with a single payment.
Th e fi xed consolidation rate for all Staff ord
loans issued aft er July 1, 2006, is 6.8 %.
SITUATION: You graduated with private student
loans. Can you consolidate them and defer payments?
ACTION: With private student loans you have
limited options. You are basically at the mercy of
your lender’s repayment policy, and they are not
required to grant any deferments. It’s completely
at their discretion. Moreover, the credit crisis has
all but shut down the private-loan consolidation
market. Right now, that market is all but closed
for private borrowers.
SILVER LINING: Th e $700 billion bailout bill
Congress pas sed in October 2008 restored a college
tax break that had expired. Th rough 2009, you can
deduct up to $4,000 in college tuition and fee s if your
income is below $65,000 for single fi lers (you can receive
a $2,000 deduction if your income is betw ee n
$65,000 and $80,000) and $130,000 for those married
and fi ling jointly (you get the $2,000 deduction
at incomes betw ee n $130,000 and $160,000). You
can claim this deduction even if you do not fi le an
itemized return.
Protecting Your
Family and Yourself
The New Reality
Your job is at risk. Th is has nothing to do with
how talented and well-respected you are, or
the fact that your past three reviews have
bee n gold star. You are at risk for reasons that have
nothing to do with you. Th e double whammy of
the credit crisis and an economic recession increases
the likelihood that businesses will be forced
to cut back on costs, and that could mean reducing
staff . In this environment, just hoping you will be
spared is not the right action. You must take active
steps today to make sure your family is safe no
matt er what happens jobwise in 2009. Th at means
making sure you have savings to pay the bills instead
of running up credit card debt or raiding your
retirement accounts. It also means having health
insurance no matt er what and a game plan for
landing your next job.
It’s important to understand that even if the
credit crisis hadn’t occurred, 2009 was shaping up
to be a tough year for the economy. Our economy is
cyclical in nature—there are periods of strong
growth and periods of slower growth. Slowdowns
are always part of the equation. Th ere is no avoiding
them altogether; rather, the goal is that when they
do hit, it is with a soft punch rather than a knockout.
In an economist’s perfect world, what we experience
is an orderly winding down fr om a period of
faster growth to slower growth that soon transitions
into a new period of even stronger growth. But
sometimes real life is less than ideal. If instead the
economy slows down with a thud—known, in fact,
as a hard landing—we can fi nd ourselves in a recession:
a period where the economy doesn’t just shift
to slower growth, it actually contracts. When that
happens, job losses can be very high as companies
cut positions to reduce costs.
Th e continuing problems caused by the credit
crisis appear to have ruined our chances of a soft
landing in 2009. Unless banks start lending again,
companies that were already girding for a slowdown
in business are going to be in even bigger
trouble. Every business, fr om the 10-person small
company to General Electric, relies on credit.
ACTION PLAN: Protecting Your Family . . . 187
Short-term credit helps businesses pay the bills
and kee ps supplies fl owing while waiting for
clients to pay their bills, as well as enabling fi rms
to fi nance longer-term expansion projects. Longterm
credit is another vital way businesses borrow
to grow. If you want to build a new plant or expand
your business line, you nee d money to pay
for your expansion before you can expect to earn
any money fr om that new business. When businesses
can’t borrow money it greatly reduces their
ability to expand. Without short-term or longterm
credit, a business is going to fi nd it doubly
tough to get through the economic slowdown. I
am not saying we are guarantee d to have a dee p
and hard landing in 2009. But it is defi nitely a possibility
if businesses can’t get credit. And let’s face
it: 2009 is not going to be a great year for consumer
spending; that’s driven much of our economic
growth in past years, but you and I both know
that you are focusing on spending less and saving
more in 2009.
What I do know for sure is that in times like
these, my saying "hope for the best, prepare for
the worst" could not be more apt. You can’t kee p
the bad times fr om happening, but you can kee p
them fr om decimating your fi nancial security .
Th ere are actions you nee d to take now to make
sure that no matt er what happens "out there" this
year, your family will be protected.
What you need to do in 2009
¡ Build a substantial savings account today so
you will be okay if you are laid off.
¡ Do not—repeat, do not—go without health
¡ Shop for private health insurance if you are laid
off; it is often less expensive than COBRA.
¡ Purchase an affordable term life insurance policy
if anyone is dependent on your income.
¡ Make sure you have all your estate-planning
documents in order.
Your 2009 Action Plan:
Protecting Your Family and Yourself
SITUATION: You are worried you may lose your job
in 2009.
ACTION: Prepare for it. As I write, the unemployment
rate has already crept up fr om less than 5 %
in 2007 to 6.5 % in October 2008. If we in fact fall
into a hard landing, I would not be surprised to see
unemployment rise to 8 % or even 9 %.
Th e best way to protect your family is to know
that you will still be able to pay the bills while you
look for a new job. Because of the weak economy,
that could take longer than you may think. Th at is
why it is imperative that you build an emergency
ACTION PLAN: Protecting Your Family . . . 189
savings account that can cover your family’s living
expenses for eight months. I know that is a lot, but
you have got to start saving as much as you can
right now. In "Action Plan: Spending," I review
the steps you and your family can take to rein in
your spending today so you have more money to
put into a safe savings account.
And if you fl ew past the Action Plans for credit
and real estate, I want to make sure you are up to
spee d on the fact that you may not be able to tap
your credit card or a home equity line of credit to
pay your family’s bills in the event you are laid off .
Lenders are not in the lending mood these days. I
cannot be more emphatic: You must have savings
set aside to be truly safe in 2009.
You also want to start your job hunt right now—
while you still have your current job. Netw ork like
crazy, show up at industry conferences, and take a
look at job postings in your fi eld. If there is any
specifi c skill mentioned that you are not up to
spee d on, get yourself schooled on it ASAP. In a
slow economy, employers won’t hire someone who
mee ts 80 % of their nee ds; they have such a large
pool to choose fr om that they can fi nd the person
who mee ts 100 % of their nee ds. Make sure that
person is you.
SITUATION: You fi gure you will get by on unemployment
benefi ts if you are laid off.
ACTION: You will still nee d to supplement that
money with your own savings. Th e reality is that
your maximum unemployment benefi t ty pically
will replace less than 50 % of your lost wages.
Th ere is also a time limit to those payouts; 26
wee ks is the standard amount of time you are eligible
to collect unemployment. In harsh economic
times, Congress can vote to extend the benefi t period
for an additional 13 wee ks. (Unemployment
is handled by your state, based on general standards
set by federal law.)
To fi nd out your state’s rules, go to www.servicelocator.
org and click on the "Find Unemployment
Insurance Filing Assistance" link on the left
side of the page.
SITUATION: You plan to use your credit card or
HELOC to cover your expenses if you lose your job.
ACTION: You must have money set aside in a regular
bank savings account or money market account
in 2009. Th e lines of credit you have relied
on in the past may not be available this year; without
your own savings set aside, you could face a
serious cash crunch if you are laid off and have no
way to pay the bills.
Here’s what you nee d to understand: Lenders
are one step ahead of you. Th ey, too, are worried
that you will lose your job in 2009, and they are
not fools. Th ey know if that happens you will then
ACTION PLAN: Protecting Your Family . . . 191
use your credit card or HELOC to cover your bills,
and because you don’t have a job, that increases
the likelihood that you won’t be able to kee p up
with the payments on that borrowed money. Th at’s
very bad for their business, and let’s just say they
are extra sensitive right now given the bad shape
they are already in. So, to head off this problem,
lenders have bee n cutt ing back on what they allow
customers to borrow. Credit card lines are being
reduced, as are HELOCs.
If you haven’t see n your credit lines change yet,
don’t think you can skate through because you
have a sparking FICO score and a solid credit history.
If you suddenly start to run up a balance on
your credit card or tap a HELOC line you opened
three years ago, that is going to set off warning
bells for the lender, and you could very well see
your credit lines disappear—just when you nee d
them the most. Th e only safe alternative in 2009
is to have cash set aside in a savings account.
SITUATION: You plan to make early withdrawals
from your 401(k) if you are laid off and can’t pay your
ACTION: Try as hard as you can not to touch your
retirement savings. What see ms like a reasonable
action to help you get through problems today will
devastate your long-term security . You nee d that
money for retirement; spend it today and you will
have less tomorrow. And don’t tell me you will
worry about that later, or you will boost your savings
when you get another job. Even the best of
intentions to make up for the withdrawals can run
into harsh realities: Your next job may not pay
enough to allow you to save to make up for your
early withdrawal. (Th at said, if you fee l you are
out of options and nee d to raid your retirement
funds to get by, please review my advice in "Action
Plan: Retirement Investing" about how you
may be able to take money out of your 401(k)
without having to pay the ty pical 10 % early withdrawal
penalty .)
Th ere is one important action I want you to
take with your 401(k) if you are laid off in 2009:
Roll over the money into an IRA at a brokerage or
mutual fund company. As I explain in "Action
Plan: Retirement Investing," rolling your money
into an IRA gives you access to the best low-cost
mutual funds and ETFs, rather than limiting
yourself to the investment choices in your 401(k).
And because of the stee p market declines, if you
qualify to roll over your money into a Roth IRA in
2009 you will get a great tax break.
SITUATION: You don’t have money to set aside in
ACTION: Get serious about fi nding ways to come
up with real savings—right now. Th is is non-ne-
ACTION PLAN: Protecting Your Family . . . 193
gotiable: You must build up a savings reserve. In
"Action Plan: Spending," I explain how you and
your family can (and must) adjust to the new realities
of 2009 to fi nd ways to reduce your expenses
—or increase your income—so you have
money to put toward important fi nancial goals.
And in 2009, there is nothing more important
than building an emergency savings fund that can
carry your family for eight months.
SITUATION: You dropped health insurance coverage
through your employer in 2009 because it was
too expensive and you are healthy.
ACTION: Get insurance now. If you can’t get it
fr om your employer, shop for your own policy. I
don’t care how healthy you are today. It’s tomorrow
I am worried about, and you and I both know
a serious accident or sudden illness is always a
possibility . Remember: Hope for the best, prepare
for the worst. You nee d to understand that many
of the families that end up fi ling for bankruptcy
did so because they had unexpected medical bills
that were impossible to pay off . Having health insurance
reduces your fi nancial burden if anyone
in your family becomes severely ill or injured.
Now, the truth is, insurance doesn’t absolutely
protect you fr om bankruptcy. Th e sad fact is that
even people with insurance end up in bankruptcy
because of high copays and costs that aren’t cov-
ered. But the point is that insurance off ers you
some protection, whereas without insurance you
have no protection.
I appreciate how expensive it is. Employers have
bee n increasing charges to employee s for their coverage;
that can mean higher premiums, higher copays,
or reductions in the scope of coverage. Th is is
happening because health insurance costs kee p
rising at a rapid rate and companies are hardpressed
to shoulder the cost, and also because
businesses fee l the pressure to boost earnings (or
minimize losses). Shift ing more benefi t costs onto
employee s helps the corporate bott om line.
Regardless of cost, you must have some insurance.
If your old plan is too expensive, you should
have shopped around for less expensive options
within the plan. Th e reality is that because you
turned down coverage during the open-enrollment
period, ty pically in the fall, you may be shut out
fr om restarting your coverage until the next enrollment
period. (Certain exceptions apply for
new employee s and employee s with life-changing
events, such as a divorce or job change; check with
your human resources department.) If that’s the
case, I am asking you to get short-term coverage
through a private plan until you are eligible to get
back on your company’s plan.
ACTION PLAN: Protecting Your Family . . . 195
SITUATION: You want to wait to see what options
you may have if Washington passes health care reform
in 2009.
ACTION: Don’t wait for Washington to save you.
You nee d protection right now. It could be months
or years before any meaningful legislation is
passed, assuming anything is passed. Moreover, it
is unlikely that any swee ping reform would go into
eff ect immediately. Typically, there is a transition
period of many months. In the interim, you nee d
insurance. You can always drop it if and when we
have reform. Th at’s one nice thing about health
insurance: You pay your premium monthly, rather
than annually. So you can drop the coverage
whenever you want.
SITUATION: You don’t know where to fi nd affordable
health insurance.
ACTION: Go to, the largest
online resource for health insurance. If you prefer
to work with an agent, the National Association
of Health Underwriters ( has an online
search tool to give you leads on agents who help
clients fi nd individual health insurance policies.
As you shop, realize that the group plan at your
old job probably included a full menu of broad
coverage—including mental health and maternity
benefi ts, prescription drug coverage, and so on—
that you may not nee d. Shop for a policy that provides
only the specifi c coverage you nee d to kee p
your premium cost as low as possible.
SITUATION: You were laid off and can’t afford the
COBRA rate for your company’s health insurance.
ACTION: Shop for less expensive health insurance.
But do not—repeat, do not—go without health
insurance. You can’t aff ord to be uninsured. What
if someone in your family becomes ill or is in a
serious accident in 2009?
has created a Web site specifi cally for people who
have bee n laid off ; it includes a calculator to help
you see what alternatives to COBRA might cost:
SITUATION: You wonder whether you should keep
the health insurance from your former employer or
shop for a private plan.
ACTION: In many cases, a private plan will be less
expensive than staying on your company plan.
Here’s what you nee d to know: Every employer
with more than 20 employee s that off ers health
insurance is required by the federal COBRA regulation
to allow employee s who’ve bee n laid off to
ACTION PLAN: Protecting Your Family . . . 197
stay on the company plan for 18 months, with one
very big catch: Th e employee is responsible for
100 % of the cost of the plan, as well as an extra
2 % to cover administration costs. Th at is not just
100 % of your normal premium when you were an
employee , but 100 % of the total cost, including
what your employer used to pay on your behalf. So
that can be a lot more than you were paying as an
employee .
SITUATION: You were let go and you have a preexisting
health condition. You worry that you will not
qualify for a private plan or it will be too expensive.
ACTION: Stay on the company plan through COBRA,
but get a private insurance plan for your
family. Assuming your family is in good health,
the cost of a private insurance plan for them will
be less than continuing their coverage through
At the same time, fi nd a health insurance broker
with extensive experience working with clients
with pree xisting conditions. (Go to
to fi nd a list of agents in your area.) Diff erent insurers
have diff erent policies; you want to work
with someone who will shop around to locate a
plan that may work for you. If you can’t secure a
private policy, you may have to opt for coverage
off ered through your state. Th is can oft en be very
costly, so it is defi nitely to be used as a last resort.
You can fi nd links to your state insurance department
at (National Association of Insurance
SITUATION: You were told your state doesn’t offer
coverage to all residents.
ACTION: Stay on COBRA for as long as possible
and lean on lawmakers for health care reform. I
am sorry to say that there are indee d many states
that do not have any last-resort coverage available
for residents who can’t qualify for an individual
private policy. Just fi ve states—Maine, Massachusett
s, New Jersey, New York, and Vermont—
have programs in place that off er guarantee d
insurance at all times and to all residents. In
Rhode Island, North Carolina, and Virginia (and
in some instances Pennsylvania), you may be able
to get last-resort coverage if you have bee n turned
down for private policies. Contact your state
health insurance commissioner’s offi ce to fi nd out
what’s off ered where you live; or look up your
state’s health insurance options on www.coverageforall.
SITUATION: You lost your job and the only new job
you have been offered doesn’t come with health
benefi ts.
ACTION PLAN: Protecting Your Family . . . 199
ACTION: Do not base your job search on health
benefi ts. Take the job and shop for your own individual
policy or continue on your old employer’s
plan through COBRA. But you nee d to choose
COBRA coverage within 60 days of being noti-
fi ed you were COBRA-eligible; if more time has
already passed, you have lost your right to stay on
your old employer’s plan.
SITUATION: You were laid off and want to go back
to school so you can change careers.
ACTION: Get a job; school can wait. I am all for
changing caree rs—hey, I spent my fi rst seven
years aft er college working as a waitress—but I
am always suspicious when I hear someone tell me
they want to go back to school right aft er they
were laid off . It becomes this nice safety blanket to
wrap yourself in, rather than dealing with a tough
job market. But if you haven’t really thought
through what your new caree r is and you haven’t
fi gured out a fi nancial plan for how you will pay
for school, then it becomes a lousy idea. What are
you going to live on while you go back to school?
Don’t think you can touch your emergency savings
plan. Th at’s for emergencies. Going back to
school is not an emergency. It is a choice. Plan on
taking out loans? Okay, but again, what are you
going to live on while you are in school? Credit
cards? Th at’s never a good idea, and as I explain in
"Action Plan: Credit," it may not even be possible
in 2009.
A caree r change can be the best move you will
ever make, but it requires careful planning. I say
focus on gett ing another job right now, even if it’s
just for a year or so, while you carefully plan your
new caree r and build up your savings so you can
aff ord to go back to school.
SITUATION: You were laid off after 20 years with
the same company. You are having a hard time fi nding
a new job at the same salary and level of responsibility.
ACTION: Be realistic. What you made at your last
job is somewhat irrelevant. What employers are
willing to pay today for the job they have today is
what really matt ers. For people who have spent a
lot of time at one company, this is a tough concept
to accept. But it is vitally important, especially
when we can expect a tough job market in 2009.
People who have bee n with the same company
for many years may have developed special skills
particular to that company or industry, and they
may have bee n well compensated for that expertise.
But there is no guarantee your next employer
nee ds those very skills or values them as much as
your former employer did. Th ese are not boom
times; you can’t set your price and then wait pa-
ACTION PLAN: Protecting Your Family . . . 201
tiently for the right off er to come around. In tough
times, you take the best off er available and appreciate
that you have a job that allows you to support
your family. If that means your family nee ds
to get by on less income, well, that’s just another
reality to face in 2009. In "Action Plan: Spending,"
I have advice on how families can make more out
of less.
SITUATION: You received a four-month severance
package and plan on taking two months off to relax
and regroup before beginning your job hunt.
ACTION: I wouldn’t do it. Sure, take a few wee ks
to decompress and refr esh. But given the slowdown
in the economy, you nee d to start the job
hunt sooner rather than later. It could very well
take a lot longer than you expect.
SITUATION: You have life insurance through your
employer. What happens to it if you are laid off?
ACTION: Whether you’re laid off or not, I want
you to get your own coverage. I have never recommended
relying on employer-provided life insurance.
If your employer provides coverage for fr ee ,
chances are you are woefully uninsured; employerprovided
life insurance is ty pically equal to one or
tw o times your annual salary. I recommend 10 to
20 times to fully protect your family. Even if you
buy extra insurance through your employer, it can
oft en be more expensive than what you can get on
your own; that’s because you are paying a group
rate based on all employee s—young, old, healthy,
not so healthy.
Another problem is that when you are laid off
you eventually (within 18 months) nee d to convert
to your own policy. And there is no guarantee the
insurer who off ered you group coverage will off er
you an individual policy or one that is the least
SITUATION: You haven’t bought life insurance because
you can’t afford to.
ACTION: If there are people in your life who are
dependent in any way on the income you earn,
then you can’t aff ord not to have life insurance.
Seriously, what will happen to them if you die prematurely?
Be it young kids, older parents who require
fi nancial assistance, or a sibling you help
out—if you do not have suffi cient assets your dependents
can live off of, you nee d life insurance.
I think you will also be surprised by how remarkably
aff ordable term life insurance is. A $1
million 20-year term policy for a healthy 45-yearold
woman can cost less than $125 a month.
ACTION PLAN: Protecting Your Family . . . 203
SITUATION: You’re not sure if you should get term
insurance or whole-life insurance.
ACTION: For the vast majority of us, term insurance
is all that is nee ded.
As its name implies, term insurance is a policy
for a specifi c period of time, the term. If you die
during the term, your benefi ciaries receive the
death benefi t (payout) fr om the insurer. And here’s
what you nee d to know: Chances are you have
only a temporary nee d for life insurance. You
nee d insurance while your kids are young and
dependent on you; once they are adults, they
will be fi nancially independent. You nee d life insurance
if you have yet to build up other assets
(home equity , retirement investments) that will
support your dependents when you die. Once you
have those assets in place, it is less likely your surviving
spouse or partner would nee d income fr om
a life insurance policy in the event you pass away
fi rst.
Many insurance agents will tell you term is not
enough. Th ey will tell you that you want a permanent
policy that never expires. Permanent policies
come in a few diff erent fl avors: whole life, universal
life, and variable life. I want to repeat: If your
nee d for insurance is temporary—say, just until
your youngest is through college—you absolutely
do not nee d a permanent policy. And you will
nee dlessly spend tens of thousands of dollars more
for a permanent policy than a term policy.
SITUATION: You don’t know how to shop for term
ACTION: You can shop online;
and specialize in working with individuals
who nee d term insurance. You will be
asked to fi ll out a comprehensive workshee t of
your income and assets as well as your expenses
and debt. How much life insurance you nee d depends
on those factors. If you want to be absolutely
sure your family will be fi nancially well off
if you die prematurely, I would consider buying a
policy with a death benefi t equal to 20 times your
family’s annual income nee ds. Full disclosure:
Th at is more than double what many insurance
agents may recommend. You can indee d help your
family tremendously with a smaller amount of
coverage, but I am asking you to consider 20× for
absolute peace of mind. If your death benefi t is
20× your family’s annual nee ds, they can take the
payout and invest in conservative bonds (such as
insured municipal bonds) and live off the principal
amount. If your death benefi t is smaller, they will
eventually nee d to dip into the principal and it
could sharply reduce how long the money lasts.
ACTION PLAN: Protecting Your Family . . . 205
SITUATION: You have a term life insurance policy,
but you’re worried your insurer will go out of business.
ACTION: Know that your state insurance department
will be looking out for you. Th e insurance
department oversee s a state guaranty association
that provides coverage (up to the limits spelled out
by state law) for policyholders of insurers licensed
to do business in their state. In the case of life insurance,
the guaranty association and state insurance
commissioner will aim to have a healthy
company take over the policies, so you will not see
a change. You can fi nd out how the guaranty system
safety net operates in your state by visiting
the National Organization of Life & Health Insurance
Guaranty Associations’ Web site: htt p://
SITUATION: You can’t sleep at night because you
are so worried about what the world will look like for
your children.
ACTION: Focus on what is in your control; make
sure you have truly protected your family by having
all essential estate-planning documents in place.
I know these are scary times, and it is sobering
to wonder how long it will take for America and
the global economy to work their way back to fi -
nancial health. But I remain confi dent that with
time we will get back on our fee t. To invoke the
analogy I made in the fi rst chapter of this book,
we are in the ICU right now, but with time we will
make a full recovery.
What always amazes me is that oft en people
who worry about the fate of our economy fail to
protect their own family. I have to tell you, the
bigger risk to your family is not what happens
with GDP growth over the next tw o quarters; it is
how well you have prepared your family in the
event you become ill or die.
SITUATION: You aren’t sure what estate-planning
documents you need.
ACTION: You nee d a revocable living trust with
an incapacity clause, as well as a will. Read that
again. A will is not enough. I want you to also have
a revocable living trust. And you nee d tw o durable
powers of att orney—one for health care and one
for fi nances. A power of att orney designates someone
you trust to carry out your aff airs in the event
you become unable to handle matt ers on your own.
Your health care power of att orney will be your
"voice" in medical decisions if you are unable to
speak for yourself, and the fi nancial power of attorney
can handle your bills and fi nancial aff airs.
You also nee d an advance directive that spells out
your wishes for the level of medical care you want
should you become too ill to speak for yourself.
The Road Ahead
I began this book with the recognition that it is
absolutely understandable for you to fee l fear,
anger, and confusion as you struggle with the
repercussions of the global fi nancial crisis.
However, I believe that the very severity of the
crisis means that we will choose to make lasting
changes that will put us on a path to a healthier
and more vibrant future. Crises force us to take a
clear-eyed view of what went wrong and compel
us to make necessary adjustments to avoid the
same pain and suff ering again.
Th e period of refl ection we are in right now has
forced us to focus on a diffi cult reworking of our
relationship with money. Th e era of living beyond
our means is giving way to an age of living a more
meaningful life based on fi nancial honesty .
As painful as this transition period is, please
know that what awaits us is a very bright future.
Our economy is suff ering fr om a credit crisis, not
a crisis of talent or drive. From the innovation that
will continue to spill out of Silicon Valley to the
reinvention now being discussed to transform our
energy sources, I remain convinced that this is
still a nation of unwavering discovery and achievement.
Short term we have to survive the credit crisis
and recession; long term we will prevail and we
will thrive again.
Your job right now is to do the right thing when
it comes to your money—to make a plan, to stick
to it, to become a saver not a spender, to set a goal
to live a debt-fr ee life. I ask that you never forget
the painful lessons that 2008 taught us. I ask
you to remember these three things:
When it comes to money, if it sounds too good to be
true, it is .
If you cannot aff ord it, do not buy it.
Always choose to do what’s right, not what’s eas y.
My hope is that reading this book has given you
an understanding that you are a huge part of the
solution to your current problems. Despite the
turmoil, despite the adversity , you have to recognize
just how much is within your control. A secure
fi nancial future is in large part going to be a function
of how willing you are to take action today. It
won’t appear out of thin air, it won’t be legislated
The Road Ahead 209
for you by Washington. It will grow out of the actions
you take each and every day for the rest of
your life.

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