Read Suze Ormans Book

1
2009:
The New Reality
I bet you are scared. Angry, too. And confused.
Th ese are absolutely rational and appropriate responses
to the global credit crisis that erupted
in 2008 and continues to send tremors through
every household in America. And I do mean every
household. No matt er how conscientious you have
bee n with managing your money, the events of
2008 have batt ered us all.
Th e one in 10 homeowners who are at risk of
facing foreclosure on their homes are obviously
scared, but so too are the 9 out of 10 homeowners
who can aff ord their mortgage but are watching
plummeting home values jeopardize their fi nancial
security .
It’s not just the overreaching Wall Stree t fi rms
who are paying the price for those risky investments.
Every U.S. taxpayer is now on the hook for
2 SUZE ORMAN’S 2009 ACTION PLAN
a massive bailout—a bailout enginee red by the
same players in the federal government that had
turned their back on regulating the very practices
at the root of today’s fi nancial crisis. Angry? You
should be.
But wait—it gets worse: Th e colossal miscalculations
on Wall Stree t have contributed to a massive
decline in the value of your 401(k) and IRA.
Years of diligent saving have bee n wiped out, and
you are afr aid that your retirement accounts will
never fully recover.
Early predictions that the fallout in the consumer
credit markets would be limited to subprime
lending to borrowers with low credit scores
proved terribly wrong. Th e truth is that credit
lines are being ree led in and home equity lines of
credit are being rescinded across the board as
banks worry that their clients—even those with
solid payment histories—won’t be able to kee p
up with the bills if the current crisis turns into a
dee p recession. A sparkling FICO credit score is
no longer a guarantee that you will land a mortgage
or car loan with decent terms. Right now
lenders are more interested in kee ping any available
cash on their books, rather than out on loan.
Th ere is also a growing sense that repercussions
fr om the credit crisis will turn what might have
bee n a moderate economic slowdown in 2009 into
an especially dee p recession. If that scenario plays
out, businesses will likely announce more and big-
2009: The New Reality 3
ger layoff s than we saw in 2008, when unemployment
rose fr om 4.9 % to 6.5 % at the end of October.
In 2009, your job may be on the line as your employer,
or your own business, struggles with the
fallout fr om the credit crisis.
Th at’s a daunting platt er of problems to contend
with. Did I say daunting? What I meant was overwhelming.
As the economic outlook grew more troubling,
I came to the realization that I had to write this
book and get it published quickly. You want to do
what’s right, but it’s no longer clear what right is
anymore. Or perhaps you are someone who always
fi gured you had time to deal with the money
issues in your life later. Th e credit crisis has woken
you up; later is now—but where do you start?
Th is book’s title is a promise. Th is is my Action
Plan for every important fi nancial move you nee d
to make in 2009. Follow the advice here and you
will know exactly what you nee d to do to adapt to
the new post-meltdown reality . Just as important,
you will know what not to do. In times of great
stress, it is natural to react by making decisions
and taking actions that bring instant relief. When
it comes to fi nancial matt ers, oft en the decisions
that calm us amid tumult are actions that can imperil
our long-term security . In the pages that follow,
I will tell you when to act and when to leave it
be—which will, in some cases, require a litt le bit
of faith and nerves of stee l, but I promise I will
4 SUZE ORMAN’S 2009 ACTION PLAN
never stee r you wrong or put your dreams of a secure
future in peril. You can count on me.
Accent on Action
I want to be very clear about something that is
central to my Action Plan: You must commit to
actually taking action. Th is is not a book to be
read and pondered. Or fi led away under "Nice to
know; I’ll get to it." If you care about fi nancial
security for yourself and your family, if you want
to do everything in your power to protect yourself
and your future, you will not get there with
wishful thinking or procrastination. You cannot
sit this one out, hoping that the storm will pass
and everything will be just fi ne. If you do nothing,
I am sorry to say you may be in even dee per trouble
in 2010. Th e fact is, the new reality requires new
strategies. Th ey will not necessarily be wholesale
changes in every aspect of your fi nancial life, but
tactical actions to make sure you do not let the
credit crisis knock you off course.
Some of the most crucial actions require pushing
yourself to stay committ ed to all the smart
moves you have already made but may now be
questioning. I know many of you are thinking
there is no point in continuing to invest for retirement
as long as the markets are down. Big, big
mistake. Now is an incredibly smart time to invest
for retirement, because the markets are down—
2009: The New Reality 5
assuming, of course, you have at least 10 years
until you will nee d that money. Same goes for your
529 college savings plan for a young child.
Th ere is to be no curling up in a fetal position on
the couch in 2009 hoping that when you emerge
the crisis will have passed. No assuming that there
is a government bailout or Wall Stree t rally right
around the corner that will fi x everything for you
without any eff ort on your part. You will have to
get off the couch and take control of your fi nancial
life in 2009. Make that commitment this year
and you will build a solid fi nancial foundation that
you can stand on when everything around you is
crumbling and that you can build on when the
good times return.
We Will Survive
As we continue to claw our way out of the credit
crisis while contending with an economic recession,
I nee d you to be able to see the big picture:
Th ough these are rocky times, our economy will
be fi ne. Our markets will recover. We will all survive.
Th at said, I want to be very clear: Th e recovery
is not going to be quick or easy.
Our economy is like a patient who was rushed
to the hospital in critical condition. Aft er months
of aggressive intervention (by the Federal Reserve,
the Department of Treasury, and Congress), the
patient is still in the Intensive Care Unit, but the
6 SUZE ORMAN’S 2009 ACTION PLAN
prognosis is that eventually there will be a full recovery.
In time, the patient will move into a rehabilitation
facility and start to get back on his or her
fee t. Before too long, the patient will be stable
enough to go home, though it might be years before
he or she is back to full health.
When exactly will that be? Th at’s impossible to
say with any certainty . My sense is that we could
be in for a long, slow period of recovery and it
will be 2014 or 2015 before the economy is back
in robust good health. Betw ee n now and then, we
could see parts of our economy get bett er faster
than others, and certainly some regions will start
their housing rebound before others. I also expect
there could be large market rallies throughout
a rocky recovery. It is also important to
understand that the stock market is very diff erent
than the economy. Just because the market rallies,
it doesn’t mean the economy is healthy. But in
terms of when we will see a lasting and consistent
return to growth, well, I wouldn’t be surprised if
that takes fi ve years or more.
So if we’re not going to see a quick turnaround
of the economy in 2009, why am I insisting that
you take action? Precisely because we are in for
tough times. You nee d to protect what you have.
Protect your family. And protect your chances
of still reaching your long-term goals. Let’s face
it, in the past you didn’t really have to work too
hard at building fi nancial security . You plowed
2009: The New Reality 7
money into your 401(k) and IRA in the 1990s and
you watched the market post an annualized gain
of 18 %. At that rate, you fi gured early retirement
was a distinct possibility . Th en, in 2000, the real
estate bubble began and you got used to annual
price gains of 10 % or more. It was easy to fee l like
you had it made.
And yet here we are. Th e major stock market
benchmark indexes have fallen back to where they
were in 1998. Home values, on average, have already
slid back to their 2004 levels, and I expect
we have more downside to get through before
real estate stabilizes. My point is, you just can’t
show up and expect easy market gains to get you
where you want to go. Th e days of easy money are
long gone.
But, my fr iends, haven’t I always said that
when it comes to your money, it’s not about doing
what’s easy—it’s about doing what’s right? Th e
plan in this book is going to help you do what’s
right. You can read this book cover to cover, go
directly to the topic that worries you the most, or
skip around as you see fi t. No matt er how you
approach it, the goal is for you to make the right
moves in 2009 to alleviate the stress, fear, and
anger you’re fee ling and replace it with the secure
sense that you have done what it takes to protect
yourself, the money you have worked so hard for,
and the ones you love.

8
A Brief History
of How We Got Here
By now you probably have some sense that
back in 2007 the fi nancial crisis began because
a sizable number of homeowners
started to fall behind on their mortgage payments.
But you may be wondering how it is that a relatively
small portion of people who failed to make
their mortgage payments could bring the global
economy to its knee s.
Th e short answer, in my opinion, is gree d. Too
many people were more interested in making a
quick buck than making sound fi nancial decisions.
Mortgage lenders stopped caring whether borrowers
were actually qualifi ed to buy a home and gave
out loans to practically anyone who applied. Wall
Stree t banks and hedge funds stoked the lenders
to give out those loans so they could then turn
around and make tons of money off of them with
A Brief History of How We Got Here 9
newfangled investing schemes. And while some
borrowers were indee d too confused or clueless to
understand their mortgages, others knew exactly
what they were doing and didn’t care that they
were buying homes they couldn’t aff ord. Plenty of
gree d to go around.
It wasn’t always this way. Not all that long ago,
if you wanted to get a mortgage you showed up at
the bank armed with a few years of tax records
and pay stubs to verify your income, as well as
proof that you had enough savings to make a down
payment of 20 %. Th e lender then took time to review
your fi nances carefully, making sure there
was indee d plenty of income to comfortably cover
the mortgage, property tax, and insurance, and
that you were not overly burdened with other debt
payments. Th e only choice you had was a 15-year
fi xed-rate mortgage or a 30-year fi xed-rate mortgage.
Th ere was no guesswork about what would
happen to your interest rate in the future, no such
thing as an adjustable-rate mortgage (ARM); if
a lender agree d to give you a mortgage, you both
knew what your payments would be for the life of
that loan. If the loan was approved, the bank was
bett ing that you would have the ability to repay
it on time for the duration of the mortgage. If a
lender didn’t think you were likely to kee p paying
the mortgage for 30 years (or until you sold the
home), you were denied the mortgage. It was that
simple. Th is protected the bank, and it protected
10 SUZE ORMAN’S 2009 ACTION PLAN
the borrower fr om taking debt they could not
aff ord.
Th e relationship betw ee n the bank and the borrower
began its seismic shift in the early 1980s.
Th is is where Fannie Mae and Freddie Mac come
into our story. Fannie was created in 1938 and
Freddie followed in 1970; both were governmentsponsored
enterprises (GSEs)—they weren’t fullblown
federal agencies, but they had the aura
of being government-backed. Both GSEs had a
straightforward mandate: to increase the amount
of money available for mortgages. Th ey did this
by buying mortgages fr om lenders so the lenders
would then have more money to lend. Fannie and
Freddie packaged loans that they held in their own
portfolios, as well as guarantee ing mortgages that
Wall Stree t could then package and sell to investors.
Th is entire process is what spurred homebuying,
because the lenders had more money to lend
to potential homebuyers, which allowed more and
more people to buy homes.
At this point it became increasingly likely
that the original lender would not hold on to the
mortgage, but would instead sell it to a loan packager
such as Fannie or Freddie (or their less-wellknown
cousin, Ginnie Mae) and Wall Stree t fi rms.
Still, mortgage-backed securities had a very good
reputation—they were new income products that
were backed by solid mortgages. Lenders were
still careful to make loans only to borrowers who
A Brief History of How We Got Here 11
could mee t their high standards. It is important to
note that the business of packaging mortgages—
what’s known as securitization—in itself is not
bad. It is, in fact, an important and positive innovation
for fi nancial markets. Th e problem began
around the beginning of the tw enty -fi rst century,
when Wall Stree t and gree dy lenders cooked up a
scheme that took a good idea and turned it into a
toxic time bomb, with a major assist fr om the Federal
Reserve.
Once the technology stock bubble began to de-
fl ate in early 2000, Federal Reserve chairman
Alan Gree nspan att empted to kee p the economy
fr om slipping into a severe recession by slashing
the Federal Funds Rate. From 2000 to 2004, the
rate fell fr om above 6 % to 1%. In such a low-rate
environment, Wall Stree t set out to create an investment
that was perceived to be safe and would
off er higher yields than basic bank CDs and
money markets were off ering. Th e too-smart-forour-
own-good minds of the fi nancial sector set
their sights on the quiet and somewhat staid world
of mortgage-backed securities. Rather than only
packaging plain-vanilla mortgages that had bee n
taken out by well-qualifi ed borrowers, they realized
there was a lot more money to be made by
expanding the market to include mortgages that
had bee n made to people who were not well quali-
fi ed. Mortgages made to people without good
credit were known as subprime mortgages. Wall
12 SUZE ORMAN’S 2009 ACTION PLAN
Stree t insisted it had come up with a way to package
subprime mortgages with solid mortgages that
would give investors a higher yield, but with no
added risk. Wall Stree t bundled the prime and subprime
mortgages together in one investment, called
a Credit Default Obligation (CDO). Mortgagebacked
CDOs were supposed to be low-risk because
of how they pooled and divided the risk of
the underlying mortgages.
But Wall Stree t wasn’t done with its great
mortgage-backed money grab. It also started
churning out massive amounts of Credit Default
Swaps (CDS) tied to mortgages. Th e CDS were
insurance that promised investors in mortgagebacked
securities that they would be paid even if
an underlying investment (your mortgage) went
into default. Wall Stree t was also able to make
massive bets on mortgages using CDS.
Now I nee d to take a quick detour and mention
another important player in this crisis: leverage.
Not only was Wall Stree t allowed to create these
credit default swaps and other so-called safe investments,
they also were allowed to leverage
those investments to create more and more money
for themselves. When you leverage, you are borrowing
money in order to have more money to invest.
Here’s an example: Say you have $1 of your
own, but someone gives you $2 so you have $3 to
invest. If your investment pans out, you simply return
the $2 with interest, but you get to kee p all
A Brief History of How We Got Here 13
the profi ts fr om your $3 investment. Th at’s a lot
more profi t than if you had just invested $1. Wall
Stree t has used leverage for years, but during this
mortgage craziness, it talked federal regulators
into allowing it to borrow up to $30 or more for
every dollar it actually owned. And Wall Stree t
fi rms leveraged themselves to the hilt to make big
bets on mortgage-backed securities and all sorts
of schemes, including credit default swaps.
With their ingenious moneymaking scheme in
place, the only remaining obstacle for Wall Stree t
and the lenders was how to ramp up the numbers
of subprime borrowers. Th is is when we started
see ing an array of unconventional mortgages, such
as interest-only mortgages, negative-amortization
mortgages, payment-option ARMs, and 1-year
ARMs with artifi cially low initial payments.
(Interest-only mortgages and payment-option
mortgages, tw o of the riskiest and insane ty pes of
ARMs, grew fr om 2 % of the mortgage market in
2003 to 20 % in 2005.) And all you nee ded to qualify
was a heartbeat. No down payment? No problem.
Nor did borrowers nee d to cough up tax
returns or pay stubs to verify their income. Th at
was so tw entieth century; this was the new world
where NINJA loans ruled. No Income, No Job,
No Assets. No problem, you still qualify !
Mortgage lenders were happy to make these
risky loans, because they knew it wouldn’t be
their problem if the borrower eventually ran into
14 SUZE ORMAN’S 2009 ACTION PLAN
trouble kee ping up with the payments. Why? Because
these loans would quickly be sold off to investors,
and the investors were happy to do the
deal because they were being told that they had
"insurance" against mortgage defaults fr om the
credit default swaps. Oh, happy days.
Lenders couldn’t lend money fast enough to
satisfy the appetite of Wall Stree t investors and
borrowers were encouraged to take out the biggest
mortgage possible. Everyone wanted their
piece of the American Dream as home values sky -
rocketed.
But the cracks began to appear in late 2006
and early 2007. Borrowers who had taken out an
adjustable-rate mortgage a few years earlier faced
their fi rst rate adjustment. Many were shocked by
new payments that were far beyond what they
could aff ord. Refi nancing into a more aff ordable
mortgage wasn’t an option for many people, because
the Federal Reserve at that time had now
bee n raising the Federal Funds Rate, which by
mid-2006 was above 5 %. Th is meant that adjustable-
rate mortgages—many of which are aff ected
by changes in the Federal Funds Rate—would be
more expensive now that the rate was so much
higher. At the same time, real estate values started
to stagnate in many areas, and many ARM borrowers
simply didn’t have enough equity built up
in their homes to be able to refi nance, no matt er
what the interest rate. Remember, too, that many
A Brief History of How We Got Here 15
people were able to buy a home for no money
down so they never had equity to begin with.
By 2007, there were suddenly a whole lot of
homeowners who couldn’t aff ord their mortgages,
couldn’t refi nance, and couldn’t sell at a price that
would cover their mortgage because real estate
prices had begun to slide. And lenders were in no
mood to strike any deals. Th at’s when the foreclosure
rate started to rise. Far fr om being a problem
confi ned to subprime borrowers in over their
heads, foreclosures soon sent home values plummeting
everywhere. If your neighbor’s home was
in foreclosure, that was bad news for you too.
Since the 2006 peak, home values have dropped
more than 20 % on average, and tw ice as much in
some markets that were once considered to be
among the hott est. Many people owe more on
their homes than what they could sell them for today.
In fact, as I write this an estimated one in six
homeowners have a mortgage that excee ds the
value of their home in today’s market—a situation
that is known as being under water.
As foreclosures began to spread—Moody’s
Economy.com estimates nearly 2.5 million homes
were lost in 2007 and 2008 and another 3.5 million
could be lost in 2009 and 2010—the damage
hit Wall Stree t. Th is is where leverage ree nters the
picture. Remember all that borrowing I mentioned
earlier? Well, a lot of it was used to invest in all
sorts of mortgage-related securities. When those
16 SUZE ORMAN’S 2009 ACTION PLAN
investments began to fall apart because so many
of the underlying mortgages that were the basis of
those bets were now in foreclosure, investors faced
the ugly downside of leverage: Th ey had borrowed
a lot of money and now had no money to pay it
back. At 30:1 leverage, a Wall Stree t player could
make bets with a value of $300 million even if it
had just $10 million of its own money backing that
bet. If the bet didn’t pay off , the bank or hedge
fund had no way to make good on the $300 million.
And the supposed "insurance" fr om CDS was
just an empty promise. No one had the money to
make good on those deals.
To review: We had lenders making loans that
borrowers couldn’t aff ord, borrowers happy to get
a mortgage they couldn’t aff ord, and Wall Stree t,
egging on lenders and borrowers, telling us that it
was all okay because they insisted they had a brilliant
way to insulate investors (and their own trading
operations) against the risk in making highly
leveraged bets, because in the unlikely event borrowers
actually fell into trouble, the credit default
swaps would save the day.
Th at, of course, is a very basic explanation, and
there are many, many other elements that came
into play. But I want to cut to the real issue here:
We are in trouble today because everyone was happy
to lie, or happy to believe lies that any sane person
could see right through.
A Brief History of How We Got Here 17
I cannot overstate my wrath at mortgage lenders
that pushed toxic loans on borrowers, knowing
there was litt le chance they could honestly
aff ord those loans. While some borrowers were
simply too confused to understand what they
were gett ing into, I cannot absolve those who
chose to drink the Kool-Aid that they could buy
a $350,000 house on an income that could realistically
pay for only a $150,000 one. Nor do I have
much patience for borrowers who tell me the problem
is that real estate prices stopped going up, so
they got stuck without enough equity to refi nance
or sell. Buying a house based on the expectation
that price gains were a given and would continue
to rise at an annual pace that was double
and triple the historical norm is not just foolish,
it’s gree dy! Borrowers chose to believe what they
wanted to believe.
And don’t get me started on the levels of dishonesty
perpetrated by the banks and hedge funds
that came up with this can’t-miss scheme and the
government policy that did litt le to provide the
regulation that might prevent a meltdown. Or the
fact that Fannie Mae and Freddie Mac also got in
on the act and lowered their underwriting standards
so they could participate in the booming
loan market.
It was a wild, drunken party of dishonesty and
gree d on a national scale.
18 SUZE ORMAN’S 2009 ACTION PLAN
The Honest Way Out
While the mortgage crisis is the most vivid example
of how dishonesty and gree d leads to fi nancial
destruction, it is by no means the only example. If
you have a credit card balance that will remain
unpaid at the end of this month, you are participating
in your own brand of dishonesty because
you are living beyond your means. If you have no
emergency savings fund, you are not being honest
about considering and preparing for all the possibilities
life may throw at you. Leasing a car rather
than buying a car that is aff ordably fi nanced with
a standard three -year loan is, in my opinion, a
form of fi nancial deception. Th inking you didn’t
nee d to invest in your 401(k) or IRA because you
could count on stee p appreciation in your home
to fund a comfortable retirement is irresponsible,
wishful thinking. If you kee p spending like crazy
on the kids because, well, they expect you to, even
though you have unpaid bills, that’s a huge slice of
dishonesty . If you are tapping your home equity to
pay for vacations you can’t really aff ord, you are
cheating yourself out of fi nancial security .
Th e lies nee d to stop. Just think about where
all this dishonesty leaves you. In credit card debt.
Without a savings safety net if something goes
wrong. With no security .
You know that I have never thought this behavior
made any sense. Th ose of you who have bee n
A Brief History of How We Got Here 19
watching Th e Suze Orman Show on CNBC, or following
my advice elsewhere, know that I have forever
advised against these acts of dishonesty . I fi nd
it incredibly gratify ing to have helped so many of
you change course. But I also know there are many
more people who have yet to mend their ways or
fi gured they had time to turn over a new leaf. Well,
your time is up. If you don’t get your act together
in 2009, you will be in more trouble than you can
imagine.
Th e reality you nee d to grasp is that the rules
have changed. Credit card companies once giddy
to help you pour on debt are now going to penalize
you harshly if you are in debt or look like you
might overload soon. A loan, be it a mortgage, car
loan, or student loan, is much harder (and more
expensive) to come by now. Nor can you rely on
a credit line or HELOC in the event you are laid
off in 2009 and nee d cash to kee p your household
running; the odds are that if you tap either
credit source you will trigger a series of unintended
consequences that can put you in even
worse fi nancial shape.
Th ere is a way out: Honesty . With yourself.
With your partner. With your children. If you are
ready to face up to what you can honestly aff ord, if
you are willing to live within your means, not
within your dreams, you can turn this around. If
you are ready to commit to an action plan that
makes sure there is enough money left over at the
20 SUZE ORMAN’S 2009 ACTION PLAN
end of the month to pay every bill and save money
too, you are on your way to living a life of fi nancial
security .
But you have to be willing to get honest about
every facet of your fi nancial life.
My 2009 Action Plan gives you every honest
answer you will nee d to navigate the treacherous
fi nancial situation we face today, but even more
important, it will put you and your family on the
path to safety and security , this year and every
year.
21
3
ACTION PLAN
Credit
The New Reality
The banking industry is running scared. Th ey
think you won’t be able to kee p up with your
credit card payments in 2009 as the nation
continues to work its way through this economic
meltdown. Of course, that’s a justifi able concern
whenever the economy slows down, jobs are lost,
and unemployment rises. But what’s diff erent in
2009 is that banks are already ree ling fr om the
mortgage-default crisis that has triggered bank
failures and shotgun marriages betw ee n weak
banks and less-weak banks. Banks aren’t exactly
in great shape these days and they are painfully
aware of a Category 3 hurricane about to bear
down on them: National credit card debt is at a
staggering $970 billion, 50 % higher than when
the last economic slowdown hit in 2000. Th at’s
22 SUZE ORMAN’S 2009 ACTION PLAN
what happens in an era of "easy" money where
banks irresponsibly hand out multiple credit cards
to anyone with a pulse, regardless of income, and
consumers are all too eager to play along.
Th e game, however, is up, my fr iends. Credit
card companies have reversed course. Th ey are
now looking for ways to lend less money, especially
on accounts they dee m risky : consumers
with high unpaid balances and poor FICO credit
scores. Reducing credit card limits, closing down
accounts with no warning, and abruptly increasing
interest rates are just some of the aggressive
tactics the card companies are implementing right
now to shore up their business. Th at means serious
repercussions for you throughout 2009. Your
FICO score may drop—not because you changed
your fi nancial behavior, but because the credit
card companies changed the rules on you.
Th e best way to insulate yourself is to get out of
credit card debt once and for all. If you pay off
your balance, you don’t have to worry about the
interest rate on your card. If you pay off your balance,
you are less likely to have your credit card
limit reduced; and even if it is reduced, it will not
have a negative impact on your FICO score.
If you pay off your credit card balance, you
can focus on building an emergency savings fund.
Th at’s especially important in 2009. Th e days of
using your credit card as a de facto emergency
fund are over. If you tap too much of your credit
ACTION PLAN: Credit 23
card line, it is likely you will see the line reduced,
your interest rate rise, and, yes, potentially have
your card closed down—and there goes your
FICO score. Unpaid balances in 2009 will put you
in the middle of a vicious cycle. You must get out
of card debt now. It is the number one action to
take in 2009.
What you must do in 2009
¡ Make it a priority to pay off your credit card
balances.
¡ Read every statement and all correspondence
from your credit card company to make sure you
are aware of any changes to your account, such
as skyrocketing interest rates.
¡ Work to get your FICO credit score above 720.
¡ Be very careful where you turn to for help with
credit card debt. Debt consolidators are often a
very bad deal. The National Foundation for Credit
Counseling is a smarter choice.
¡ Resist the temptation to use retirement savings
or a home equity line of credit to pay off credit
card debt.
Your 2009 Action Plan: Credit
SITUATION: You always pay the minimum amount
due on your credit card bill and are never late, but
your credit card limit was just reduced.
24 SUZE ORMAN’S 2009 ACTION PLAN
ACTION: Paying the minimum in 2009 is not
good enough. Credit card companies are anticipating
that as the recession plays out, consumers
will be hard-pressed to kee p up with their bills.
So even if you have paid on time in the past, they
are worried about what will happen in the future.
And the fact that you pay just the minimum is a
huge warning signal to your credit card company.
It’s a tip-off that you may already be on shaky
ground.
Paying just the monthly minimum due signifi es
to a credit card company that you may fall behind
on payments in a severe recession and that you are
also more likely to let your balance grow if you hit
hard times. And that’s the last thing they want in
2009. To kee p you fr om doing just that, they cut
your credit limit.
SITUATION: You are worried that a lower credit limit
will hurt your FICO credit score.
ACTION: Pay off your balance every month and
your FICO credit score will not be aff ected. Your
FICO credit score is based on a series of calculations
that measure how good a credit risk you are.
One of the biggest factors in your credit score—
accounting for about 30 % of your score—is how
much debt you have. Th ere are a few ways that
this specifi c calculation is done, but one of the
chief ways it’s determined is the debt-to-available-
ACTION PLAN: Credit 25
credit ratio. Debt is how much money you owe on
all your credit cards. Available credit is the sum of
all the credit lines that have bee n extended to you.
Th e higher your debt, the worse it is for your FICO
score. And your debt-to-credit ratio will look much
worse if your credit limit is cut.
Let’s say you have only one credit card that has
a $2,000 balance on it. Last year your credit limit
on that card was $10,000. So your debt-to-credit
ratio was 20 % ($2,000 is 20 % of $10,000). Now
you fi nd out that your credit card company has
reduced your credit line to $5,000. Th at means
your ratio shoots up to 40 % ($2,000 is 40 % of
$5,000). Th at will indee d have a negative impact
on your FICO score.
Th e only way to kee p your FICO score unaffected
by a credit-limit reduction is to get out of
credit card debt and pay off your bills in full each
month.
SITUATION: The credit card company canceled
your account. Do you still have to pay the remaining
balance?
ACTION: Of course you do! When your account is
canceled, it is because the credit card company
has labeled you a high-risk cardholder. What is
being canceled is your ability to use that card in
the future. But you are still responsible for every
penny of your existing balance.
26 SUZE ORMAN’S 2009 ACTION PLAN
SITUATION: Your credit card has been canceled
and you are worried it will hurt your FICO score.
ACTION: Focus on gett ing the balance paid off ;
the lower the balance, the less it will damage your
FICO score if your card is canceled.
Th ere are tw o issues that come up when a card is
canceled: how it aff ects your debt-to-credit-limit ratio
and what happens to the interest rate on your
unpaid balance. In most cases, when a card that has
a balance on it has bee n revoked or canceled, the
credit card company will immediately raise your interest
rate to about 30 %. When this happens, if you
continue to pay only the minimum monthly payment,
you may never get out of debt on that card.
SITUATION: You thought the interest rate on your
credit card was fi xed at 5%, but it just shot up to 30%!
ACTION: Th ere is no such thing as a permanent
fi xed interest rate on your credit card. Th e rate is
fi xed only until the credit card issuer decides it
isn’t. It’s a marketing ploy. And credit card companies
have all sorts of reasons (embedded in the
agree ment you accepted when you opened the
card) to raise your rate.
In 2009, you bett er believe more and more
credit card companies are going to jump to increase
a low rate on a credit card if you make
ACTION PLAN: Credit 27
them nervous in any way. And just to be clear: An
unpaid balance makes them nervous. Paying the
minimum makes them nervous. See ing you fall
behind on another debt payment or missing a payment
makes them nervous big-time.
If you want to stee r clear of being hit with a giant
rate hike, you have tw o options: don’t run up a
balance in the fi rst place; or, if you do have an unpaid
balance, get it paid off . When you have a zero
balance, what do you care about the interest rate?
SITUATION: You have a low-interest-rate credit
card you never use—it is just there in case of emergency.
Now you’re worried that if you have to use it,
your interest rate will go up.
ACTION: Build a real emergency savings account.
Relying on your credit card to bail you out of
emergencies is too dangerous in 2009. (See "Action
Plan: Saving" for advice on where to open a
savings account and "Action Plan: Spending" for
action steps on how to come up with more money
to put toward a savings fund.)
If you use a credit card for an emergency expense
in 2009 and you can’t pay off the balance,
you will set off a vicious cycle. An unpaid balance
where there once was none makes a credit card
company nervous. It can also make other credit
card companies you have accounts with nervous.
Th at could cause the credit limits on all your cards
28 SUZE ORMAN’S 2009 ACTION PLAN
to be cut. And if that causes your FICO credit
score to drop, then you can expect the interest
rate on your credit card to rise.
Th e only solution is to stop thinking of your
credit card as a safety net if you run into trouble.
Th e only true safety net is a savings account.
SITUATION: You have a FICO credit score above 720
but your interest rate just shot up. What’s the best
way to pay off your credit card debt?
ACTION: See if you can apply for a balance transfer
to a low-rate card. Because you have a high
FICO score, you may be in luck. But lenders aren’t
exactly rolling out the welcome mat right now, so
this may not be feasible.
Go to cardtrak.com and use the Search tool to
shop for balance-transfer off ers. Th e idea is to
move your money to a card with a low introductory
rate and then push yourself to get the balance
paid off before the low rate expires. Th is can be
tricky in 2009. You have the added risk that even
if you do everything right with your new card, you
could still have the introductory rate rescinded because
something out of your control happened on
one of your other accounts, such as having your
credit limit reduced. In "Action Plan: Spending," I
explain how to reassess your family’s income and
expenses to fi nd more money to put toward paying
down credit card debt.
ACTION PLAN: Credit 29
SITUATION: You have a low FICO credit score, but
you are current on all your accounts. How should you
deal with your debt?
ACTION: Here’s how:
¡ Pay the minimum amount due on every card
each month. That’s your only shot at keeping
your FICO score from falling further. It will also
lower the odds that your credit card company
will close your account.
¡ Line up your cards and put the card that charges
the highest interest rate at the top of the pile.
That’s the card you focus on paying off fi rst.
Send in as much money as you can each month
to get that balance down to zero.
¡ Once the fi rst card is paid off, focus on the second
card in your pile: the card with the nexthighest
interest rate.
¡ Keep up with this system until you have all the
cards paid off.
Of course, the big challenge is fi nding extra
money every month to put toward paying off your
credit card debt. In "Action Plan: Spending," I
have suggestions about how to "fi nd" more money
in your month by reducing your expenses.
30 SUZE ORMAN’S 2009 ACTION PLAN
SITUATION: You are behind on your credit card payments,
but you want to know the best payment strategy
for improving your FICO score.
ACTION: Focus on paying the most you can on
accounts that are the least late. Th e longer unpaid
debt has bee n on your credit reports, the less effect
it has on your FICO score. So if you can make
current an account that is past due by only 60
days, it will help your FICO score far more than
paying off your balance on an account you have
bee n past due on for three years. I want you to
organize your credit card statements into tw o
piles: cards that are past due for less than one year
and those that are past due for more than one year.
Start with the fi rst pile: Pay off the account that is
closest to being current fi rst, then move to the next
card in that pile. Once you have paid off the cards
in the fi rst pile, I want you to use the strategy I
covered in the action step above for paying off
cards that you are more than one year behind on.
SITUATION: You want to use your HELOC to pay off
your credit card debt.
ACTION: Do not do this. Even if you still have
enough equity to kee p your HELOC open, this is
a dangerous mistake. You are putt ing your house
at risk. When you borrow fr om your HELOC,
ACTION PLAN: Credit 31
your home is the collateral. Let’s say you get laid
off in 2009—not exactly impossible, given the
way the economy is struggling—and suddenly you
can’t kee p up with the HELOC payments on top
of all your other bills. Fall behind on the payments
and you could lose your house.
As much as I want you to pay off your credit
card debt, you nee d to understand that credit card
debt is "unsecured" debt. Th ere is no collateral
that a credit card company can easily force you to
hand over to sett le your debt. So it makes no sense
to transfer your unsecured debt into a secured
debt—a HELOC—where you run the risk of losing
your home if you can’t make the payments.
SITUATION: You want to take out a loan from your
401(k) to pay off your credit card debt.
ACTION: Do not do this. I know it is tempting, but
it is such a dangerous move. Anyone who has bee n
listening to my advice over the years knows I have
never approved of 401(k) loans because you end
up paying tax tw ice on the money you borrow. But
I can understand that if you are staring at an interest
rate of 30 % on your credit card, you fi gure the
tax penalty is worth paying.
Given what has happened to the economy, I
once again must say no. First, we are in the midst
of a severe recession. Th at increases the possibility
that you will lose your job. I don’t care how valued
32 SUZE ORMAN’S 2009 ACTION PLAN
an employee you are. No one is safe when a company
is losing money, or can’t kee p operating because
the credit crisis makes it impossible for the
fi rm to do business. We are all vulnerable in times
like these. And if you have an outstanding loan
against your 401(k) when you are laid off , you ty pically
must pay off the loan within a short period of
time. Fail to do that and it becomes a withdrawal;
that means you owe tax on the entire amount immediately
and a 10 % early-withdrawal penalty if
you are under age 55 in the year you left service.
And tell me exactly where you will get the money
for that. Not your credit card, that’s for sure.
An even bigger issue is that you nee d your 401(k)
for tomorrow. Use it today and what will you have
in retirement? Can’t think about that right now?
Excuse me, you can’t aff ord not to think about that.
And that brings me to the issue of bankruptcy. I
certainly hope this never happens to you, but in
the event you must declare bankruptcy, one silver
lining is that any money you have in a 401(k) or
IRA is protected. Th at is, you will not be required
to use your retirement savings to sett le your debts.
It is a permanent asset for you. Don’t blow it by
using the money to pay off your credit card debt.
SITUATION: You have heard that credit card companies
may be willing to reach a settlement for a reduced
payment. Who’s a likely candidate?
ACTION PLAN: Credit 33
ACTION: You must be seriously behind in your
payments and have a sizable lump sum of cash at
the ready to have any shot at working out a sett lement
that reduces what you owe.
Th e only way the credit card company will forgive
a portion of your unpaid balance is if you can
make a lump-sum payment that covers some of
the money you owe. Let’s say you have $20,000 in
credit card debt that the credit card company is
willing to reduce to $10,000. You nee d to be able
to pay cold cash to cover the remaining $10,000
immediately. Th is is not about gett ing your balance
lowered and then promising to be a good Boy
Scout or Girl Scout who will stick to a monthly
repayment plan. To get a sett lement requires having
enough cash at the ready to pay off the entire
remaining (reduced) balance. If you don’t have
that money, you aren’t likely to be off ered a sett lement
deal.
SITUATION: You wonder if negotiating a settlement
will hurt your FICO credit score.
ACTION: If you don’t want your FICO score to go
down, do not ask for a sett lement. A sett lement
means you failed to live up to your obligation to
pay the full amount of debt you were responsible
for. It will indee d have a negative impact on your
credit score. Th at said, in certain rare instances—
if you’ve previously had a stellar record, have
34 SUZE ORMAN’S 2009 ACTION PLAN
suff ered a job loss or medical catastrophe, and the
outstanding debt isn’t huge—you may be able to
convince the card issuer not to report the sett lement.
Be prepared to document your case.
SITUATION: You just received a tax document from
the credit card company that says it reported the
amount of your settlement to the IRS.
ACTION: Be prepared to pay income tax on the
amount of the forgiven credit card debt.
By law, the credit card company is required to
send you and the IRS a 1099-C form that shows
the amount of the forgiven debt, which is indee d
money that you will owe income tax on. Sorry,
there is no tax break for credit card sett lements.
(An exception is if you are insolvent, meaning
the amount of all your liabilities is more than the
value of all your assets. If the forgiven debt is
reported to the IRS on a Form 1099, you should
att ach a note to your tax return explaining the insolvency
—otherwise, the IRS will likely initiate
an automatic audit, since the income reported on
the 1099 does not appear on your return. Be prepared
with good documentation to back up your
claim that at the time the debt was forgiven,
your liabilities excee ded the fair market value of
your assets. I recommend you work with a tax advisor
to help you navigate this situation.)
ACTION PLAN: Credit 35
SITUATION: You hold a credit card from a bank that
failed. What’s going to happen to your account?
ACTION: Th e best protection is a strong FICO
score. When one bank fails, another bank takes on
its existing credit card accounts. But you nee d to
realize that the new bank is not required to kee p
off ering you that card. It will investigate your account
and decide if you are a good credit risk. And
let’s be honest here: If your bank failed in part because
it was too lenient about extending credit, it
stands to reason that the acquiring bank may not
want to kee p your business. Bott om line: If you are
a credit risk, your credit card could be shut down.
If you have a strong FICO score, you will no doubt
be welcomed by the new bank with open arms.
SITUATION: You hold a credit card from a bank that
failed. Do you still need to pay off your balance?
ACTION: Of course you are still responsible for
the debt. People, there is no shortcut around personal
responsibility . You made the charges, so you
are responsible for the debt you ran up.
Kee p sending in your payments. Print a copy of
the canceled check or e-payment and kee p it in a
safe place. Chances are the transition to your new
bank will be seamless, but you never know. I think
it is wise to kee p a printed record for at least six
36 SUZE ORMAN’S 2009 ACTION PLAN
months aft er your bank has bee n taken over by
another bank.
SITUATION: You have a FICO credit score of 660,
but you were just turned down for a car loan.
ACTION: Improve your score to 720 if you want a
loan with decent terms.
Lenders are no longer eager to lend money to
people with just so-so credit. Th at’s true of any
ty pe of loan: mortgages, car loans, private student
loans. In the past (the days of irresponsible, subprime
lending, circa 2007 and earlier), it was fairly
easy for anyone to get a loan of any ty pe. If you had
a great FICO score over 720, you got the best
terms. But if you had a low FICO score, you could
still get a loan, though you’d pay a higher interest
rate and maybe higher fee s. Now a low score can
mean no loan. It’s the same issue we have bee n
talking about over and over: Lenders are running
for safety . Th ey are very cautious about whom they
will lend to. A FICO score below 700 is likely going
to make it very hard to qualify for a loan in
2009, or you will have to pay a stee p risk penalty :
much higher interest rates and fee s than you might
have paid with the same score tw o years ago.
SITUATION: You want to improve your FICO credit
score, but you aren’t sure what to do.
ACTION PLAN: Credit 37
ACTION: Know what matt ers to FICO and make
the necessary changes in your fi nancial life.
Fair Isaac is the parent company that is responsible
for the FICO credit score. You actually have
three FICO scores, one fr om each of the three
credit bureaus: Equifax, Experian, and Trans-
Union. Credit scores range fr om 300 to 850. A
year ago, I would have told you that a score of 720
or bett er was all you nee ded to get the best loan
off ers. But the fallout fr om the credit crisis has
meant that the top tier has actually bee n pushed
higher; some mortgage lenders reserve their best
rates for individuals with FICO scores above 760.
Unless you plan on buying a house in 2009, I
wouldn’t worry as long as your score is at least
720. Th at’s still plenty good enough to kee p most
creditors happy.
If your score is below 720, here’s what you nee d
to do to make it bett er:
¡ Pay bills on time. This accounts for 35% of your
credit score. If you are late on payments—not
just credit card payments, but bills of any kind,
it will pull down your score. Pay on time, even if
it is just the minimum due, and it will help your
score.
¡ Reduce what you owe. We already covered this
earlier in the chapter. The less you owe on your
cards and other debt, the less "risky" you look
38 SUZE ORMAN’S 2009 ACTION PLAN
to potential lenders. How much you owe relative
to your available credit and other debts accounts
for 30% of your score.
¡ Hold on to cards with a long credit history. The
longer your credit record, the more data FICO
has to assess whether you are a good credit risk.
This accounts for 15% of your score. Make sure
you keep your card with the longest history in
good shape; you don’t want it to be canceled.
¡ Limit your credit applications. The more new
credit you ask for, the more nervous you make
lenders. New credit accounts for 10% of your
FICO score. If your record shows you have applied
for multiple credit cards and a new car loan
at the same time, it will pull down your score.
¡ Aim for a mix of different types of credit. I know
this sounds crazy after explaining how you don’t
want to have too much credit, but lenders do in
fact like to see that you have a few different
types of credit. It’s a sign you have experience
juggling different obligations with different loan
terms. So having a credit card and a car loan is
actually better than having just a credit card.
That said, your credit mix accounts for just 10%
of your FICO score. And my advice for 2009 is to
ignore this factor. If you have only credit cards, I
am not going to suggest you sign up for a store
card or take on some other debt.
ACTION PLAN: Credit 39
SITUATION: You are considering hiring a debtconsolidation
company to help you with your credit
card debt.
ACTION: Don’t fall for the come-ons. Th ese off ers
are oft en rip-off s and can do serious damage to
your credit score and leave you in more debt than
you started with.
I know how tempting it sounds when you hear
an ad that tells you the Super Duper Debt Consolidation
Co. is standing by to make all your credit
card debt stress go away. What they don’t explain
is that they ty pically charge you 10 % or so of what
you owe to take on your case, and in the event they
work out a sett lement with your creditors, they are
going to want another 10 % or more of the amount
they "saved" you. And I promise you, these debtconsolidation
companies aren’t going to spend a lot
of time explaining to you that any sett lement they
negotiate for you will ruin your FICO credit score
and may end up costing you income tax on the
amount of debt that is forgiven.
Most troubling is the growing number of complaints
in 2008 that debt-consolidation fi rms collected
their initial fee and then did nothing for the
consumer. Not only were the clients out their fee ,
their FICO scores were hurt even more because
the debt-consolidation fi rm told them they were
40 SUZE ORMAN’S 2009 ACTION PLAN
taking care of the payments and the sett lement.
In reality , nothing was being done, so the amount
owed ballooned as interest rates were raised and
penalty fee s piled up.
Th ere is no easy way out of debt. Anyone promising
to magically make everything all bett er is
either lying to you or not explaining the fi nancial
and credit costs of what they are doing.
SITUATION: You don’t know where to turn for honest
help in dealing with your credit card debt.
ACTION: Contact the National Foundation for
Credit Counseling. Th is is a netw ork of nonprofi t
agencies with trained counselors who will help you
assess your situation and lay out the most logical
and realistic steps for you to follow. Th ey are not
miracle workers; as we just discussed, there are no
miracles to be had when it comes to your credit
card debt. But the NFCC are the "good guys" you
can trust. Go to nfcc.org or call 800-388-2227.
SITUATION: You visited an NFCC-network credit
counselor in 2008, but you still can’t afford a repayment
plan with credit card interest rates at 19%—and
higher.
ACTION: Don’t give up. In 2009, you may have
more options. As I write, the NFCC has bee n
working with the top ten card issuers on a plan to
ACTION PLAN: Credit 41
standardize a Debt Repayment Plan (DMP) by
March 31, 2009 that would off er interest rates low
enough so consumers could pay off their enrolled
balances (with a fi xed payment of 2 % or a hardship
payment of 1.75 %) within fi ve years. Check
my Web site or nfcc.org for updates.
SITUATION: You feel the walls caving in and fear
bankruptcy is your only option.
ACTION: Contact the NFCC and get honest help
in assessing your options. If you aren’t eligible for
a DMP, the counselor will try to fi nd a workable
alternative to bankruptcy. Only about 10 % of
their clients have ended up in bankruptcy.
Th at said, if in fact you owe more than what
you make; if you have tried every which way to
pay your bills, including working a second or even
a third job; if your debt kee ps growing and you are
being charged 32 % interest and you can’t see any
way out, then bankruptcy may, sadly, be an option
for you. Just remember that bankruptcy will destroy
your FICO credit score, but then again, if
you have bee n behind in payments your FICO
score is probably already pretty low. Bankruptcy
is really a last resort when you have tried everything
else. Th is drastic step requires the most
careful consideration. You will want to fi nd a reputable
att orney who can explain the current law,
the pros and cons of fi ling, and the diff erent kinds
42 SUZE ORMAN’S 2009 ACTION PLAN
of bankruptcy. For a good overview of the subject
visit the credit.com Web site at: www.credit.com/
slp/chapter8/Bankruptcy.jsp.
SITUATION: You keep getting calls saying that you
owe money on a credit card, but you have no idea
what the collection agency is talking about.
ACTION: First of all, verify the debt. Debt collection
agencies can pursue old debts that have never
bee n paid off , hoping you will pay money to stop
the calls. But plenty of times the debts are false—
the result of identity theft , clerical errors, or credit
reports that have not bee n updated. Sometimes
a debt is so old it’s passed the time period when a
debt collector could legally sue to collect (see below).
Within 30 days of being contacted, send the
collector a lett er (be sure to send it certifi ed mail,
return receipt requested) stating you do not owe
the money, and requesting proof the debt is valid
(such as a copy of the bill you supposedly owe). If
the collection agency doesn’t verify the debt within
30 days, it can no longer kee p contacting you and
cannot list the debt on your credit report. Remember
your best shot at avoiding these "zombie"
debts that erroneously resurface is by staying on
top of your credit report. In these credit-crunched
times, no one can aff ord a single inaccuracy that
could lower a credit score. Go to annualcredit
report.com to get your fr ee credit report. Each of
ACTION PLAN: Credit 43
the three credit bureaus, Equifax, Experian, and
Transunion, are required to provide you with one
fr ee report a year.
SITUATION: You haven’t been able to pay your
credit card bills for some time and your cards were
shut down fi ve years ago, but you are still getting
calls saying you owe money.
ACTION: Check out your state’s statute of limitations
on debt collection. In every state, the statue
of limitations for credit card debt begins to tick
fr om the date you failed to make a payment that
was due—as long as you never made another payment
on that credit card account. (You can fi nd
the list of state statutes at htt p://www.fair-debtcollection.
com/SOL-by-State.html#15.) One way
to prove the statute applies to your debts is to get
a copy of your credit report. It will list the dates
you were delinquent as reported by your creditors.
So if your state’s statute of limitations on credit
card debt is fi ve years, and your last payment was
due on April 12, the statute of limitations on that
debt will run out fi ve years fr om that April 12,
assuming you haven’t made another payment.
(Please note: statutes will vary for diff erent ty pes
of debt. Th e statutes of limitations are diff erent for
credit card accounts than for mortgages and auto
loans.) Also important to note: If you are contacted
by a collection agency and you make a
44 SUZE ORMAN’S 2009 ACTION PLAN
promise to send in a check or you actually do send
in a small amount of money, it is possible that the
statute of limitations starts all over again.
SITUATION: You are being harrassed at work by
calls from collection agencies.
ACTION: Th e Fair Debt Collection Practices Act
(FDCPA) restricts tactics that debt collection
agencies may use. Th ey cannot call you at work if
they know your employer prohibits such calls.
Once you tell them this, they have to stop the
calls; it’s wise to follow up with a lett er. Show you
know your rights by informing them that under
provision 15 of the U.S. Code, section 1692b-c,
the lett er constitutes formal notice to stop all
future communications with you except for the
reasons specifi cally set forth in the federal law.
Collectors also cannot phone your home so oft en
as to constitute harassment and they cannot call
before 8 A.M. or aft er 9 P.M. You can learn more
about your rights under the FDCPA at htt p://
www.credit.com/credit_information/credit_law/
Understanding-Your-Debt-Collection-Rights.jsp#2.
4

45
ACTION PLAN
Retirement
Investing
The New Reality
Aft er watching your 401(k) and IRA investments
lose 30 % or more last year, you are
consumed with fear and doubt. You fear
that your losses are so stee p you will never be able
to aff ord a comfortable retirement. And you doubt
that you will ever be able to recover those losses,
especially if you stick with stocks. I completely
understand why you would fee l that way.
But I have to tell you, the biggest risk to your
retirement security is giving in to your emotions.
When fear and doubt are in control, you may make
decisions that fee l "right" for 2009, but they will
hurt your long-term retirement strategy. Th at’s
46 SUZE ORMAN’S 2009 ACTION PLAN
what makes retirement investing so tough: You
nee d to have the resolve and confi dence to look
past what is happening this month, this quarter,
and this year, and focus instead on the correct
actions to take today that will serve you well in
retirement.
For many of you, the toughest thing I will ask
of you in 2009 is not to change a thing. As I will
explain, sticking to your long-term strategy in
2009 is more important—and has the potential to
have the greatest payoff down the line—than in
any other year.
At the same time, those of you who are within
10 years or so of retiring may nee d to make big
changes to your retirement strategy. I’ve heard
fr om so many near-retiree s, panicking now because
they had the bulk of their money invested in
stocks. As I will explain in detail in the Action
Plan that follows, that was never a good idea. As
you near retirement, you nee d to begin shift ing
greater and greater portions of your money into
bonds and stable-value accounts.
I cannot stress enough how important it is to be
careful about retirement investing in 2009. Rash
actions are not the right actions. Trust me, you
cannot aff ord to get this wrong. So please read
what follows carefully. Whether you are 25 or 65,
I have laid out the actions you nee d to take to stay
on course, starting now.
ACTION PLAN: Retirement Investing 47
What You Must Do in 2009
¡ Make sure you have the right mix of stocks
and bonds in your retirement accounts given
your age.
¡ Do not make early withdrawals or take loans
from retirement accounts to pay for non-retirement
expenses.
¡ Convert an old 401(k) to a rollover IRA so you can
invest in the best low-cost funds, ETFs, and
bonds.
¡ If eligible in 2009, consider moving at least a portion
of a 401(k) rollover into a Roth IRA. Or wait
until 2010 to convert to a Roth, when everyone,
regardless of income, will be able to make this
move. Just be aware of the tax due at conversion.
Your 2009 Action Plan:
Retirement Investing
PLEASE NOTE: When I refer to 401(k)s throughout
this chapter, the advice is also applicable to
403(b)s and other tax-deferred accounts.
SITUATION: You don’t plan on retiring for at least
10 years, but after watching your retirement account
lose 30% in 2008 you’ve had it with stocks. You want
to stop investing in the stock market, at least until
you see stocks going up again.
48 SUZE ORMAN’S 2009 ACTION PLAN
ACTION: Resist the temptation to stop investing
in stocks. If you have time on your side—and that
means at least 10 years, and preferably longer, before
you nee d money—you want to kee p a large
portion of your retirement money in stocks.
As noted above, the hardest part of retirement
investing is staying focused on your long-term
goal, rather than gett ing overwhelmed by what is
happening day-to-day. And if your goal is indee d
10, 20, or 30 years off in the future, then I have to
tell you that now looks like a great time to kee p
investing in stocks. I know that’s hard to fathom
when stock prices are so low, but it’s because they
are much lower that the long-term prospects are
for bett er performance. You remember the fi rst
commandment of investing—buy low, sell high?
Well, right now you can defi nitely buy at lower
prices. I am not suggesting that you will be able to
sell higher next year or even the year aft er. Th at’s
not likely. But it is also irrelevant, because we are
focusing on the opportunity to buy today and hold
for 10, 15, 20 years or more. Buy low today and
down the road it’s likely you will be able to sell at
much higher levels.
SITUATION: You keep hearing that the best thing
you can do is to keep investing in your 401(k), but it
just makes no sense to you, given that 2009 is supposed
to be a rocky year in the markets.
ACTION PLAN: Retirement Investing 49
ACTION: Focus on how many shares you can buy
in 2009 and forget about the value of those shares.
If you have time on your side, and by that I
mean at least 10 years until you intend to tap your
retirement savings, your concern should not be so
much what your retirement accounts are worth
today but what they might be worth in the future.
I understand the desire to shift all your money
into a stable-value fund or money market fund offered
in your 401(k). But that is a short-term salve
that could leave you weaker in the long run. Why?
Because once you move your money out of stocks,
you give up any chance to make back your losses.
Sure, the stable-value fund will inch along with a
3 % to 4 % gain each year, but chances are that’s not
enough to help you reach your long-term investing
goals; the return of a stable-value fund will barely
kee p up with the rate of infl ation. If you told me
your account was already large enough that simply
kee ping pace with infl ation was all you nee ded,
then I would be the fi rst to say: Move everything
into the stable-value fund. But that’s not the situation
most people are in; they nee d larger gains over
time to build a big enough retirement pot to retire
comfortably. Only stocks off er the potential for in-
fl ation-beating gains over the long term.
As I write in mid-November 2008, many of the
major stock indexes are down 40 % over the past
year. While there could defi nitely be additional
losses as we work our way out of the credit mess
50 SUZE ORMAN’S 2009 ACTION PLAN
and economic recession, I believe we have probably
see n the worst of the damage. I do not expect
us to be down another 40 % fr om here.
SITUATION: You have more than 10 years before
retirement, but you just can’t stand to watch your
401(k) go down every month. You want to put your
monthly contributions in a safe place within your retirement
account.
ACTION: You have to understand that at today’s
lower prices, the money you continue to invest in
your 401(k) will buy more shares. And what you
want right now is to gather as many shares as you
can. Now, I am not a wishful thinker; I certainly
expect more instability in the markets in 2009 that
could push stock prices even lower. So why would
I tell you to kee p buying in 2009? Because it is going
to pay off for you in 2019 and 2029 and 2039.
Let’s walk through a simplifi ed hypothetical example.
Let’s say you invested $200 in your 401(k)’s
stock fund. Th e share price was $20, so your $200
bought 10 shares. One month later, let’s say that
the share price has fallen to $10 a share. Th at
means your $200 can buy you 20 shares.
If, however, you decided to give up on the stock
market aft er that one month of investing and put
your $200 contribution into a stable-value fund,
you would still own your 10 shares and have $200
in cash in your 401(k).
ACTION PLAN: Retirement Investing 51
On the other hand, if you decided to kee p investing
your $200 contribution that month into
the stock fund at $10 a share, you would now have
30 shares—the 10 you bought the fi rst month and
the 20 you bought the second.
Now, for the purposes of this exercise, let’s assume
that the stock fund went back up to $20 a
share one month aft er you did this.
In the fi rst example, where you stopped investing
in the stock market, your 10 shares at $20
would now be worth $200 and you would still
have $200 in the stable-value fund. So in total
you would have $400 in your account. You
broke even.
In the second scenario, if you kept investing,
you would now have 30 shares of the stock fund in
your 401(k) that is now worth $20 a share. You
would now have $600 in your account—a gain of
$200 over what you invested.
In the fi rst example, you are just back to where
you started. In the second, you are up 50 % on your
money.
I realize this is an extreme example—there is
no chance your stock investments will completely
rebound in one month—but I wanted to make the
point clearly that the right action to take over time
is invest, invest, invest. As long as you have at least
10 years until you nee d this money, I am telling
you to try to relax and have a long-term perspective
when you open your statement and the value
52 SUZE ORMAN’S 2009 ACTION PLAN
of your account has gone down. Th e more it goes
down, the more shares you get to buy; the more
shares you buy now, the bigger the payoff when
the market goes back up. Please do not stop investing
now. Don’t change your strategy—just change
your point of view.
SITUATION: Your plan is to get out of stocks while
they continue to go down, then shift your money
back to stocks when things get better.
ACTION: What you are trying to do is "market
timing." In the short term, you may fee l as if you
are doing the right thing, but it will backfi re on
you over the long term. And retirement investing
is all about the long term.
Th e big problem with market timing is that if
you are out of the stock market, you run the very
real risk that you will not be back in the market
when it rallies; there is no way you will ever make
up for your losses if you miss those rallies.
Listen, I get where you’re coming fr om: It would
be so great if we could sell before the markets go
down and buy before the markets go back up, but
it is nearly impossible to have perfect timing because
there is no telling when the big rallies will
come. For example, one day in an extremely wild
period in October 2008, the Dow Jones Industrial
Average lost nearly 700 points. Let’s say you got
out of stocks that day because you had had enough.
ACTION PLAN: Retirement Investing 53
Well, tw o trading days later the Dow Jones Industrial
Average sky rocketed more than 900 points.
So you missed the rally that wiped out the losses
fr om a few days earlier. Of course, that is a very
rare and dramatic example; it’s not oft en we get
such huge swings in the space of a few trading
days. But the point is clear: If you try to time the
markets, you risk missing out on rallies.
I know it is not fun or easy, but a long-term buyand-
hold strategy in a diversifi ed mutual fund or
exchange-traded fund (ETF) is what works best.
Here’s some evidence to consider:
Let’s say you invested $1,000 in 1950 and then
had perfect market timing and managed to miss
the 20 worst months betw ee n 1950 and June 2008.
Your $1,000 would have grown to more than
$800,000, according to Toreador Research &
Trading. But it’s not as if there is some public calendar
that tells us exactly when to get in and out.
So let’s take a look at what happens if you missed
the 20 best months for stocks during that stretch—
that is, you were in cash when the market rallied.
Well, your $1,000 would have grown to just
$11,500. If, instead, you had invested your $1,000
and left it in the market through good and bad
times, you would have ended up with more than
$73,000. Sure, that’s a lot less than $800,000. But
it’s also a lot more than $11,500. Granted, none of
us think in terms of a 57-year time horizon, but
please know that myriad studies similar to this
54 SUZE ORMAN’S 2009 ACTION PLAN
one come to the same conclusion over shorter time
spans too. Buy and hold is the swee t spot betw ee n
elusive perfect market timing and tragic poor
market timing.
SITUATION: You have time on your side, but you
still don’t trust history this time. You just can’t shake
the feeling that this time is different, that buy-andhold
investing is not the way to go.
ACTION: Push yourself to kee p the faith. But if at
the end of the day you can’t function because you
are so worried, then perhaps it is best for you to
get out of stocks. However, you nee d to understand
the serious trade-off you will make.
Let’s start by stripping away your emotions for
a moment. My best fi nancial advice is for you to
stay invested. I know what we are going through
right now is incredibly scary. But we have had
scary times before.
On the next page are the 10 most recent
bear markets (periods of major losses when the
stock market indexes go down at least 20 %) prior
to 2008.
So this is not the fi rst (or last) scary time. What’s
crucial to understand is that despite all those bad
times, patient investors did fi ne. More than fi ne,
actually. From 1950 through 2007, the annualized
gain for the S&P 500 stock index was more than
10 %. Th e big takeaway: Th ere are bad times and
ACTION PLAN: Retirement Investing 55
there are good times, and history tells us that over
time, the good times outw eigh the bad.
So now you know my best fi nancial advice: Stay
the course. Th at is what I would do if it were my
money. But it’s not my money. It’s your money.
And no one will ever care about your money as
much as you do. So if you know that the only way
you can get through these tough times is to pull
your money out of stocks and into a stable-value
fund or a money market, then you nee d to do that.
I just ask that you consider everything you read in
this Action Plan. From a fi nancial point of view,
you are putt ing yourself at the risk of never making
up the losses and not making big enough gains
BEAR MARKET LOSS
August 1956–October 1957 –21.6%
December 1961–June 1962 –28%
February 1966–October 1966 –22%
November 1968–May 1970 –36%
January 1973–October 1974 –48.2%
September 1976–March 1978 –19.4%
January 1981–August 1982 –25.85
August 1987–December 1987 –33.5%
July 1990–October 1990 –19.9%
March 2000–October 2002 –49.1%
Source: The Vanguard Group; Standard & Poor’s
56 SUZE ORMAN’S 2009 ACTION PLAN
to beat infl ation. Perhaps you can strike a compromise
with yourself: How about you move a small
percentage of your money out of stocks and into a
stable-value fund? Th at will make it easier to get
through the rocky times, but it will kee p a portion
of your retirement funds invested in stocks.
I respect the emotional component of investing
—something that too many professionals dismiss.
All I ask of you in 2009 is to try as hard as
you can not to let your emotions completely derail
your long-term strategy. Compromise could be the
ticket for you: By moving a portion of your money
into a stable-value fund—say, no more than a
third or so—you should be able to slee p bett er today
without derailing your chances of slee ping
well in retirement too.
SITUATION: You want to stop contributing to your
401(k), even though your company matches your
contribution, so you will have more money to pay off
your credit card debt.
ACTION: Don’t do it. If you work for a company
that matches your contribution, I don’t care how
much credit card debt you have or how messy your
fi nancial life may be. You cannot aff ord to miss
out on a company match. Do you hear me?
When your employer matches a dollar of your
money with a 25-cent matching contribution or
ACTION PLAN: Retirement Investing 57
gves you 50 cents for a dollar invested that is too
good a deal to pass up.
SITUATION: You want to stop contributing to your
401(k) after you reach the maximum employer match
so you will have more money to pay off your credit
card debt.
ACTION: Do it. Once you get to the point where
you have maxed out your employer’s matching
contribution (ask HR to help you fi gure out the
max you nee d to contribute to collect the full company
match), then you absolutely should stop contributing
so you have more money in your paycheck
to put toward paying off your credit cards. As I
explain in "Action Plan: Credit," reducing your
credit card balances is not only smart in 2009, it is
necessary.
SITUATION: You plan on retiring in fi ve years and
are wondering if it makes more sense to keep contributing
to your 401(k) or use the money to pay off
your mortgage.
ACTION: If you intend to live in your home forever,
then I recommend you focus on paying off
the mortgage. With one big caveat: If you get a
company match on your 401(k), you must kee p
investing enough to qualify for the maximum em-
58 SUZE ORMAN’S 2009 ACTION PLAN
ployer match. Th at is a great deal you are not to
pass up. But I wholeheartedly recommend scaling
back your contribution rate just to the point of the
match so that you’ll have more money in your paycheck
to put toward paying off your mortgage before
you retire. Yes, I realize this means you will
have less saved in your 401(k), but you will also
nee d a lot less because you will no longer have
a mortgage payment to deal with in retirement,
and for most retiree s that is the biggest income
worry.
SITUATION: You can’t afford your mortgage and
want to borrow or withdraw money from your 401(k)
to make the payments.
ACTION: Don’t do it. Too many people these days
are making this huge mistake. I understand that
you are desperate to hang on to your house and
will do anything to avoid foreclosure, but I defi -
nitely do not want you to take a withdrawal. You
will pay income tax and may also be hit with a
10 % penalty for money taken out before you are
59½. And then, six months later, you will fi nd
yourself back in the same hole: All the money fr om
your 401(k) will be gone and once again you will
fall behind on your mortgage.
A 401(k) loan carries a ton of risk, too. If you
are laid off , you ty pically must pay back the loan
ACTION PLAN: Retirement Investing 59
within a few months. Th e current economic outlook
predicts a rise in layoff s in 2009. So if you
take out the loan, get laid off , and can’t pay the
money back ASAP, you will run into another tax
problem: Th e loan is treated as a withdrawal and
you’ll be stuck paying tax—and possibly a 10 %
early-withdrawal penalty . A loan is also dangerous
because the markets may rally during the time
you have taken out the loan, which means you will
have missed an important period to recoup some
of your losses.
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 for bankruptcy. You get to kee p that
money no matt er what.
My preference is that you scour every part of
your fi nancial life to fi nd other income sources for
covering your mortgage. See "Action Plan: Spending"
for advice on how to squee ze more savings
out of your current income.
SITUATION: Your credit card account was closed
down and your interest rate on the remaining balance
was increased to 32%. You want to take a 401(k)
loan to wipe out the credit card debt.
ACTION: As noted above, it is just too risky to
take out a loan fr om your 401(k) in 2009, given
the heightened possibility of layoff s. I understand
60 SUZE ORMAN’S 2009 ACTION PLAN
the damage a 32 % credit card interest rate can do,
but I want you to resist the temptation to raid your
401(k). Please review "Action Plan: Spending" for
my advice on how to seriously tackle your expenses
to fi nd savings you can then put toward
important fi nancial goals, such as paying off highrate
credit card debt.
SITUATION: You have been laid off and need the
money in your 401(k). Can you withdraw it without
paying the 10% penalty?
ACTION: Yes, if you are 55 years of age or older
in the year you were laid off . You will, however,
still have to pay ordinary income tax on what you
withdraw. I want to be clear: I am not recommending
that you take money out of your retirement
accounts at such a young age, but I recognize
that some of you are in a very tough situation. I’m
asking that you please do everything you can to
avoid tapping your retirement money today.
SITUATION: You are under 55 in the year you were
laid off. You desperately need the money in your retirement
account just to make ends meet. Is there a way
you can withdraw it without having to pay the 10%
penalty?
ACTION: Yes. But it is tricky . Look into sett ing up
a withdrawal plan that allows you to take out sub-
ACTION PLAN: Retirement Investing 61
stantial and equal periodic payments (SEPP) fr om
your retirement account without paying the 10 %
penalty . Please check with your tax advisor so he
or she can tell you exactly how it works—it is covered
by Rule 72t in the IRS code—and make sure
your advisor is an expert in this area, because it is
very complicated. Th is applies to all kinds of retirement
accounts, not just 401(k)s and 403(b)s as
the situation above does. And I nee d to repeat what
I said above: Taking money out of your retirement
account at an early age is obviously not ideal. So
please do everything possible to leave your retirement
money untouched.
SITUATION: You are worried that your company
may go bankrupt and that you will lose all the money
in your 401(k).
ACTION: Confi rm that your money was sent fr om
your employer to your 401(k) plan and you have
nothing to worry about. Money you invest in a
401(k) is your money, not your employer’s. Your
employer hires a third party —ty pically a brokerage,
fund company, or insurance company—to
run the 401(k), and that company in turn segregates
your money in a separate account that is all
yours; even if that brokerage or fund company got
into trouble.
62 SUZE ORMAN’S 2009 ACTION PLAN
SITUATION: You have employer matching contributions
that are not fully vested and you are concerned
that you may lose this money if your company goes
bankrupt.
ACTION: Th at could indee d happen. Money that
is not vested is not yet yours. So in the event your
company goes under, it is not legally obligated to
leave the unvested portion of your match in your
account. Th e money you contribute to your 401(k)
is always 100 % yours.
SITUATION: Your employer announced it will
suspend its 401(k) matching contributions in 2009.
Should you keep contributing to your 401(k)?
ACTION: Because you are not going to get the
matching contribution, you want to be strategic
about how best to use your money. If you have credit
card debt, suspend your 401(k) contributions so
you have more money in your paycheck to put toward
paying off your credit card balance. If you do
not have credit card debt but you do not have an
eight-month emergency fund, make sure you create
a savings fund before you do anything else. If
you have no credit card debt and you have an eightmonth
emergency fund, then I suggest you suspend
your 401(k) contributions in 2009 and instead—if
you qualify —invest in a Roth IRA account. If you
ACTION PLAN: Retirement Investing 63
don’t qualify , invest in a traditional IRA. If you already
have funded your Roth or IRA, then just
kee p taking that extra money to pay down the
mortgage on your home if you plan to stay in that
home forever or kee p contributing to your 401(k);
even without the company match, it remains a
smart way to save tax-deferred for your retirement.
SITUATION: You have money in an old employer’s
401(k) and wonder if you should leave it where it is,
transfer it to your new employer’s plan, or do an IRA
rollover.
ACTION: Do an IRA rollover. Rather than be restricted
to the handful of mutual funds off ered in
your 401(k), you get to pick the funds, exchangetraded
funds (ETFs), and stocks or individual
bonds to invest in when you do an IRA rollover.
Th at puts you in total control and allows you to
choose the best low-cost investments for your retirement
money.
SITUATION: You want to do an IRA rollover, but you
don’t know how.
ACTION: Choose the fi nancial institution you
want to move your money to (that’s the rollover
part) and that company will help you switch the
money fr om the 401(k) into your new IRA account.
I believe kee ping your costs as low as pos-
64 SUZE ORMAN’S 2009 ACTION PLAN
sible is vitally important, so I recommend discount
brokerages or no-load fund companies that also
have a low-cost brokerage arm for your bond and
ETF investing. Once you pick the fi rm you want
to move your money to, all you will nee d to do is
complete an easy rollover application form and
choose the option for a direct rollover; that means
your new fi rm will contact your old 401(k) directly
and get your money moved. Once your IRA is in
place, set up an automated monthly investment
(fr om a bank account) for the growth portion of
your retirement portfolio. I highly recommend
making monthly investments rather than big,
once-a-year lump-sum investments. Periodic investments
are a way to dollar cost average, a smart
investment strategy for stock investing.
SITUATION: You want to do an IRA rollover but are
not sure if you should roll it over into a traditional IRA
or a Roth IRA.
ACTION: If you are eligible to roll over into a Roth
IRA in 2009, you have to consider it. Th ere is one
big caveat, though: When you convert any money
into a Roth IRA that was in either a 401(k) or a
traditional IRA, you will owe taxes. So you nee d
to consider carefully how you will come up with
the cash to cover a tax bill. One strategy is to convert
just a small portion at a time, so you aren’t hit
with a staggering tax bill. I also highly recommend
ACTION PLAN: Retirement Investing 65
you consult a tax advisor with expertise in Roth
conversions to make sure you choose a strategy
that does not put you in a tax bind.
But here is what you nee d to understand: Th e
money in your 401(k) is, in most instances, taxdeferred.
Th at means when you eventually withdraw
money fr om it in retirement, it will be taxed
at your ordinary income tax rate. If you roll it over
into a traditional IRA, the system stays the same
for tax purposes.
A Roth IRA is diff erent: You invest money that
you have already paid tax on and then in retirement
you get to take out all the money in your
Roth without paying any tax on it. So the smart
thing to do with your 401(k) is to roll it over fi rst
into an IRA rollover. Th en, depending on how
much money you actually have in your IRA rollover,
you would either convert it to a Roth IRA
litt le by litt le or do it all at once. Remember, you
will owe taxes on whatever amount of money you
convert. But if you go through this eff ort there is a
nice payoff : Th e growth on the money in your
Roth IRA will be tax-fr ee if you leave it untouched
until you are 59½ and have owned the Roth for at
least fi ve years. You can learn more about Roth
conversions at htt p://www.fairmark.com/rothira.
SITUATION: You want to convert to a Roth IRA but
were told your income is too high.
66 SUZE ORMAN’S 2009 ACTION PLAN
ACTION: Roll your 401(k) into a traditional IRA
in 2009 and then convert that IRA into a Roth
IRA in 2010, when everyone, regardless of income,
will be allowed to convert to a Roth.
In 2009, you must have modifi ed adjusted gross
income (MAGI) below $100,000 on your federal
tax return to be eligible for a Roth conversion.
Th at’s $100,000 whether you are single or you fi le
a joint tax return. But the income limit vanishes in
2010; everyone and anyone will be allowed to convert
their rollover 401(k) or traditional IRA into a
Roth IRA in 2010. A nice bonus of waiting until
2010 is that any tax due on your conversion can be
paid over tw o years.
SITUATION: You converted to a Roth IRA in 2008,
but you are kicking yourself now because your account
is down 20% and you owe tax on the amount
that was originally converted.
ACTION: Do a recharacterization. In a rare act of
leniency, the IRS allows for do-overs of IRA conversions.
If you convert a traditional IRA to a
Roth and then regret it, you get to reverse your
decision.
Th e advantage of doing this during a down market
is that you can then reconvert back into the
Roth IRA and your new tax bill will be based on
the current value of the account at the time of the
second conversion.
ACTION PLAN: Retirement Investing 67
So let’s say you converted $20,000 in 2008.
Th en the market decline dropped the value to
$10,000. You owe tax on the $20,000, since that
was the value at the time of the conversion. If you
do a recharacterization, the money goes back into
the traditional IRA and you wipe out that tax bill.
You must then wait until the next tax year to reconvert
to a Roth. Let’s assume at that point your
IRA is still stuck at $10,000. You will owe tax on
that $10,000 conversion. Th at’s a lot bett er than
the 2008 tax bill that would be based on the
$20,000 original conversion.
SITUATION: You aren’t sure if you qualify for a Roth,
and how much you can contribute if you do.
ACTION: In 2009, the Roth contribution limit is
$5,000 if you are under 50 years old; if you are
above 50, you can invest up to $6,000. Individuals
with modifi ed adjusted gross income below
$105,000 and married couples fi ling a joint tax return
with income below $166,000 can invest up to
those maximums. Individuals with income be-
tw ee n $105,000 and $120,000 and married couples
with income betw ee n $166,000 and $176,000
can make reduced contributions. Any fi nancial
institution that off ers Roth IRAs will have an online
calculator or a customer-service representative
to help you determine your eligibility .
68 SUZE ORMAN’S 2009 ACTION PLAN
SITUATION: You qualify for a Roth, but you wonder
why you should bother with one if you can just keep
contributing to your 401(k) after you exceed the company
match.
ACTION: It’s important to understand that all the
money you pull out of your 401(k) (or traditional
IRA, for that matt er) will be taxed at your ordinary
income-tax rate. And given the large defi cits
our country faces—to say nothing of the large
bills for various bailouts—there is every reason to
believe that tax rates are going to be higher in the
future, not lower. How do you protect yourself
fr om those higher tax rates? Invest your retirement
money in a Roth IRA. If the account has
bee n open for at least fi ve years and you are 59½
when you take it out, it will not be taxed, period. It
is far bett er to pay taxes on your money today so
you never have to pay them again. Also, it’s helpful
to know, especially in times like these, that you
can always withdraw any money you originally
contributed to your Roth at any time, without
taxes or penalties, regardless of your age. Only the
growth on your contributions must stay in your
Roth until you are 59½. At that point, and if the
account has bee n open for at least fi ve years, you’ll
be able to withdraw the growth tax-fr ee as well.
Another great benefi t of a Roth is that if you do
not nee d to make withdrawals, the IRS will not
ACTION PLAN: Retirement Investing 69
force you to; you can just leave the money growing
and eventually pass it along to your heirs as an
amazing tax-fr ee inheritance. Th at’s quite diff erent
fr om a traditional IRA and 401(k): Th e IRS
insists you start making required minimum distributions
no later than the year you turn 70½.
SITUATION: Your income is too high to invest in a
Roth IRA.
ACTION: Invest in a traditional (nondeductible)
IRA; even if you can’t deduct your contribution,
the money you set aside will grow tax-deferred in
2009 and then you can convert to a Roth IRA
in 2010.
SITUATION: You don’t know how to invest the
money you have in your retirement account.
ACTION: You nee d a mix of stocks and bonds;
the mix is mostly a function of how many years
you have until you retire, but I also respect that
your "risk tolerance" might aff ect your decision
making. In the questions that follow, I tell you
what percentage of stocks and bonds you should
have if you are fi ve years fr om retirement, 10 to 15
years fr om retirement, or 20 or more years fr om
retirement.
EXCHANGE-TRADED FUNDS (ETFS)
AND NO-LOAD MUTUAL FUNDS: For your
70 SUZE ORMAN’S 2009 ACTION PLAN
stock holdings, I’d like you to focus on either noload
index mutual funds, ETFs, or high-yielding,
dividend-paying stocks . ETFs and no-load mutual
funds are the best way to build a diversifi ed portfolio.
Each mutual fund or ETF owns dozens and oft en
hundreds of stocks ; for those of you who do not have
large sums of money ($100,000 or more) to invest,
that is a safer way to go than if you put all your money
into a few individual stocks .
BONDS: I prefer you to invest in individual
bonds, rather than bond funds. I’ll explain below.
SITUATION: You don’t know which is better—a noload
mutual fund or an ETF?
ACTION: If your retirement account off ers them,
ETFs are the way to go.
Here’s what you nee d to understand: Mutual
funds and ETFs both charge what is known as an
annual expense ratio. Th is is an annual fee that everyone
pays, but it is sort of hidden in that you won’t
see it deducted fr om your account as a line-item
cost; instead, it is shaved off of your fund’s return.
Th ere are no-load index mutual funds that have
very low expense ratios—below 0.30 %. But ETFs
can be even bett er, with annual expense ratios of as
litt le as 0.07 %. I know that sounds like a very small
diff erence, but hey, every penny you kee p in your
account rather than pay as a fee is money that continues
to grow for your retirement. Th at’s just one
ACTION PLAN: Retirement Investing 71
reason why I love ETFs. Th e one catch with ETFs is
that they trade on the stock markets as if they were
a stock, so that means you will have to pay a commission
to buy and sell ETF shares; when you buy a
no-load mutual fund you do not pay a commission.
Discount brokerages oft en charge $10 or so. Th at’s
not a big deal to pay a few times a year, but you sure
don’t want to pay that commission if you are making
investments every month with small amounts
of money (dollar cost averaging). If that’s the case,
you are bett er off putt ing money in your IRA every
month into a money market account and then purchasing
your ETFs every three months rather than
every month. Th at way you save on commissions.
SITUATION: You want to invest in stocks, but you’re
confused by all the choices. What’s a good long-term
strategy?
ACTION: A solid long-term strategy for the stock
portion of your portfolio is to put 90 % of your
stock money in a broad U.S. index fund or ETF
and 10 % in an international stock fund or ETF.
Th e Vanguard Total Stock Market Index fund
(VTSMX) and its ETF cousin, the Vanguard Total
Stock Market ETF (VTI), are good choices for
your U.S. investment. Now, if you are antsy about
stocks in 2009, I want you to be sure to check out
my advice later in this chapter for investing in
high-dividend funds or ETFs. I think they are a
72 SUZE ORMAN’S 2009 ACTION PLAN
great defensive way to invest in stocks in 2009,
and it is perfectly fi ne to use dividend funds/ETFs
instead of the U.S. index fund. For the international
portion, you can opt for the Vanguard Total
International Stock Index (VGTSX) or the iShares
MSCI EAFE ETF (EFA).
PLEASE NOTE: If you are currently invested in
cas h or bonds, and are ready to follow my strategy for
owning stocks , don’t rush to move all your money into
stocks in one lump sum. I recommend you use the
dollar-cost-averaging strategy explained in this chapter
and invest equal amounts each month over the
next year to move your money slowly into stocks .
SITUATION: You aren’t sure if the fi xed-income portion
of your money belongs in bonds or bond funds.
ACTION: Buy individual bonds if you can, not
bond funds.
I prefer bonds to bond funds because with a
high-quality bond you know you will get the
amount you invested back once the bond matures.
For example, if you invest $5,000 in a Treasury
note with a fi ve-year maturity , you will get the
$5,000 back aft er the note matures in fi ve years.
During the time you own the note, you will also
collect a fi xed interest for all of those fi ve years.
(By the way, a note works just like a bond; it’s just
that our Treasury likes to call them notes.) Th e
problem with bond funds is that they do not have a
ACTION PLAN: Retirement Investing 73
maturity date and their interest rate is not fi xed. So
you may get back less than what you invested and
your interest rate could go down over the years.
I recommend kee ping the bond portion of your
account in Treasuries and/or CDs if you are in
a retirement account, and high-quality generalobligation
municipal bonds outside of a retirement
account. Because of what is going on in the economy,
I think it’s wise to stick with notes or bonds
that mature in fi ve years or less. In the coming
years, we may see higher interest rates, so I don’t
want you to lock up your money today for 10 years
or longer. Stick with shorter maturities so you
can reinvest at what I expect will be higher rates
in the future. (If your money is in a 401(k) and you
are fi ve years or less fr om retirement, I have to say
that in 2009 I think it is best to stick with the
stable-value fund or the money market option,
rather than the bond fund.)
SITUATION: You are fi ve years away from retirement
and you feel you cannot afford to lose one penny more
in your 401(k) plan. What should you do?
ACTION: Ideally, you don’t want to bail out of
stocks completely. Let’s review a few important issues.
First, any money you know you will nee d in
the next fi ve to 10 years to pay bills does not belong
in the stock market. Never has and never will.
But just because you are retiring in fi ve years, it
74 SUZE ORMAN’S 2009 ACTION PLAN
doesn’t mean you will nee d to use all that money
immediately, right? Some you will start to use,
and the rest you won’t touch for 10 or 20 or even
30 years, given our longer life spans. If that sounds
like your situation, I would ask you to think about
kee ping 25 % to 30 % of your money in stocks even
if you are just fi ve years fr om retirement.
If your issue is that you lost so much money you
worry you won’t have enough for retirement and
you want to kee p what you have safe, then you
nee d to face facts. Moving all your money into a
stable-value fund is not the solution. Here’s what
you nee d to do: Delay your retirement for another
three years or more. Th at will give your stocks
more time to recover fr om the recent losses. It will
also potentially give you more working years to
save more. And most important, it means you delay
when you start to nee d the money; every year
you can put off touching your retirement savings
is going to be a tremendous help to you.
Now, the one exception here is if in fact you
have determined that when you retire you want to
use all your Roth IRA money to pay off your mortgage.
In that case, you will indee d "nee d" all your
money sooner rather than later. And to repeat myself:
Money you know you nee d within fi ve to 10
years does not belong in stocks. Put it all in your
retirement plan’s stable-value fund or money market
account.
ACTION PLAN: Retirement Investing 75
SITUATION: You are 10 years from retirement and
you don’t know how much should be invested in
stocks and how much should be in bonds or cash.
ACTION: Kee p at least 50 % of your money in individual
bonds, CDs, or stable-value funds or
money market accounts. Th e absolute best move
when you are nearing retirement is to reduce your
risk, and that means moving out of stocks and into
bonds. But this only makes sense if your stash at
the point you retire is big enough that you can get
by on it earning 4 % or so a year fr om bond interest.
You nee d to make sure you have a large enough
amount saved up and you have fi gured your costs
correctly to be able to move completely into bonds
and live comfortably. It’s also important to realize
that even if you retire at 60, there’s a very good
chance you will live to be 80 or even 90. So you are
asking your retirement fund to support you for 20
or 30 years. Th e simple math is that if you are
making withdrawals fr om your retirement account
each month and your remaining balance is
growing at just 4 % or so a year, you run the risk
that your money will not last 25 or 30 years. (Just
about every fi nancial institution has a fr ee online
retirement calculator that will estimate how long
your money will last. Or ty pe "retirement calculator"
into your search engine.) You nee d to balance
the growth potential of stocks with the fact that
76 SUZE ORMAN’S 2009 ACTION PLAN
you will soon be relying on your retirement account
to live. A 50-50 mix is a good target for balancing
those tw o diff erent nee ds.
As I explain later in this chapter, I think ETFs
that focus on dividend-paying stocks are a very
smart place for your stock investments today. Th e
income you receive fr om the dividend is a good
way to "get paid" today while still investing in
stocks for future gains. If you currently have a
50% stock investment and want to invest in dividend-
paying stocks, you can make the switch over.
If, however, you have a lot of money in bonds or
cash, please take your time moving money into a
stock ETF; rather than one lump-sum investment,
make smaller monthly investments—known as
dollar cost averaging—over the course of the
next year.
SITUATION: You don’t plan to touch your retirement
money for 10 to 15 years. How much should be
invested in stocks and how much should be in
bonds/cash?
ACTION: If you have 15 years until retirement,
have about 70 % in stocks and then scale that back
by 5 percentage points or so each year, so that
when you are 10 years fr om retirement you have
50 % in stocks.
ACTION PLAN: Retirement Investing 77
SITUATION: You have 20 or more years until retirement
and you want to know how much should be
invested in stocks and how much should be in
bonds/cash.
ACTION: Aim for 100 % stocks. You are in a great
situation. You have so much time on your hands
that you can ride out this bear market and profi t
when the market rallies. As I said earlier, now may
prove to be a fantastic time to be investing in
stocks because you get to buy in at lower prices.
If you are afr aid to have all your money in the
market, there is nothing wrong with kee ping 20 %
or so in bonds/cash. With that mix, you are going
to do well when the stock markets rally and also
have a nice bond cushion to reduce your portfolio’s
losses when the stock market is falling. If that
helps you relax a bit and stay committ ed to a longterm
strategy, I think 20 % in bonds is just fi ne,
but I’d prefer to be in stocks 100 %.
SITUATION: You were planning on retiring in 2009,
but after taking these big losses in your account
you’re not sure you can still afford to.
ACTION: Focus on what the market loss will mean
to you in terms of monthly income.
Let’s say in 2007 you had a $250,000 retire-
78 SUZE ORMAN’S 2009 ACTION PLAN
ment stash. Today it is $200,000. So what does
that mean to you in terms of retirement income?
Your intention at retirement was to have your
money invested mostly in bonds so your money
would be safe and you could count on a return of
approximately 4 % in 2009. Th e $50,000 you lost
would generate $2,000 in income at a 4 % rate. In
other words, your real monthly loss in income
comes to about $170 a month. So the question is,
does that loss of $170 a month mean you can no
longer retire? If the answer to that question is yes,
then the truth is you really were cutt ing it too
close to retire anyway.
SITUATION: You have an IRA at a brokerage fi rm,
but you’re worried that if the company goes under, as
Bear Stearns did, you will lose all your money.
ACTION: Stop worrying. Th e money you have invested
in your accounts at a brokerage or fund
company is completely separate fr om the operations
of the parent company. Th e brokerage or
fund company can’t use your money to pay its bills
and debt.
Even if a company goes under, what happens is
that you will transfer your money to another brokerage
or fund company. Or, more likely, the company
will be taken over and you become a client of
that new company.
ACTION PLAN: Retirement Investing 79
And just so you know, if there is an irregularity
and a company uses your money fr audulently, you
may be able to recover up to $500,000 ($100,000
limit for cash accounts) fr om the Securities Investor
Protection Corp. Th is is not like federal insurance.
It’s a voluntary program of member fi rms
that kee ps a kitty around to sett le problems; at the
end of 2007, SIPC had about $1.5 billion in its
fund. Th is covers standard investment accounts
only; SIPC does not cover alternatives such as currency
and commodity investments. Check with
your brokerage or fund company to see if it belongs
to SIPC.
SITUATION: You have a variable annuity and are
worried that the insurance company will go under
and you will lose all your money.
ACTION: Money invested in a variable annuity is
ty pically in segregated subaccounts that are separate
fr om your insurer’s balance shee t. Even if the
insurer runs into trouble, your money should not
be aff ected. Now, that said, you do nee d to understand
that your variable annuity is susceptible to
market losses; that’s what the word "variable"
means. How much your account is worth is largely
a function of the performance of the subaccounts
(funds) you are invested in.
80 SUZE ORMAN’S 2009 ACTION PLAN
SITUATION: You have a single-premium fi xed annuity
and are worried that the insurance company
will go under and you will lose your money.
ACTION: With a single-premium fi xed annuity
your payout is indee d a guarantee fr om your insurer,
so if your insurer goes under there is reason
to be concerned. Concerned, but not panicked.
First, in the unlikely event anything happens to
your insurer, there is a state guaranty fund that
will swoop in to cover annuity payments—up to
certain limits. In most states, the guarantee d payout
for an annuity is $100,000, though it can be
higher in some states. (Go to www.nohlga.com
and use the locator to fi nd your state’s insurance
department, where you can learn about your
state’s guaranty fund limits.)
If your annuity excee ds your state’s guaranty
limit, you nee d to weigh the cost of cashing out
carefully.
SITUATION: You are retired and need a higher income
payout than you can get from bank CDs today.
ACTION: Consider municipal bonds and dividendpaying
stock mutual funds or ETFs.
As I write this in November 2008, municipal
bonds are paying the highest yields I have see n in
ACTION PLAN: Retirement Investing 81
many years, so take advantage of them. I want to
be clear: You never want to put money that is in an
IRA, 401(k), or other tax-deferred account in
municipals. Because your money is already taxdeferred,
you get no added benefi t fr om buying
munis. So I am talking about money you invest
outside of your IRA and 401(k). Now, I know that
earlier I told you that the bond portion of your
IRA and 401(k) should be kept in Treasuries with
short maturities, but I have a diff erent strategy
for municipal bonds. I think it is smart to invest
in municipal bonds with maturities of 10 to 20
years. As of November 2008, a 20-year generalobligation
municipal bond has a yield of 5.14 %.
For someone in the 28 % federal tax bracket,
that is the equivalent of a 7.1 % yield. Th at is a seriously
great return on your money. If you are in
a higher tax bracket, your return will be even
higher.
As much as I love municipal bonds, I want to
emphasize that this strategy only makes sense if
you have at least $100,000 to invest; that is how
much you nee d to be able to buy a diversifi ed portfolio
of fi ve to 10 diff erent bonds and not be hit
with outrageous fee s. (If you don’t have that much
money, stick with Treasury notes.)
Another strategy to generate more income in
2009 is to invest a portion of your money in highdividend
individual stocks or ETFs.
82 SUZE ORMAN’S 2009 ACTION PLAN
Because of the stee p market losses, some company
dividend payouts are now 5 % or even higher.
Th at’s a lot bett er than what you can get at the
bank.
However, you nee d to know that dividend
stocks of course have greater risk than a bank CD.
Even though you are receiving a nice steady dividend
payout, the underlying value of your shares
can indee d fall. And in today’s tough economy,
there is the possibility that some companies—such
as the hard-pressed fi nancial services industry—
might fi nd that they have to suspend or reduce
their dividend payout. You nee d to understand
that companies choose to pay dividends—they
are not required to do so. In the third quarter of
2008, more than 100 companies cut their dividends,
according to Standard & Poor’s.
So here’s my strategy for cautious dividend
investing:
¡ Invest only money that you know you will not
need to cash in for at least the next 10 years. You
will earn income (the dividend payout) on the
money, but because these are stocks, you want
to know that if the share price declines you won’t
have to sell at a big loss.
¡ Stick with low-cost ETFs. Owning individual
stocks increases your risk of suffering big losses
if there is an unexpected problem in that one
company or industry. It’s safer to invest in a di-
ACTION PLAN: Retirement Investing 83
versifi ed portfolio of dividend-paying stocks. I
like Vanguard High Dividend Yield (VYM) and
iShares Select Dividend Index (DVY) if you invest
in ETFs.
84
5
ACTION PLAN
Saving
The New Reality
Even safe havens can be risky during a credit
crisis. Th e high-profi le failure of IndyMac
bank in July 2008 resulted in some depositors
receiving an initial payment of just 50 cents
on the dollar for money they had at the bank that
excee ded Federal Deposit Insurance Corp. (FDIC)
coverage. Another jolt came in September 2008
when the Reserve, a money market mutual fund
company, announced that its Reserve Primary
Fund "broke the buck." Money market mutual
funds are designed to always maintain a fi xed $1
value per share. Th eir sole purpose is to provide
safe savings through a low yield. But one of the
Reserve Primary Fund’s investments was a Lehman
Brothers security . When Lehman went under,
so did the value of that security .
ACTION PLAN: Saving 85
As I write this in November 2008, it is still not
clear how much Reserve shareholders will receive
when the fund is liquidated; it could be 97 cents
on the dollar. Another disturbing development is
that shareholders of 15 money market funds managed
by the Reserve have had their accounts fr ozen
for more than a month—meaning they have
no access to money that is supposed to be in the
most liquid of investment accounts.
Th e Reserve’s problems triggered massive
redemption requests fr om other money fund investors
at other companies; in September, the Department
of the Treasury had to step in and off er
a temporary insurance fund to stop an all-out run
on money market funds (more on this below).
Th e timing of the savings scare couldn’t be
worse. Never has having an emergency savings account
bee n more important. Th e weak economy
increases the odds that we will see rising layoff s in
2009; that’s why I want you to push as hard as you
can to fi nd a way to set aside at least eight months
of living expenses in an insured savings account.
As I explained in "Action Plan: Credit," if you’ve
slid by in the past thinking you could always tap
your credit card in a pinch, that’s not going to
work this year. Credit lines are being reduced, and
even if you have bee n spared so far, I have news for
you: If you get laid off and start using your credit
card more, you bett er believe the credit card company
is going to think about cutt ing your credit
86 SUZE ORMAN’S 2009 ACTION PLAN
limit the minute they catch wind that your unpaid
balance kee ps growing. Nor is your home equity
line of credit (HELOC) a viable "emergency"
fund anymore. If you still have an open HELOC,
consider yourself lucky . With falling home prices
eroding equity throughout 2007 and 2008, banks
have bee n closing down HELOC accounts. And
HELOC closures may continue in 2009 as many
housing markets continue to struggle.
Bott om line: In 2009, everyone must have a
safe standard savings account that will cover eight
months of living costs. Rely on credit lines and
HELOCs and you put your family at extreme
risk.
What you must do in 2009
¡ Make sure your bank or credit union is covered
by federal deposit insurance.
¡ Check that what you have on deposit is eligible
for full insurance coverage in the unlikely event
your bank or credit union fails. Through December
31, 2009, the general limit has been raised
to $250,000 from its previous $100,000, but
you need to understand the ins and outs.
¡ If your savings is in a money market mutual fund
sold through a brokerage or mutual fund fi rm,
consider moving your money into the Treasury
money market fund at that company.
¡ Build up your savings to cover eight months of
living expenses.
ACTION PLAN: Saving 87
¡ Move all money you need within the next fi ve to
10 years into savings. Money you need soon
does not belong in the stock market.
Your 2009 Savings Action Plan
SITUATION: You don’t know if your bank or credit
union is backed by federal insurance.
ACTION: Confi rm that your bank is part of the
Federal Deposit Insurance Corp. (FDIC) program
or that your credit union is part of the National
Credit Union Administration’s insurance fund
(NCUA). You can check a recent statement or
swing by the bank or credit union. If you see
the FDIC or NCUA insurance logos displayed
anywhere on a statement or fr ont door, you are
halfway home. Another option is to go to www.
myfdicinsurance.gov or www.ncua.gov and use
the online tools to confi rm that where you save is
indee d backed by federal insurance.
SITUATION: You don’t know if all of your money
on deposit at the bank or credit union is covered by
insurance.
ACTION: Know the new insurance limits for 2009.
Prior to the credit crisis, each individual had a base
guarantee of up to $100,000 per bank. So if you
88 SUZE ORMAN’S 2009 ACTION PLAN
had a checking account, a CD, and a money market,
all the accounts were fully insured if their combined
total did not excee d $100,000. If you had a
joint account, you and the person you shared the
account with were eligible for another $100,000
each of coverage. (Th e same limits applied for federally
insured credit unions.)
For 2009, the limit for banks and credit unions
has bee n raised to $250,000 per person per bank/
credit union. Th e Treasury made this change in
October 2008 to stave off a run on banks fr om
depositors spooked by the continuing fallout fr om
the credit crisis. If you have less than $250,000 at
any single bank or credit union and that bank or
credit union is federally insured, stop worrying.
You are fi ne in 2009.
SITUATION: Given the new $250,000 limit, you
want to know if it is smart to invest $250,000 in a
high-rate fi ve-year CD your bank is offering.
ACTION: No. You have to understand that currently
the $250,000 insurance is good only through
December 31, 2009. It may be renewed past 2009,
but as of now, we do not know if it will be extended
or made permanent in 2010. For now you have to
act as if the limit will go back to $100,000 until you
hear diff erently. So do not lock up $250,000 at one
bank in case the limits are reduced; it might mean
you could have $150,000 in uninsured money.
ACTION PLAN: Saving 89
To be absolutely safe, limit the money you deposit
at any one bank to $100,000 or stick with a
CD that expires by December 31, 2009.
SITUATION: You already purchased a long-term CD
for more than $100,000 and now you’re worried
about what will happen if the limits are rolled back
after 2009.
ACTION: Don’t do anything yet. I don’t think you
nee d to rush to make any changes. Check with
your bank—or my Web site—by December to
fi nd out what’s going to happen in 2010. If the
limit is reduced to $100,000, you can still choose
to cash in your CD early. Most banks will dock
you with a penalty for an early withdrawal, but it
is ty pically limited to forfeiting some of your interest,
not principal. For now, sit tight and let’s see
what happens by the end of 2009.
WEB SITE ALERT: You have my promis e that
the minute the FDIC and NCUA announce any changes
in 2009, I will have an update at my Web site.
SITUATION: You have more than $250,000 at one
bank and are worried your money isn’t 100% covered
by FDIC insurance.
ACTION: You may still have full insurance coverage,
but you nee d to check that your accounts mee t
the obscure rules that extend your insurance past
90 SUZE ORMAN’S 2009 ACTION PLAN
the basic $250,000. Th e quickest and best way to
make sure your accounts are fully insured is to go
to www.myfdicinsurance.gov and plug your bank
info into the easy-to-use calculator. In just a few
simple steps you will have verifi cation straight
fr om the FDIC if all your accounts are fully
insured. (Credit union members should use the
NCUA Calculator at htt p://webapps.ncua.gov/
ins/). If you don’t have easy access to a computer, I
recommend marching down to your bank or credit
union and having them go online with you to verify
the level of coverage you have; don’t just take a
teller’s word for it. You want to see your account
information plugged into the EDIE tool (at a bank)
or the NCUA Calculator (for a credit union).
SITUATION: You worry that the FDIC or NCUA will
run out of money if things get really bad and there
are lots of failures. You fear the insurance really isn’t
going to be there if and when you need it.
ACTION: Rest assured your money is safe as long
as it is covered by federal insurance. Th at insurance
is backed by the full faith and credit of the
United States government. Please don’t get worked
up if you hear or read ominous stories that the insurance
funds are running short of money in 2009.
I certainly hope that doesn’t happen, and I am in
no way suggesting that it will. But these are diffi -
cult times and there may be more bank failures or
ACTION PLAN: Saving 91
credit union failures if our economy and the credit
markets continue to struggle. But here’s the big
picture to stay focused on: Th e FDIC and NCUA
can go directly to the Treasury to get any money
they nee d to fulfi ll their stated insurance promises.
And the Treasury will raise any extra money
it may nee d to cover losses that excee d what is already
set aside in the insurance funds. Th ere is
absolutely no way our government is going to let
depositors with insured accounts lose a penny.
Th at promise is one of the pillars of our fi nancial
system.
SITUATION: You worry that if your bank or credit
union fails, your account will be frozen and you won’t
be able to pay your bills or get cash out.
ACTION: Relax. Typically, when a bank or credit
union is taken over by regulators it occurs on a
Friday and by Monday everything is open and
running as if nothing happened. It is in the best
interests of the regulators to make sure depositors
have quick access to their money. Th at’s not only
"good business," it is also how the regulators prevent
a panicked run on the banks.
SITUATION: Your money is at a credit union and
you are wondering if you should move it to an FDICinsured
bank.
92 SUZE ORMAN’S 2009 ACTION PLAN
ACTION: As long as your credit union belongs to
the National Credit Administration’s insurance
fund (NCUA), your money is safe. Th e coverage
limits and government backing are the same as
those at an FDIC-insured bank. Th ere is no nee d
to move your money.
SITUATION: You have money deposited with an online
bank and wonder if it is safe.
ACTION: Check if the online bank says it is part
of the FDIC insurance program. Every bank that
is in the FDIC insurance program—whether online
or "bricks and mortar"—is safe. You can
check the home page of your online bank; all
banks that participate in the program will advertise
that fact boldly. But I think it is smart to double-
check directly with the FDIC; go to www.
myfdicinsurance.gov to verify you are protected,
and confi rm that every penny is in fact insured.
SITUATION: A stock mutual fund you bought at
your bank had a big loss in 2008. The bank is FDIC
insured, so you thought your money is safe.
ACTION: You nee d to understand that FDIC insurance
does not cover investments, such as a
stock fund. Federal insurance for banks and for
credit unions covers deposit accounts, not investment
accounts. A deposit account can be a check-
ACTION PLAN: Saving 93
ing, savings, CD, or money market account. But
banks are also allowed to sell investments. Mutual
funds are investments. Stocks and exchangetraded
funds (ETFs) you buy through a bank are
investments. And they have zero insurance. Zero.
When you opened the account you probably signed
some sort of acknowledgment that you understood
this, but those disclosures are easy to miss. And,
of course, there was no guarantee that your
fr iendly bank account manager who was excited
to have you make the investment took the time to
slowly and clearly spell things out.
When you invest in the stock market—whether
it be through a fund you buy at a bank, a credit
union, a brokerage, or a fund company—you have
no protection against bear market losses.
SITUATION: Last time I checked, my savings account
had an interest rate of 5%, but now it is below
2.5%. Should I move to a bank offering accounts with
higher yields?
ACTION: It is always smart to shop around for the
best-yielding savings accounts, but you nee d to understand
that 2008 was the year of the falling bank
rate. Banks peg the savings rate they off er consumers
to the Federal Reserve’s Federal Funds Rate.
And for more than a year the Federal Reserve has
bee n aggressively cutt ing the Federal Funds Rate.
In December 2007, the rate was at 4.25 %. In
94 SUZE ORMAN’S 2009 ACTION PLAN
November 2008, it was down to 1%, and as I write,
there is talk that it may go down to 0 %. So if you
are earning more than 1 % or so on a regular savings
account, that’s actually pretty good. I am all
for moving your money to the highest-yielding
bank accounts, and you can check Web sites such
as www.bankrate.com for banks that off er the
highest savings rates. But if you have a competitive
yield right where you are and it is FDIC insured, I
wouldn’t make it a huge priority in 2009 to hunt for
an extra 0.25 % in yield. But hey, if you have the
time and energy to shop around, go for it. Just remember:
Only put your money in a bank that is
FDIC insured or a federally insured credit union.
SITUATION: Your savings are in a money market
mutual fund your broker told you was safe, but you
wonder if it’s as safe as an account at an FDIC-insured
bank.
ACTION: Th e short answer is no. A money market
mutual fund (MMMF) sold by a brokerage fi rm
or a mutual fund fi rm is not backed by permanent
federal insurance. Only a money market deposit
account (MMDA) sold through a federally insured
bank or credit union, or a bank subsidiary of
a brokerage or mutual fund company, is eligible
for insurance.
I know, I know: MMDA, MMMF—why do
they have to make it all so confusing?
ACTION PLAN: Saving 95
So just to be sure you have it down straight:
MMDA: Sold at a bank or credit union, or through
a bank subsidiary of a brokerage or fund company.
Eligible for federal deposit insurance.
MMMF: Sold through a brokerage fi rm or mutual
fund company. No insurance.
Now, in normal times, an MMMF is considered
just as safe as an MMDA. But I don’t have to tell
you how not normal the times are for us right now.
And I don’t think you should rest easy with the
temporary insurance off ered by the emergency
Treasury action last September. It’s important to
understand that this Treasury plan is temporary
and voluntary. We don’t know how long the Treasury
will kee p off ering this deal to MMMFs;
Treasury is currently authorized to kee p the plan
through September 18, 2009, but it must reauthorize
the plan every three months betw ee n now and
then. Your brokerage fi rm or mutual fund fi rm
must choose to become part of the program (and
pay a fee to participate). So, at the very least, you
nee d to check with your brokerage or fund fi rm to
fi nd out if it is participating in this temporary insurance
program. But here’s the really important
caveat: Only deposits in MMMFs as of the close
of business September 19, 2008, are eligible for
the Treasury’s insurance.
Th at’s just too many question marks to deal with
if you ask me. Here’s my safe and sound MMMF
strategy for 2009: Kee p your money with the same
96 SUZE ORMAN’S 2009 ACTION PLAN
fi rm but move it into the Treasury MMMF (every
major brokerage and fund company has this option).
If your money is invested in U.S. Treasuries,
you have nothing to worry about. Your money is
backed by the full faith and credit of the U.S. government.
Th ere aren’t going to be any defaults in
that portfolio. And you don’t have to worry if the
Treasury Department eventually removes its current
MMMF insurance off er. If you don’t have a
Treasury MMMF option at your existing brokerage
or fund company, then I would consider moving
my money into an insured bank deposit in 2009,
or to a brokerage or fund company that off ers a
Treasury MMMF. (To be extra safe, I recommend
that money you nee d to pay bills, etc., be moved
into a bank or credit union MMDA account. We’ve
see n how the Reserve had to temporarily fr ee ze
some accounts; you nee d to make sure that money
you nee d quick access to is in fact available. Right
now the only way to ensure ready access is with an
insured bank or credit union account.)
SITUATION: You understand why it makes sense to
have eight months of living expenses set aside in an
emergency savings fund, but there is no way you can
ever save that much.
ACTION: I am well aware how stretched you are
fi nancially. I fully expect that many of you may
not be able to fl ip the switch and magically have a
ACTION PLAN: Saving 97
bank account that is stuff ed with enough money
to cover eight months of living expenses. But you
must start moving toward that goal. Month by
month you must build security for yourself and
your family. You may get to the eight-month goal
in six months of aggressive saving, or it may take
you a few years. Th at’s okay. Th e point is that you
are moving in the right direction. Every month
you will have more security , not less. Check out
"Action Plan: Spending" for steps on how to reduce
your expenses so you have more money to put toward
goals such as this one.
One of the best ways to get on a consistent savings
patt ern is to set up an automated deposit fr om
your checking account into a savings account.
Studies show that once you automate you tend to
stick with it; that’s true of bank savings accounts
and your 401(k) investing. As the saying goes, set
it and forget it.
Now, how much should you have deposited each
month? Here’s the goal for 2009. Decide how
much you can aff ord to deposit. Now add 20 % to
that amount. Don’t cheat here. If you were going
to set aside $100 a month, commit to $120. If you
were going to aim for $500 a month, it’s now $600
a month. Will that be hard? Yes. Will it take some
serious spending cuts? Probably. But in 2009 you
cannot aff ord to be laid back and do what is easy.
You must push yourself as hard as possible to build
your security as quickly as possible.
98 SUZE ORMAN’S 2009 ACTION PLAN
SITUATION: You are retired and need safe income,
but you can’t live off of 2.5% interest in your bank
CDs. What are you supposed to do?
ACTION: Kee p some of your money in the bank;
no matt er how low the yield—safety fi rst. I know
the current market is especially hard for retiree s
who depend on interest income fr om their bank
deposits to help cover their monthly living costs.
Yields on savings accounts have dwindled as the
Federal Reserve aggressively lowered its Federal
Funds Rate fr om above 4 % in late 2007 to just over
1.0 % in late 2008. During the same stretch, the
cost of everything rose. Th e offi cial infl ation rate
hovered around 4 % in 2008, but out in the real
world, the price of basic necessities—food, medications
—increased at more than tw ice that offi -
cial rate of infl ation. I don’t have a lot of chee ry
news for savers in 2009. Th ough long-term bank
rates will rise, that may not happen in 2009, as the
Federal Reserve may be more preoccupied with
kee ping rates low to deal with a stuck credit market
and an economy in recession.
Th at said, you must kee p your savings safe, no
matt er how low the yield. Some relief is on the
way in 2009, as Social Security benefi ts increased
6.2% over what you received in 2008. Th at is the
largest infl ation adjustment since 1982. I also
recommend checking out municipal bonds; as I
ACTION PLAN: Saving 99
write, you can get yields of nearly 5 % on bonds
with fi ft ee n-year maturities. Th at’s a good deal
right now and it does not require you take on the
risk of investing in longer-term issues. And please
check out my dividend stock strategy in "Action
Plan: Retirement Investing." It may be a smart
way for you to earn more income on a small portion
of your money that you’re comfortable investing
in the stock market.
SITUATION: You have a mortgage or a car loan with
a bank that failed and you wonder if you need to keep
paying it.
ACTION: You must kee p paying. A bank’s failure
does not excuse you fr om paying your loan.
Very soon aft er a bank failure, you should receive
notice of the bank that has taken over your
account. And if all goes well, you will just kee p
paying exactly as you have, with no disruption.
Now, that said, I want you to kee p very careful
records of all your payments. If you use online
banking, print out each payment for at least six
months and tuck them away in a safe place. As I
said, the transition should be seamless, but when
Bank A takes over Bank B, sometimes the wires
can get crossed in the back offi ce during the
switch over. So you want to have perfect records to
prove any problem is not because you fell behind
on payments. If you do receive a notice that you
100 SUZE ORMAN’S 2009 ACTION PLAN
haven’t paid, you have to not only deal with the
bank but check your credit reports (go to www.
annualcreditreport.com; you are entitled to one
fr ee credit report a year fr om each of the three
credit bureaus) to make sure the bank has not
mistakenly reported your loan payment as late
or delinquent. If it is showing up on your report,
you must ride the bank hard to correct the mistake.
At the same time, fi le a dispute with the
credit bureau. By law, they must look into the matter
and report back to you within 30 days. Don’t
take anyone’s word that they will take care of it.
You must stay on top of the issue and kee p checking
(and nudging) to make sure any mistake is
cleared up. As I discussed in "Action Plan: Credit,"
2009 is not a time to let your FICO credit score
drop. Especially when your bank is the one that
has tripped up.
101
6
ACTION PLAN
Spending
The New Reality
The fi nancial crisis has served as a deafening
wake-up call that will not stop ringing in
your ears. You know in the very core of your
being that you nee d to change how you run your
fi nancial life. Th ere’s no room anymore for just
gett ing by or putt ing off the hard decisions for tomorrow.
Tomorrow is here, and it requires a commitment
to taking the actions that put you and
your family on a lasting path to fi nancial security .
You know you nee d to pay down your credit card
debt to kee p your credit line intact and your FICO
score strong. You also know you can’t rely on having
easy access to a large credit card limit or HELOC
in 2009 to cover emergency expenses. You
know—or I hope you’re at least beginning to realize
—that you must come up with cash to put in a
102 SUZE ORMAN’S 2009 ACTION PLAN
savings account for emergency protection. You
have also woken up to the notion that you can’t rely
on huge home-price appreciation as your de facto
retirement account. You know you must contribute
more to your retirement savings because now is actually
a great time to be investing for the long term.
Th ere’s only one problem. You don’t know where
you will come up with the money for all this.
Th e truth is that the most eff ective cash-generating
action you nee d to take in 2009 is to spend
less. Th e less you spend, the more money you will
have aft er paying the monthly bills to put toward
reducing your credit card debt, building your emergency
savings, and increasing your retirement investing.
It’s not a news fl ash; it’s just a fact.
Th is year is all about making more by spending
less.
What you must do in 2009
¡ Separate wants from needs.
¡ Get over your guilt that you aren’t "providing"
for your kids.
¡ Strike the word "deserve" from the conversation.
What you deserve is irrelevant; what you
can truly afford is all that counts.
¡ Try to negotiate better terms on a car loan you
can’t keep up with.
¡ Be very careful when asked to cosign any loan,
no matter how much you love the person who is
asking for your help.
ACTION PLAN: Spending 103
Your 2009 Spending Action Plan
SITUATION: You know your family needs to save
more, but you have no idea where to start.
ACTION: Get a grip on where your money is going.
You can’t move forward building an honest fi nancial
life if you don’t fi rst understand where you are
today. I want you to slowly and carefully fi ll out
the Household Cash Flow workshee t below. To do
this, you nee d to fi rst pull out a year’s worth of
bank statements and credit card statements. Th e
amount you put in the right-hand column should
be the average cost for the past 12 months.
WEB SITE ALERT: A more extensive version
of this works hee t is available for download on www.
suzeorman.com.
EXPENSES MONTHLY COST
HOME
MORTGAGE/RENT
HOME EQUITY LOAN
PROPERTY TAX
INSURANCE
MAINTENANCE
UTILITIES
Gas and Electric
104 SUZE ORMAN’S 2009 ACTION PLAN
EXPENSES MONTHLY COST
Heating
Water
Home Phone
Cell Phone
Cable/TV
Internet
MAINTENANCE
Repairs/Upgrades
Gardener
Snow Removal
TOTAL MONTHLY HOME EXPENSES: __________
FOOD
Groceries
Dining Out/Takeout
Coffee
TOTAL FOOD: __________
CAR/TRANSPORTATION
Car Loan #1
Car Loan #2
Gas
Maintenance
Tolls/Paid Parking
Car Insurance (total all cars)
ACTION PLAN: Spending 105
EXPENSES MONTHLY COST
Public Transportation
TOTAL CAR COSTS: __________
OTHER INSURANCE
Health Insurance*
Life Insurance*
Disability Insurance*
Long-Term-Care Insurance*
Dental Insurance*
TOTAL OTHER COSTS: ___________
MISC. SPENDING
Child Care
Private School Tuition
Entertainment (Movies, DVD rentals,
Concerts, Sporting Events)
Hair/Manicures/Pedicures
Club Memberships
Computer Equipment and Games
Clothes
Gifts
Vacations
Medical Copays and Out-of-Pocket
Expenses
Pet (Food and Vet)
Media Subscriptions (Newspapers,
Magazines, Online)
106 SUZE ORMAN’S 2009 ACTION PLAN
EXPENSES MONTHLY COST
Charitable Contributions
Other
Other
Other
TOTAL MISC. SPENDING: __________
OTHER LOANS/DEBT
Credit Card 1
Credit Card 2
Credit Card 3
Student Loan
401(k) Loan
Bank/Personal Loan
TOTAL OTHER DEBTS: __________
MONTHLY SAVINGS/TAX PAYMENTS
Emergency Savings Account
401(k) Contribution*
IRA Contribution
College Savings Fund
Self-Employment Tax Payments
TOTAL SAVINGS/TAX PAYMENTS: __________
TOTAL EXPENSES (A): __________
*If these items are taken out of your paycheck, they do not need to be itemized
on this worksheet, which tallies expenses against take-home pay.
ACTION PLAN: Spending 107
INCOME MONTHLY AMT.
After-Tax Pay
Rental Income
Dividend/Interest Income
Social Security
Retirement Income (401(k),
IRA, and Pension)
TOTAL INCOME (B): __________
TOTAL INCOME–TOTAL EXPENSES
(B–A): _________
SITUATION: Your expenses are more than your
income.
ACTION: Circle every expense in your workshee t
that is a "want." It is imperative to separate expenses
that are for true nee ds (health insurance,
the electricity bill) fr om those that are not crucial
for your family to function (gym membership,
new clothes, computer games, etc.).
If you do not have an eight-month emergency
savings fund, if you have credit card debt, and if
you are not saving for retirement, you have no
choice but to reduce and even eliminate many of
the "wants" your family is spending money on.
Th is is not supposed to be a comfortable or easy
exercise. Cutt ing down fr om four manicures a
108 SUZE ORMAN’S 2009 ACTION PLAN
month to three is not going to get you where you
nee d to go. Your fi nancial security is buried in
those expenses. Th e more you are willing to curtail
spending on those expenses, the more money
you have to protect your family. Th e $25 you don’t
mindlessly shell out to the kids every wee k when
they head out to spend time with fr iends is $100 a
month you have to put toward a term life insurance
policy that protects them if anything were to
happen to you. Th e $300 a month you don’t spend
on the second (or third) car your family can do
without is your future retirement security ; put
that much in a Roth IRA for 20 years and you will
have more than $157,000, assuming your money
grows at an annualized 7 % rate.
SITUATION: You feel guilty cutting back on what
you’ve always provided for your family.
ACTION: Decide once and for all if you want to
indulge or protect your family.
It really is that simple. If you have credit card
debt and no emergency savings, I have to tell you,
you do not care about your family’s safety and security
. All you care about is being the hero who
doesn’t say no, the bott omless ATM for every desire,
expectation, and wish your family has.
Th at is indulgent. And destructive. Let’s walk
through this together. You look at your expense
and income workshee t, get fr ustrated, and decide
ACTION PLAN: Spending 109
to just continue down the path of overspending.
You ignore the fact that your credit card balance
kee ps rising. You ignore the fact that you have no
emergency savings. You ignore the fact that you
have very litt le saved up for retirement. You ignore
the fact that you don’t have health insurance because
it is just too expensive.
And then you get laid off . Or you get sick. You
can’t pay the mortgage, and you have no savings
to help you in this time of emergency. So the
downward spiral begins. You might even lose your
home. All because you fee l as if you must always
give your kids everything they want—and right
now. How does that indulge your kids?
Or let’s look even further into the future. Twenty
years fr om now, your litt le ones are going to be
adults, working to make ends mee t for their own
families. Th en you come knocking on the door saying
you can’t aff ord to support yourself in retirement
because you never saved up enough during
your prime working years, the years when you
made the decision to give your kids everything they
wanted. How does that indulge your adult kids?
I appreciate that it may initially be hard to institute
new fi nancial priorities and habits in your
family. Change is always a process that takes getting
used to. But the real problem here is that you
think acting responsibly with your money will be
punishment for your kids. You think that by slowing
down the spending you are taking something
110 SUZE ORMAN’S 2009 ACTION PLAN
away fr om them. I couldn’t disagree more. I see it
as protecting them. When you make the commitment
to spend less, you will have more money to
put toward what your family nee ds: lasting fi nancial
security .
And I have to tell you: How receptive will your
kids be to the change comes down to how you sell
it. If you are moping, if they can fee l your guilt,
they are going to fee l lousy. Your kids don’t deserve
that.
Children are incredibly adaptable, and they are
going to take their cues fr om you. So don’t pitch
this as a scary time and don’t suggest that they are
in any way to blame for your problems. In an ageappropriate
manner, let them know that you are
all going to be fi ne, but you nee d to be extra careful
with spending and saving to make sure the
family is safe during these challenging times.
SITUATION: Even after removing the "wants," you
still don’t have money to put toward paying off your
credit card debt and building savings.
ACTION: Look for ways to pay less for your nee ds.
You nee d a phone, but do you nee d a home phone
and a cell phone? Does your family nee d the superdeluxe
cell plan that lets everyone aimlessly text to
their heart’s delight, or might you be able to spend
$50 less a month with a scaled-back plan? Have
you really, seriously done everything to reduce your
ACTION PLAN: Spending 111
utility bills? I am talking about the low-hanging
fr uit of inexpensive insulation, unplugging unused
electronics, replacing burned-out bulbs with energy-
effi cient CFLs. I know you have heard all of
this before. But you sort of fi led it away under
"someday I really should." Th at day is here. I bet
you can reduce what you spend on your family’s
nee ds by 10 % to 20 % if you put your heart into it.
Insure Big Savings
Health insurance, car insurance, and home insurance
(including renter’s insurance) are three of the
most important "needs" for every family. Without
question, they are necessary expenses. But there
are great ways to lower your insurance premiums.
You are not to reduce your level of coverage, but
rather, make sure you have taken advantage of every
deal and discount possible.
¡ Raise your deductibles on all your policies. You
can save 10% or more if you agree to a deductible
of $500 or $1,000 rather than just $250.
There’s no need to keep a low deductible when
you have a solid emergency savings fund that
can cover any out-of-pocket expenses.
¡ Keep your auto and homeowner’s/renter policies
with one insurance company. You will be
eligible for a 10%–20% "multiline" discount.
112 SUZE ORMAN’S 2009 ACTION PLAN
¡ Designate one car as your "low mileage" car; if
you keep annual mileage below 7,500–10,000
miles, the premium discount can be 10% or so.
¡ Keep your FICO credit score above 700. Some
insurers base the premium rate you are offered
on your credit score. The higher your score, the
more likely you are to get the best terms on all
your insurance.
SITUATION: Three years ago, you and your partner
agreed you would be a stay-at-home mom, but your
partner’s commission-based salary has fallen along
with the bad economy, so you are stuck putting some
expenses on your credit card, knowing you will not
be able to pay it off in full.
ACTION: Base your fi nancial decisions on what
you have today, not what you had in the past. If
your family can no longer aff ord to live on one income,
you must consider going back to work.
I say that with great understanding of how hard
this will be for you to consider. But remember,
2009 is about making the right and honest choices
to build a secure future. And what is right is not
always the same as what is easy. Going back to
work when you believe it is far more important to
be a stay-at-home parent is an emotionally charged
ACTION PLAN: Spending 113
and diffi cult step to contemplate, but in these
tough times, it just might be necessary.
You nee d to focus on what is best for your children.
I believe very strongly that fi nancial security
is what’s best for your children. And if you cannot
honestly kee p your family fi nancially secure—by
being out of credit card debt, having a heft y savings
fund, and kee ping your retirement savings on
track—you are not doing what is best for them.
Start by considering whether you (or your partner)
can take on part-time work to supplement
what is coming in fr om the one income. Th at may
be a way to make more without having to rely
completely on child care. But if that doesn’t close
the gap, you must think about taking on a bigger
job. If it nee ds to be full-time, it nee ds to be fulltime.
Maybe not forever, but for now. 2009: the
year you take action to build fi nancial security for
your family.
SITUATION: You can’t afford to pay private-school
tuition and invest the maximum in your retirement
accounts.
ACTION: It might be time to rethink whether
public school is the bett er move for your entire
family. Look, I know this is a huge issue, and I am
not suggesting you make a decision in the next 15
minutes about whether you can continue to send
114 SUZE ORMAN’S 2009 ACTION PLAN
your 10-year-old to private school. But I also think
it is shortsighted to presume that this expense is
untouchable. If you are shortchanging your retirement
savings, or if your emergency fund is nonexistent,
you really nee d to think through whether
you are doing the best for your child. If your issue
is that you do not think your local public schools
provide the quality education you want for your
children, I want you to take a dee p breath and
consider moving to a community with a strong
public school system. As I said, this is not a quick
or easy decision. And to be honest, 2009 is probably
not the best time to try to sell your home. But
I encourage you to at least start giving this serious
consideration. Will home values and property
taxes be higher in a town with high-quality
schools? Probably. But I seriously doubt it will cost
you the $30,000 or more a year it can take to send
tw o children to private school.
SITUATION: You lost your job and can no longer afford
to make the payments on your family’s second
car, but you owe more on the loan than you can get at
trade-in.
ACTION: Call up your lender and see if you can
get the loan terms modifi ed. Ideally, you don’t
want to extend the length of the loan (that will
increase your total cost over the life of the loan),
ACTION PLAN: Spending 115
but push to see if you can get the interest rate reduced.
Th at will lower your costs. Or perhaps the
lender will agree to a temporary period of reduced
payments.
Th ere’s a good chance lenders will be receptive
to playing "Let’s Make a New Deal." Th e fi nancial
and credit crisis has bee n devastating for car lenders.
Th eir lots are already fi lled with repossessed
cars—overfl owing, in fact. At the same time, the
credit crunch has made it much harder for potential
buyers to get car loans for new cars. Th at has
caused a massive decline in sales that has jampacked
the same lot already stuff ed with repos,
with new cars that aren’t selling. Th is is a car
dealer’s worst nightmare, so that increases the
chance the lender may be willing to work out a
deal to kee p your car off his lot. Gett ing a reduced
payment fr om you is bett er than no payment—
especially if it means one less car on the lot.
SITUATION: You just want your car to be repossessed
already—you’re sick of trying to keep up with
the payments.
ACTION: If you know you can’t aff ord the car,
hand the car back to the lender rather than waiting
for repossession. By proactively contacting the
lender and giving the car back, you will avoid paying
fee s charged for repossession. And more im-
116 SUZE ORMAN’S 2009 ACTION PLAN
portant, you will avoid the trauma of having your
car towed away fr om your work or home. You
change the dynamic by making an embarrassing
act into an act of responsibility .
SITUATION: You turned the car back in—or it was
repossessed—but you were told you still owed the
lender money.
ACTION: You are responsible for the diff erence
betw ee n what you still owed on the loan and what
the lender can recoup by reselling the car. If you
can’t cover that payment, you did not live up to
your fi nancial obligation. Whether you turned in
the car or it was formally repossessed, failure to
pay the balance will stay on your credit report for
seven years.
SITUATION: You want to borrow from your 401(k) to
keep up with the car payments.
ACTION: Do not touch your retirement savings. If
you nee d to kee p the car or you want to avoid having
a repossession on your credit report, you must
fi nd other income sources to make the payment.
Go back and review the Household Cash Flow
workshee t at the beginning of this chapter. If you
nee d more cash, fi nd it fr om spending less. Th e absolute
worst move you can make is to pull money
out of your 401(k). As I explain in detail in "Ac-
ACTION PLAN: Spending 117
tion Plan: Retirement Investing," it is never wise
to touch your retirement savings. And in 2009 it is
downright dangerous, given the increased possibility
of being laid off . Lose your job and your
401(k) loan will nee d to be repaid within a few
months. Where are you going to come up with
that money?
SITUATION: Your eldest child heads to college in
2010 and you’re feeling like this is the last chance to
take a long family vacation, even though it probably
means putting $4,000 on your credit card that you
won’t be able to pay off immediately.
ACTION: You will get no argument fr om me that
family time is a high priority . As you may have
heard me say, my mantra is "People First, Th en
Money, Th en Th ings." But that doesn’t translate
to giving you carte blanche to spend whatever you
want to create those memories. Th ey are not priceless
memories. If you nee d to run up credit card
debt to fi nance the memories, they have a very
stee p cost: a 15 % interest rate, on average.
Th is is not about what you and your family deserve.
We all deserve vacations. But you have to
face up to what is going on in our economy right
now. I am not a pessimist; we will eventually move
past this fi nancial mess. But in the interim, what
you and your family nee d is to be safe. An unpaid
credit card balance is not safe. Not having an
118 SUZE ORMAN’S 2009 ACTION PLAN
emergency savings fund is not safe. Same goes for
no retirement savings. If you haven’t taken care of
those priorities, you can’t aff ord to take an expensive
vacation. Period. Th at doesn’t mean you can’t
spend time with your family and create lasting
memories. Take the vacation—just do it at home,
or closer to home, this year.
SITUATION: Your daughter is getting married. You
have all dreamed of a big wedding, but your investments
took a big hit last year and the only way you
can afford the wedding is to put it on your credit card.
This is a once-in-a-lifetime event, so it’s not like you
can just say no.
ACTION: You can, and must, say no. It is absolutely
unacceptable to take on any sort of debt to
pay for a wedding. No exceptions. I don’t care
what anyone dreamed of.
Do you dee p down, honestly, believe that what
you spend is a refl ection of your love for your
daughter? Do you honestly believe that it is bett er
to take on $20,000 in credit card debt to impress
your fr iends, rather than use that $20,000 for retirement
savings? Step back for a moment and put
this decision to the Nee d vs. Want test. What you
and your daughter want is a big expensive wedding.
But all that is really nee ded is an aff ordable wedding
that is full of love.
ACTION PLAN: Spending 119
SITUATION: You love giving gifts. It is important to
you and something your friends and family have
come to expect from you. You can’t imagine stopping
your gift-giving ways just to have more to save for
yourself.
ACTION: As wonderful as it is that you give gift s,
you and I both know that your fr iends and family
don’t love you because of the gift s. If you have yet
to build an emergency savings fund that can cover
eight months of living costs, you must curtail your
gift giving so you can give yourself something far
more important: security .
Besides, you are never, ever to buy gift s that
you can’t aff ord to pay for immediately. As I explained
in "Action Plan: Credit," an unpaid credit
card balance in 2009 puts you at great risk of falling
into a costly vicious cycle you will fi nd it hard
to climb out of. Worried what your fr iends and
family will think if they don’t receive an expensive
gift this year? Come on. Do you really think anyone
who cares about you would fee l good if they
received a gift with an unspoken price tag that
said, Th is gift cost $50 that I couldn’t aff ord and
means I will not be able to pay off my credit card bill
this month?
120 SUZE ORMAN’S 2009 ACTION PLAN
SITUATION: You are struggling to make ends meet,
but you don’t want to stop contributing to the charities
you have supported in the past.
ACTION: Can you give time rather than money
this year? I understand how important it is to help
those in nee d. But you have important nee ds this
year too. And it is not selfi sh to make your fi nancial
safety and security a priority . If you nee d to
reduce or suspend your contributions this year to
shore up your fi nances, that’s the right and honest
move for you to make.
I realize how hard this is, especially when charities
are also fee ling the pinch and are stepping up
their requests for donations. But you must give
only what you can honestly aff ord. If that means
no fi nancial contributions in 2009, that is okay. I
encourage you to donate your time—or more of
your time than you already give—to the causes
you support. Th at is a valuable contribution. And
to be honest, I think it can also have a great unintended
benefi t for you: In these very scary times,
it can be calming to focus on what you can do
through your actions to make the world a bett er
place.
Now, that said, I also know how upsett ing it
can be to curtail helping others in nee d. Take another
hard look at the Household Cash Flow
workshee t and see if there are any costs you could
ACTION PLAN: Spending 121
pare back to fr ee up a litt le money to contribute to
the causes most important to you. Challenge yourself:
"I want to cut $X a month in savings so I can
continue to make charitable contributions in
2009." Oft en, having a specifi c goal makes it easier
to focus on "wants" that you can do without. If
only for 2009.
SITUATION: Your son graduates from college in a
few months and needs a car for work. He has asked
you to cosign for a car loan.
ACTION: If you cannot cover the payments yourself,
then you are never to cosign a loan. You nee d
to understand that cosigning makes you legally responsible
for the loan; in the event your child can’t
make the payment, you are expected to come up
with the payment. Failure to do so will hurt your
FICO score, not just your child’s.
And let me defi ne what it means to be able to
aff ord to cosign: You have no credit card debt
yourself. You are not struggling to make your
mortgage and car payments. Even if you can afford
to cover the payments, I want you to carefully
consider what you are doing. If your child can’t get
a car loan on his own, you nee d to ask yourself
why. Is he buying an expensive car when his budget
can aff ord only a moderate-priced car? Is he
focusing only on new cars for their "wow" factor,
rather than buying a safe, reliable older car that is
122 SUZE ORMAN’S 2009 ACTION PLAN
more aff ordable? Is there something the lender
knows about his credit score that you don’t—such
as the fact that he is already up to his ears in credit
card debt? Helping a child who is just gett ing
started is fi ne, but helping a child who has already
abused credit and has no clue how to be fi nancially
responsible is not acceptable.
If you decide to go ahead and cosign, I recommend
that you be in charge of making the payment.
I have see n too many parents cosign and
assume their kid is making the payments, only to
get a disturbing lett er fr om the lender that the
loan is delinquent and everyone’s FICO score has
bee n hurt. I know you are focused on your kid being
an independent adult, but if he or she nee ds
your help with a loan, you have every right to oversee
the payment.
SITUATION: You need a new car, but you don’t want
to overreach and end up like your neighbor who had
her car repossessed last year.
ACTION: Find out what you can aff ord with a
maximum loan term of three years. Th at’s what
you can aff ord. It makes no fi nancial sense to
stretch into a more expensive car if you nee d to
extend the loan term to four or fi ve years. Th at’s a
colossal waste of money. What you nee d to understand
is that a car is a lousy investment. It is guarantee
d to lose money; the trade-in value will never
ACTION PLAN: Spending 123
cover the purchase price or the interest payments
on a loan. Th erefore, you want to kee p your cost as
low as possible by limiting yourself to a three -year
loan. At www.bankrate.com, you can see what
ty pical car rates are in your area and use the fr ee
calculator to fi gure out your monthly costs.
And I want to be clear, I am talking about a
regular loan. No leases. Not now, not ever. With a
car loan, you will eventually own the car fr ee and
clear and can drive it for fi ve to seven more years
without having to worry about your monthly payment.
If you lease, you ty pically fall into a trap
where you just kee p rolling over into a new lease
every three years. So you are always making payments.
Given that we just discussed what a lousy
investment a car is, why would you ever choose a
never-ending cycle of car payments?
Before you start shopping, make sure your FICO
credit score is at least 720. Th ere are indee d great
deals to be had given all the unsold and repossessed
cars on dealer lots, but you nee d to have a high
credit score to get a loan with a reasonable rate. In
a slowing economy, where lenders are downright
scared to lend, they are going to off er reasonable
deals only to borrowers with sparkling credit. In
November 2008, a FICO score of 720 or bett er
would make you eligible for a 6.7 % car loan rate. If
your score was 620–660, the rate was 12 %.
I also recommend taking a look at certifi ed preowned
cars; these are used cars that come with a
124 SUZE ORMAN’S 2009 ACTION PLAN
limited warranty . Make sure the warranty is fr om
the manufacturer, not the dealership. Given the
huge inventory of repossessed cars, you may be
able to fi nd an especially good deal on a used car.
Sure, right now you might also be able to score a
great deal on a new car if you have a solid FICO
score. But please remember that the goal is to
spend the least amount of money for a car that is
safe and mee ts your commuting nee ds.
SILVER LINING: Th e federal sales-tax deduction
is reinstated for the 2008 and 2009 tax years. As
part of the big $700 billion bailout bill, Congress reinstated
an expired tax break that gives you the option of
deducting either your state income tax or the sales tax
you paid for the year. For residents of states with no (or
low) personal income-tax rates who made big-ticket
purchas es, you can save money on your federal return
if you itemize and claim the sales-tax deduction.
A Pledge for 2009
Throughout this book I have asked you in various
ways to change your actions, to think before acting,
to act in a manner that might go against your
instincts. I’m a fi rm believer that action is often
the only antidote for overcoming fear or doubt, for
burning through confusion, and for changing habits
that have become ingrained patterns in our lives.
ACTION PLAN: Spending 125
To that end, I am asking you to make the following
pledge.
Within a month of reading this book, I ask that
you:
¡ Do not spend money for one day
¡ Do not use your credit card for one week
¡ Do not eat out at a restaurant for one month
I think you will be surprised by the changes these
resolutions bring about in you. In my own life I have
found that small, mindful acts can change your entire
worldview. Once you have fulfi lled these three
requests, I ask that you make a promise to yourself
to make it your absolute priority to eliminate your
outstanding credit card debt as soon as possible.
What may have once seemed overwhelming and
impossible, may suddenly seem like the right thing
to do—a very necessary action to take—in 2009.
7