The Money Class Read online

  ALSO BY SUZE ORMAN

  You’ve Earned It, Don’t Lose It

  The 9 Steps to Financial Freedom

  Suze Orman’s Financial Guidebook

  The Courage to Be Rich

  The Road to Wealth

  The Laws of Money, the Lessons of Life

  The Money Book for the Young, Fabulous & Broke

  Women & Money

  Suze Orman’s Action Plan

  This book is designed to provide accurate and authoritative information about personal finances. Neither the author nor the publisher is engaged in rendering legal, accounting, or other professional services, by publishing this book. If any such assistance is required, the services of a qualified financial professional should be sought. The author and publisher will not be responsible for any liability, loss, or risk incurred as a result of the use and application of any of the information contained in this book.

  While the author has made every effort to provide accurate telephone numbers and Internet addresses at the time of publication, neither the publisher nor the author assumes any responsibility for errors or for changes that occur after publication.

  A Certified Financial Planner® is a federally registered mark owned by the Certified Financial Planner Board of Standards, Inc.

  Copyright © 2011 by Suze Orman, a Trustee of the Suze Orman Revocable Trust All rights reserved.

  Published in the United States by Spiegel & Grau, an imprint of The Random House Publishing Group, a division of Random House, Inc., New York.

  SPIEGEL & GRAU and Design is a registered trademark of Random House, Inc.

  Library of Congress Cataloging-in-Publication Data

  Orman, Suze.

  The money class: learn to create your new American dream / Suze Orman.

  p. cm.

  eISBN: 978-0-679-60470-9

  1. Finance, Personal—United States. 2. Wealth—United States. I. Title

  HG179.O75764 2011

  332.024′01—dc22 2011001394

  www.spiegelandgrau.com

  Jacket design: Greg Mollica

  Jacket photograph: Brian Bowen Smith

  v3.1

  To all the great teachers who’ve taught me everything I know

  CONTENTS

  Cover

  Other Books by This Author

  Title Page

  Copyright

  Dedication

  How to Enter The Classroom

  CLASS 1: THE NEW AMERICAN DREAM

  Making Change • The Dreams of Tomorrow Reside in Today’s Choices • The Money Class Curriculum

  CLASS 2: STAND IN YOUR TRUTH

  LESSON 1. FINDING YOUR TRUTH: A PERSONAL FINANCIAL ACCOUNTING

  LESSON 2. LIVING TRUTHFULLY: HOW TO STAND TALL

  IN YOUR REALITY

  Focus on What Is Real Today … and What You Will Need Tomorrow • Live Below Your Means but Within Your Needs • The Pleasure of Saving Is Equal to the Pleasure of Spending • Define Yourself by Who You Are, Not What You Have

  LESSON 3. THE FOUNDATION OF ALL TRUTHFUL LIVING: THE POWER OF CASH

  Debit Card Rules • The “Life Happens” Fund • Credit Unions: A Great Place to Save • Safety First with Your Savings • Saving for Big-Ticket Items • The Truth Will Indeed Set You Free

  CLASS 3: FAMILY

  LESSON 1. HOW TO BUILD HONEST FAMILY RELATIONS

  Opening the Lines of Communication

  LESSON 2. HOW TO RAISE YOUNG CHILDREN TO STAND IN THE TRUTH

  Your Priceless Legacy • Set the Right Tone • Imparting Good Values When It Comes to Money • Money Lessons for Children • Money Lessons for Tweens and Teens • Money Lessons for Teenagers Heading to College • How to Handle Money Gifts and Savings • The Three-Option Approach

  LESSON 3. HOW TO CREATE A FINANCIALLY HONEST COLLEGE STRATEGY

  Who Should Save for College • The Best Way to Save for College: 529 Plans • UGMA/UTMA • Coverdell Accounts • How to Invest Your 529 Plan • The College Talk Every Parent Must Have with a High School Freshman • Borrowing Rules for College Loans • The Risks of Private Loans for College • Stafford Loans • PLUS Loans • How to Choose the Right School

  LESSON 4. HOW TO HELP ADULT CHILDREN FACING FINANCIAL CHALLENGES

  How to Handle Student Loans That Are in Default • How and When to Help Independent Children Who Are in Financial Trouble

  LESSON 5. THE CONVERSATION EVERY ADULT CHILD SHOULD HAVE WITH HIS OR HER PARENTS

  Building Family Financial Security Under One Roof • Updating Legal Documents • When a Parent Remarries

  LESSON 6. ADVICE FOR GRANDPARENTS: HOW TO BUILD A LASTING LEGACY

  Follow the Parents’ Lead • Pay It Forward • Give Experiences, Not Things

  CLASS 4: HOME

  LESSON 1. THE TRUTH ABOUT HOME VALUES

  A Decade of Extremes • A Home Is a Savings Account, Not a Hot Stock • Financing Is Cheap, but Not Easy

  LESSON 2. WHEN IT MAKES SENSE TO RENT

  The Math of Rent vs. Buy • Advice for Owners Who Now Want to Rent

  LESSON 3. THE NEW RULES OF BUYING A HOME

  Set a Budget That Satisfies Your Needs • Know Your Income Limits • Aim to Make a 20% Down Payment • A Special Note About FHA-Insured Loans • Special Rules for Buying Condos and Co-ops • Where to Come Up with the Down Payment • Opt for a 30-Year Fixed-Rate Mortgage • Understand the Risk of Distressed Property

  LESSON 4. WHAT TO DO IF YOU ARE UNDERWATER

  If You Are Underwater and Cannot Afford Your Mortgage • Loan Modification • Short Sale • Foreclosure • If You Are Underwater but You Can Afford the Mortgage

  LESSON 5. HOW TO REDUCE MORTGAGE COSTS

  When It Makes Sense to Pay Off a Loan Ahead of Schedule • The New Realities of Refinancing • Refinancing Rules • Lower Your Mortgage Costs Without a Refinance

  LESSON 6. THE DANGERS OF HOME EQUITY LINES OF CREDIT

  The Dangers of Rising Interest Rates and Falling Behind on Payments • Home Equity Loans

  LESSON 7. REVERSE MORTGAGES

  Reverse Mortgage Basics

  LESSON 8. INVESTING IN REAL ESTATE

  What You Need to Know Before You Buy Investment Property • What to Do with an Investment Property That Is Underwater

  CLASS 5: CAREER

  LESSON 1. ADVICE FOR THE EMPLOYED

  Build Your Plan-for-the-Worst Fund • Live Below Today’s Means • Grab Your Full Retirement Bonus • Make Your Case for a Raise and Promotion Through Your Work • How to Ask for a Raise • Change Your Attitude Before You Change Your Job

  LESSON 2. ADVICE FOR THE UNEMPLOYED

  Cut Your Spending Immediately • Do Not Dip into Your Retirement Savings • Make Sure Your Credit Profile Remains Strong • Do Not Go Back to School to Avoid a Hard Job Market • Get to Work as Fast as Possible, Rather Than Holding Out for a Better Offer • How to Deal with a Steep Pay Cut • A Special Note for Stay-at-Home Moms

  LESSON 3. STARTING (AND RUNNING) YOUR OWN BUSINESS

  Launching a Business: Can You Afford It? • Where to Get the Money to Start Your Business • A Few Words About Micro Lending • Running Your Own Business • When to Expand • When to Close • Standing in Your Truth in Business • Closing Down a Business Responsibly

  A Note About the Retirement Classes

  The Money Navigator: A Special Offer for Readers of The Money Class

  CLASS 6: RETIREMENT PLANNING: GETTING GOING IN YOUR 20S AND 30S

  LESSON 1. TIME IS YOUR GREATEST ASSET

  Getting Started Early • With Lower Returns, Savings Are More Important Than Ever

  LESSON 2. RETIREMENT ACCOUNTS EXPLAINED

  Retirement Plans Offered by Employers • Retirement Plan Withdrawal Rules • Non-Workplace Retirement Accounts •
Nondeductible IRAs • Roth IRAs • Retirement Plans for the Self-Employed

  LESSON 3. HOW MUCH YOU NEED TO SAVE FOR RETIREMENT

  The Retirement Formula • The Best 401(k) and IRA Strategy • A Word on Vesting • Where to Open an IRA Account

  LESSON 4. INVESTING YOUR RETIREMENT MONEY

  The Ups and Downs of the Stock Market • Dollar Cost Averaging • How Much to Invest in Stocks • Choosing the Best Options Within Your 401(k) • How to Build the Best 401(k) Investment Portfolio • Exchange Traded Funds • Bond Investments • Retirement Planning Mistakes to Avoid • What to Do with Your 401(k) When You Leave a Job

  CLASS 7: RETIREMENT PLANNING: FINE-TUNING IT IN YOUR 40S AND 50S

  LESSON 1. DECIDING WHEN IT MAKES SENSE TO PAY OFF YOUR MORTGAGE

  Questions to Ask Yourself • The Benefits of Paying Off Your Mortgage • How to Pay Off Your Mortgage Ahead of Schedule

  LESSON 2. HAVE A REALISTIC PLAN FOR WORKING UNTIL AGE 66–67

  Your Work-Longer Game Plan

  LESSON 3. DELAY YOUR SOCIAL SECURITY BENEFIT

  Social Security Basics • Social Security Strategies

  LESSON 4. ESTIMATE YOUR RETIREMENT INCOME: HOW ARE YOU DOING?

  Social Security Benefits • Retirement Accounts • Pensions • Lump Sum vs. Annuity

  LESSON 5. SAVING MORE, AND INVESTING STRATEGIES IN YOUR 50S

  How to Invest Smart • Making the Most of What You Have • Best Investments Outside Your 401(k) • Bond Investments • No Target Funds Allowed

  LESSON 6. PLAN FOR LONG-TERM CARE COSTS

  When to Buy • Making the Financial Case for LTC Insurance • Health Insurance, Medicare, and Medicaid • LTC Basics

  CLASS 8: LIVING IN RETIREMENT

  LESSON 1. HOME FINANCES: STAND IN THE TRUTH OF WHAT IS AFFORDABLE FOR YOU

  The Affordability Issue • Start the Discussion

  LESSON 2. COPING WITH THE HIGH COST OF HEALTHCARE IN RETIREMENT

  Rising Costs vs. Your Annual Retirement Income • Long-Term Care Premium Increases

  LESSON 3. STICK TO A SUSTAINABLE WITHDRAWAL RATE

  The Right Rate • How to Make Tax-Smart Withdrawals

  LESSON 4. AVOID LONG-TERM BONDS AND BOND FUNDS

  What You Must Understand About Bonds • How to Build a Bond Ladder • Beyond Treasury Bonds: Municipal Bonds and Corporate Bonds

  LESSON 5. EARN HIGHER YIELDS BY INVESTING IN DIVIDEND-PAYING ETFS AND STOCKS

  The Case for Dividend-Paying ETFs and Stocks • Stock Dividend Basics • The Protection of a Stop-Loss Order • How Much to Invest • How to Choose a Dividend-Focused ETF • Tips for Owning Individual Dividend-Paying Stocks

  LESSON 6. DOUBLE-CHECK YOUR BENEFICIARIES AND MUST-HAVE DOCUMENTS

  Life-Changing Events

  CLASS 9: THE ULTIMATE LESSON

  Clearing My Own Roadblocks • The Road Ahead, Not the Rearview Mirror • The Legacy We Create

  About the Author

  How to Enter The Classroom

  Welcome to The Money Class. The information in this book provides the foundation for your work: The facts describe the new financial reality we have to apprehend, both collectively and individually. The new perspective offered paves the way for the inner work—the emotional and psychological shifts—to be considered. The financial guidance and information contained in this book are supported by a number of important tools and resources that are housed in The Classroom on my website. It’s also where I’ll post any information updates you need to know.

  To gain access, go to the home page of my website, www.suzeorman.com.

  Click on The Classroom icon.

  You will be asked to enter a passcode.

  The code is: 999 999 999

  In The Classroom you will find everything you need to put the lessons learned in this book into action. Throughout the book, this icon will alert you to the additional information you can find online.

  In The Classroom you will also find a special offer for readers of The Money Class that you can learn more about here.

  CLASS

  THE NEW AMERICAN DREAM

  The American Dream. As a concept, it is so ingrained in our collective imagination that it doesn’t even need to be defined, right? Think about it: Did you ever need to have it explained to you? My guess is you did not and that even from a young age, you, like me, knew it represented a promise—of opportunity, of possibility—that came with being American.

  But on closer inspection, it is not just an American impulse that the American Dream describes, it is a human one, and it unites us. No matter your socioeconomic, ethnic, or religious background, we all aspire to the same things: We seek to provide for our family and keep them safe, no matter what shape that family takes, no matter if we are talking about our parents or our children, a blended family or a family “by choice,” not blood. We want future generations to have even more opportunity than we ourselves have, a dream that is intrinsically linked with education and the advancement that follows from it. We want to live in a home that is secure in every sense—as a haven for our loved ones and as a wise place to have spent our money. We want the guarantee that our hard work will pay off, that it will support us financially, that it will allow us to achieve our goals, and that when it is time to stop working, we will reap the benefits of those years of dedicated service and live out the rest of our lives comfortably in retirement.

  As universal as these desires are, we refer to them as the American Dream because for centuries this country has, for the most part, been able to make good on this promise of America as the land of opportunity. This belief has played a defining role in shaping our national psyche. It is at the heart of our Declaration of Independence—that we each possess “certain unalienable Rights, that among these are Life, Liberty, and the Pursuit of Happiness.”

  How truly terrifying, then, to take stock of the American Dream today and to question the truth of it—to wonder if it still exists in reality or if it has become an illusion, a myth. Take a look around: As of December 2010, more than 14 million Americans were out of work; another 9 million were working only part-time because they cannot find full-time employment. That is 23 million people who are struggling to make ends meet. Many of those lucky enough to still be employed in their 60s are looking to hang on to their jobs as long as possible because they simply cannot afford to retire—which also means there are fewer job openings for young people entering the workforce.

  In many areas of the country, the dream of homeownership has backfired. Real estate values have deflated to such an extent that a record number of people owe more than their homes are worth. That’s not an American Dream—it’s a nightmare.

  Because of the dire economic conditions of recent years, many parents are unable to afford the high cost of college tuition for their children. And there is a record number of student loans in default, making people question whether they ever should have taken them on to begin with.

  The sum total of all these facts and figures? The home, the job security, the education, the retirement—the very standard of living that all of us took for granted for so long is completely under siege.

  Whether we speak about it or not, we are grappling with the frightening possibility, the fear, that we no longer live in a land where effort applied to opportunity produces a better life. The doors leading to more and greater things, once wide open, now seem to be closing. It is hard to move up in an economy where there has been no job or wage growth over the past decade. Once a manufacturing powerhouse—“Made in the U.S.A.” was our calling card—we have ceded that engine of growth, and the jobs that go with it, to other countries as our own economy now relies on our ability to consume, not produce.

  The impact of these economic shifts has been felt deeply within our homes. While the median household income for adults born in the 1960s is indeed higher than the income of their parents’ generation, much of that is a function of smaller household size and the fact that there are now likely two wage earne
rs per household. It takes more of us working more to maintain our forward progress. Even so, the pace of our growth has slowed considerably. According to a study commissioned by the Pew Charitable Trusts, family income doubled in the postwar years, between 1947 and 1973, but in the three decades since then the increase has been a mere 20%. That statistic provides important context to why household debt relative to income more than doubled over the same period: For many, borrowing was a way to keep up with our parents and grandparents. To put it in more emotional terms, it is why so many of us wonder how our parents and grandparents seemed able to enjoy a higher standard of living even though their means were so much less than ours.

  The meritocracy that underpins our economy and culture—work hard, move up the ladder—has also been weakening, as the distribution of income has become increasingly uneven. In the 1950s and 1960s, our national economic growth trickled down across a broad spectrum of income levels. Since the 1970s it has been more fractured, with much of the economic gains benefiting upper-income households. This concentration of wealth leaves the middle class, the heart and soul of this country, struggling just to hang on.

  The epic financial crisis—and there really is no other way to describe it—that began in 2008 may have delivered a decisive blow to the stubborn optimism that we held on to in spite of the on-the-ground reality of how our financial lives have been marked by increasing struggle. For many, the crisis was a rude awakening; for others, it was a grim confirmation of the creeping anxiety we’ve been feeling about how we are going to make it all work. Either way, it is hard to find a family that was untouched by this financial disaster. It was a galvanizing moment for us as a nation—it has forced us to reckon with our beliefs in our country and our individual ideals.

  Is it time, then, to pronounce the American Dream dead?

  In many ways it pains me to say this, but in my opinion the American Dream as we knew it is dead.

  But listen to me: That is not such a bad thing. The old American Dream has been in need of revision for quite some time; we have just been very good at avoiding that truth. It’s time to take that dream back into our hands and reshape it. It’s time to create a New American Dream that is based in honesty, authenticity, good intentions, and genuine need.