Interested in saving some pennies? As part of the “Make Your Life Better TODAY” series, Suze Orman, the best-selling author of “Women & Money: Owning the Power to Control Your Destiny,” shares smart advice on how to secure your financial future and handle five specific situations you might be facing:
Scenario No. 1: A young married couple in their early 20s to mid 30s who are expecting their first child or already are the parents of young children. What is the best way to save money to pay for their child's college education?
Do: Decide if you can legitimately afford to save for your children's education or not. With mortgages imploding, adults neglecting their retirement savings and perhaps even lacking any sort of emergency savings, a young couple must put themselves and their needs first so that they don't become a financial burden on their children later in life. The best way to lay the groundwork for your child's financial future is to make sure that as parents you have a will, a living revocable trust, and the proper life insurance policy (I recommend term insurance with a death benefit equal to 20 times the income you want to replace if you die) in place in case something happens to you while your child or children are young.
Never: Never name your minor child as a beneficiary of your life insurance policy because a minor cannot inherit money and as a result it will be put in a blocked account that they cannot access.
If you are in a good position to put some money aside for your children, invest in a 529 Savings plan, a tax-advantaged investment vehicle designed to save for your children's higher education. A 529 sports benefits like state tax advantages, grant and scholarship opportunities and exemption from state financial aid calculations. However, DO NOT put money set aside for college into a UGMA account (Uniform Gifts to Minors Act) because that money will be considered as your child's assets and could hinder the awarding of financial aid.
Scenario No. 2: A young single professional in their late 20s to mid 30s. Perhaps they are either finished paying off their college loans or close to it. They may have credit card debt. Maybe they just received a recent promotion or have taken a new job; they are making more money, and want to start being more aggressive when it comes to saving, perhaps for retirement, perhaps as a nest egg to start a family. What is the best investment option for a young, single professional?
Do: Buy a home you can call your own. There will never be a better tax write-off than a home. Next, contribute into your company's 401k if the company matches their contribution, but only up to the point of the match. Finally, contribute to a Roth IRA (if you qualify), or a nondeductible IRA if you don't qualify for the Roth, so you can take advantage of the Roth conversion possibility in 2010. However, before putting money toward any of the investments above, you MUST pay off any and all credit card debt you have. Getting out of debt is the most important priority before investing for retirement.
Never: Never buy a home or piece of real estate if you do not have at least 10% to 20% to put down. While buying a home is a great investment, if you do not have at least 10% to 20% of the purchase price to put down, then you can't afford the home and are buying before you have demonstrated the ability to save, which is a bad idea in the current market. Also, never ever borrow against your 401k plan because you will pay double taxation on the money you borrow. Because you don't pay taxes on the money you put into a 401k, when you pay back the loan (which you must do within five years, or 15 years if used to buy a home), you pay it back with money you have paid taxes on. Then, when you retire and take the money out again, you end up paying taxes on it a second time. And that isn't even considering the penalties you have to pay if you change jobs/quit/lose your job, in which case the money is due immediately and subject to taxes and a 10% penalty.
Scenario No. 3: A couple is going through a divorce. The wife moves out of the home and rents an apartment while the husband continues to live in the home and pay the mortgage. A few years later, the wife gets a call saying she owes money on the mortgage that her ex-husband has stopped paying. What is the best way to protect your finances and credit in a divorce?
Do: If you are close to being married for 10 years, wait until you reach the 10-year mark before you get a divorce. After 10 years, each party is vested in the other's Social Security account, which means you can collect retirement benefits on your former spouse's Social Security record if you are at least age 62 and if your former spouse is entitled to or receiving benefits. However, if you remarry, you generally cannot collect benefits on your former spouse's record unless your later marriage ends (whether by death, divorce or annulment). Also, if you do not remarry and your previous marriage lasted more than 10 years, you can receive benefits as a widow/widower if your divorced spouse dies.
Never: Never leave your name on any loans you aren't going to be responsible for, and make sure to close down any joint credit cards. This means paying off all of your loans in full ... all credit cards, car loans and home loans must be paid off in full, and then closed. If your soon-to-be ex-husband is going to keep living in the house, force him to either refinance the mortgage in his name or make him sell the property.
Scenario No. 4: The Blended Family: Two divorced people with children from previous relationships marry a la “The Brady Bunch.” The new family purchases a new house to live in together, blending not only the family, but the assets of the newly married parents. How can you best protect your assets for your own biological children when you remarry?
Do: Create a will and a living revocable trust so that you can specify who will inherit your assets if you die before your new spouse. Otherwise, if your spouse outlives you, your separate assets will pass to your new spouse, and you could wind up disinheriting your children from your previous marriage.
Never: Never title with your new spouse as Joint Tenancy, which would automatically transfer the asset to your spouse in the event of your death. Take the title as Tenancy in Common, which allows you to transfer the asset according to your will. If you do want your spouse to be able to live in the new house for as long as they want, create a life estate.
When creating a life estate, be sure everyone understands that the surviving spouse is responsible for things like taxes, insurance and the mortgage on the home, but expenses like major home improvements are shared by both the children and the surviving spouse. A trust can spell out which party or parties bears the responsibility for maintaining the property, but these particular details must be discussed as they can often become major issues that divide families.
Scenario No. 5: A married couple in their mid 40s to early 60s realize they may not be as prepared for retirement as they had thought. Perhaps they have been living beyond their means. Perhaps they still have a mortgage on their home. Perhaps they have not been saving as aggressively as they should have been. Perhaps expenses like paying for college, supporting their own parents, or medical or home emergencies have eaten into potential retirement savings. So what can someone do to make up for lost time when it comes to planning for retirement?
Do: Pay off the mortgage on your home. Your mortgage is the largest payment that you have, and it is easier to pay off your mortgage than to simply save money equal to match the value of your home. For example, if you have a $200,000, 30-year fixed mortgage at 6%, your yearly payment will be $14,400 a year. But you are paying that money into an asset that you will own. On the flip side, in order to save an equivalent amount of money, you would need to invest $400,000 at 5% to earn $14,400 a year. At the end of the day, it is easier to pay off $200,000 on a property you will own rather than save and grow twice that amount in cash. On top of that, the supposed tax write-off you benefit from by having a mortgage is minimal, especially in the latter stages of the loan.
Never: Never stop investing in your retirement account just because the market goes down, because a down market offers a great investment opportunity for long-term investors because share prices are often at their lowest. Also, never wait until you are 65 to collect Social Security if you are 62 and earning less than $13,000 a year. Basically, if you can afford to retire early, it is worth it to start collecting Social Security early even thought your benefit will be permanently reduced. You can either use that money to live off of, or invest to make up for the reduced benefit. However, if you cannot afford to retire early and must continue working full time past the age of 62, DO NOT start to collect Social Security, because the 2-for-1 penalty (SS is reduced by $1 dollar for every $2 you earn) virtually wipes out the benefit.
But what if both the husband and wife are 62, on Social Security, but rising medical bills are putting them further and further into debt, and forcing them to go back to work. However, if they make more than $26,000, they will dock their Social Security. What can they do?
As I mentioned above, if you work and make more than $13,000 a year, Social Security will reduce your benefit by $1 for every $2 you earn, and for most people, that would completely wipe out any benefit they would receive. As an alternative, if someone does want to go back to work full time and be able to receive the full benefit when they reach their retirement age instead of the reduced benefit they took for retiring early, you have the option to pay back the money you received from Social Security and withdraw your benefit application, and essentially take a retirement "do-over." By paying back the money and halting your benefit, you can go back to work and hold out for the full benefit once you hit your full retirement age.