By Angela Ebron
These days, we're all scrambling to keep our money safe, and no one knows that better than financial expert Suze Orman, whose latest bestseller is Suze Orman's 2009 Action Plan. Before you stuff your cash under the mattress, check out her road map to steer yourself in the right economic direction.
In Your 30s:
You're likely married, caring for a young and growing family, and thinking about buying a house. You have a solid decade of work behind you and you're forging your career, trying to achieve the goals you've set for yourself. But in the current economy you may be worried about yourself or your husband getting laid off. And, if you're like most 30-somethings, you've probably racked up a good amount of credit card debt too.
Your To-Do List:
1. Think 40 years ahead. The main thing you have going for you in your 30s is time. "You still have 35 or 40 years until you retire," says Orman. "Now it's more important than ever to put money in a retirement account." The reason? Compounding. Say you're 30 and you plan to retire at 70. If you put $200 a month into an account for the next 40 years, with an 8% annual average rate of return, you'd be sitting on a hefty $700,000 by your 70th birthday. "But if you waited until you were 40 to do the same thing, you'd have only $300,000 by age 70," points out Orman. "Start putting away that money at age 50, and it drops to just $118,000." Clearly, a nearly $600,000 difference is a big incentive to build a retirement fund now. If you can't afford $200 a month, put away less. The point, stresses Orman, is to start early.
But where to put it? The easiest choice is your company 401(k). Contribute enough to get the maximum match. However, if your employer doesn't offer a match (or has suspended the match, which many companies are doing during this recession), then opt for a Roth IRA, if you qualify.
2. Stash your cash. You've heard it before, but it's more important now than ever thanks to recession-fueled layoffs: Stay liquid. If you or your spouse lost your job, would you be able to cover your living expenses for eight months? "Well, my dear, that's how long it may take you to find a new job these days," stresses Orman. "Building an eight-month emergency fund in an FDI C-insured savings account should be one of your top priorities."
3. Get out of debt. You charge something for the house here, toys and clothes for the kids there. Before you know it, you owe way more than you can afford. "One of your main objectives in your 30s should be to pay it off," says Orman. "High unpaid credit card balances lead to higher interest rates, lowered limits and a lower FI CO credit score." First, get a grip on your spending. Figure out exactly where your money goes each month and see where you can cut back.
Next, focus on your credit cards after you've established an eight month emergency fund. (Until then, pay the minimums.) "Once you have your eight-month fund, continue paying at least the minimum each month on all your cards, but also add an extra payment on the card with the highest interest rate," says Orman. Once that card's balance is zero, start tackling the card with the second-highest interest rate. Then move on to the next and the next. And always pay on time, since it makes up 35% of your credit score.
4. Protect your family. It's extremely important to have a will, a living revocable trust and term life insurance on yourself, with a death benefit equal to 25 times (yes, says Orman, 25 times!) the income you want to replace if you die. "But don't name your kids as beneficiaries of your life insurance policy if they're minors," cautions Orman. Children under 18 can't inherit money, and it will be put into a blocked account that they can't access.
In Your 40s:
Your responsibilities seem to have multiplied overnight. You can't escape constant thoughts of college-if you aren't already writing those checks, you soon will be. If you own a home, mortgage payments are never-ending, and there's still credit card debt. You're also thinking more about your parents now. How will you care for them as they get older?
Your To-Do List:
1. Build on your foundation. "The goal in your 40s is to keep doing what you've been doing-shoring up your eight-month stash of cash, contributing to a 401(k) or Roth IRA, paying off lingering debt," says Orman. "As long as you've ratcheted up your retirement fund, you can now also ratchet up savings for your childrens' college education."
Her suggestion? A 529 savings plan. "It's one of the easiest and smartest ways to save for future college costs," she says. The money you put in grows tax-deferred and the withdrawals are tax-free. (Check out SavingForCollege.com for more information on 529s.) "Whatever you do, don't borrow from your 401(k) to pay for college," warns Orman. "Your retirement account comes first, girlfriend!"
2. Don't be house-poor. Owning a home is part of the American Dream, but sometimes it's smarter to put the dream on hold for a while. "Your 40s may be a better time to buy your first house," says Orman. "Homeownership is hard in the current economy, and you should only buy one if you can really afford it."
And by "afford," she means not only being able to comfortably pay your mortgage each month, but all your other living expenses too, especially if you're already in debt or if you get laid off.
If you're well on your way to meeting the financial goals of your 30s-or better yet, have met them-then and only then should you consider buying a house, even if it means doing it after age 40. "But don't even think about it if you don't have at least 20% to put down," says Orman matter-of-factly. The government's banking bailout has pretty much put an end to complete financing.
In fact, you may even be hard pressed to find a lender willing to accept 10% down. "The new reality is that the only way many people can qualify for a regular mortgage is if they make a solid 20% down payment," she says.
3. Prep your parents. None of us wants to think about what may happen to our parents as they get older, but it's smart to start making some plans anyway. "If you don't think you'll have the money it takes to care for them when they're seniors, you should talk to them about purchasing a long-term-care insurance policy now," recommends Orman.
In Your 50s:
College tuition is finally behind you (or soon will be) and the kids are about to leave the nest (if they haven't already). But now you have a new and very immediate worry: retirement. If you haven't planned well for it over the last two decades, you may find yourself wondering, Can I afford to retire in 10 or 12 years, or will I have to keep working for the next 15 or 20?
Your To-Do List:
1. Try to pay off your house. Wouldn't it be great to head into retirement mortgage-free? There's no reason you can't. In fact, doing so may be more beneficial to you in the long run since your mortgage is probably the biggest debt you have. "If you've paid off your credit card debt and are investing in your retirement plan, then accelerating your mortgage payments makes good sense," says Orman. "You'll now own that asset free and clear, and you can take the money you had been using for the mortgage and put it into bonds and high-yielding stocks."
2. Play catch-up. After age 50 you're allowed to invest extra "catch-up" contributions into your retirement funds, points out Orman. So take advantage of that while you're still getting a paycheck. This year, folks age 50+ can put an extra $5,500 into their 401(k), maxing out at $22,000. If you have an IRA, you're allowed to contribute an extra $1,000, up to the $6,000 limit.
3. Get insured. We're living longer than ever before. And with that comes the hard truth that we don't know how we'll fare. "That's why it's important to get long-term-care insurance in your 50s," says Orman. It will cover nursing home, assisted living or in-home health care costs, which can take a big chunk out of your bank account-or your kids'!-otherwise. Don't wait until after 60 to purchase it, however. You'll face higher premiums and may be denied coverage because of a preexisting condition. Act early and give yourself peace of mind.
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