Bankruptcy, Credit Cards, Debt, FICO, Retirement
February 09, 2020
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In today’s podcast, we go to Suze School as Suze talks about many of the money myths coming from Women & Money listeners.
Suze Orman's Women and Money podcast is proudly sponsored by America's credit unions. The Perfect Home for Your Money. So, I have an exciting announcement to make, as you know, I have a new book coming out February 25th, The Ultimate Retirement Guide for 50 Plus: Winning Strategies to Make Your Money Last a Lifetime. Also, the audio of that book is over the top great. However, if you go to www.SuzeOrman.com, that's S-U-Z-E, you will see it right there how you can win a one-on-one money makeover with me. Obviously, it will be on the phone, but wouldn't you like to have a long conversation with me where I ask you questions, you answer, and we make sure that you are on the road to your ultimate retirement? But just know that this offer ends March 3, 2020. So come on, what are you waiting for? Go to SuzeOrman.com, right now. So are you all liking our new theme song? So many of you have written in saying, you know, Suze, I heard that you were going to have a new theme song. You mentioned it in prior podcasts, and I was thinking, no way, I love your current theme song, there's no way that we would like a better theme song. Please, Suze, don't change your theme song. And then, just about two weeks ago, or a week ago, I lose track of time. Whatever it was, I changed the theme song and now I'm getting emails from you saying, I love that theme song. Yes, I never, ever thought you could replace it with something better, but I love your new theme song. I hope that's true for all of you. But I just want to tell you what's interesting is, when the theme song was written and I'm listening to it. Do I like it? Do I not like it? I asked three or four people that really matter to this podcast. Do you like this theme song? And every one of them said no, we like your old theme song. And I sat with that, and I sat with that, and I listened and I thought, you know what? I know what I like, so I overruled everybody else's decision and I said, let's go for it. And I'm so glad that I did because now all the people that said they didn't like it are coming back to me and saying, oh, you were right, Suze. Fabulous, fabulous. Anyway, that theme song, "Rise Above" is by Effie. Soon, if not now, you will find it on Spotify. Maybe even at the end of this podcast, I'll play you the entire song because, you know, the truth is, I just take a little bit of it, like 15 seconds, 20 seconds. But there is, like, a minute and a half of the song. So actually, that's what I'm going to do at the very end of this podcast, I will play you the entire song by Effie. Today, I want to talk about 10, not myths, but 10 things that you keep writing about over and over again, that I just want to give you a list of 10 things and straighten up your confusion. Because these are the 10 emails that I keep finding that I'm getting. So, I thought maybe today we can all go to Suze School and I could just talk to you about these 10 things that I keep seeing that you're getting wrong.All right, the first one, can we just all get that a Roth is not an investment. You write in and you tell me you funded your Roth and I go, well, what's it invested in? And you say it's in the Roth, Suze, I put it in a Roth. And I'm like, yes, but what are you investing in within your Roth account? And you say, well, why do I have to invest in anything? A Roth is a Roth, right? No, a Roth is like a house, an IRA is like a house. Remember, a Roth is an after-tax individual retirement account. A traditional retirement account, a traditional IRA is pretax. Either one of those is just like a house, and you can get a house, but you need to move furniture into the house. You need to put things in the house for you to be able to live in that house unless you just want that house to be an empty house. So when you have a Roth or a traditional IRA, that is your house that holds your money for retirement. You have to make investments in that account. Got that, everybody? All right, I just want you to know that. Next, you keep asking me and telling me, well, Suze, I'm funding my employer-sponsored plan. An employer-sponsored plan is when you work, you're an employee, you work for somebody and they offer you a 401k, or 403b, or a TSP. And you write to me and you say, well, I have a retirement account, so I know I can't have a Roth. So, should I have a Roth or a traditional IRA, or should I keep funding my employer-sponsored plan? Everyone, you can have both. You can have an employer-sponsored plan and you can have a Roth or a traditional IRA, got that?Next thing you asked me is Suze, I have a traditional IRA, and I have a Roth IRA. Can I put the maximum each year in each? Now the maximum is $6000 if you are under 50, $7000 if you are 50 or older. So you're asking me, let's say you're under 50, you're asking me, can you put $6000 in a traditional IRA and can you put another $6000 in a Roth IRA? No, it doesn't matter how many IRA accounts you have. The maximum that you can put in annually is $6000 if you are under 50 and $7000 if you are 50 or older. So, if you have let's just say three Roth IRAs. For some reason, you have those three Roth IRAs at different institutions, you could put $1000 in one, $3000 in another, $2000 in another. But you cannot put more than $6000 if you're under 50, $7000 if you are 50 or older, in a total of all of your Roth or traditional accounts. Got that?Now, it's true that I don't like whole life insurance policies. I actually hate them. I don't like universal life insurance policies or variable life insurance policies. The main insurance policy that I like is term insurance, and I don't like policies that say, all right, you can have insurance and investing in one. I don't like it, and I've told you that over and over again. But that doesn't mean that you should go out and just cancel your whole life insurance policy. If you need insurance on somebody, and you need to know if you need it because maybe you are financially dependent on that person or other people are financially dependent upon you. So before you ever cancel a whole life insurance policy, or a universal, or variable life insurance policy, can you just get a term life insurance policy in place? Can you just do that?Now, if you have an elderly parent and they happen to have a whole life insurance policy, which many of your elderly parents, especially if they're in their 80s or 70s, they may have. Be very careful before you cancel them because it's going to be too expensive for you to get term insurance when they are 70 or 80. And if you've already been paying in it or they've already been paying and they're not doing very well, they're not healthy, think twice before you cancel it. Do you understand that? Because recently I had somebody write in where her mother was paying like $92 a month on one policy, maybe $70 or something like that on another policy, it had a cash value on it of just a few $1000. She had been doing this for years and years and the death benefit was, I think, $11,000 on one and maybe $7000 on another, and she canceled it. And then she wrote to me and said, Suze, I'm not sure that I did the right thing because my mother is, you know, living with me. She has dementia, she's now stopped eating, she's not well, I don't know, should I reinstate it? Never, ever cancel a policy on somebody who is older and not doing well, they're not healthy. For that, you may really want to just keep paying it. So can you just think twice before you do something? When you hear me say I don't like something that doesn't mean just go out and cancel it. Every one of you is in a different situation, in a different circumstance. Think twice about it in your particular situation, all right? Now, a lot of you are looking for financial advisors, and you're thinking you can't do it on your own, and you're out there and you're finding financial advisors that are charging you 1.7% or 2% in fees to manage your money. And you're writing to me and asking me, is that a lot of money? So here's what I want you to know. You are never to pay more than 1% when you use a registered investment advisor. And a registered investment advisor is somebody that you give your money to, let's say it's $100,000, and they charge you a percentage, again, it should never be more than 1%. The more money you give them, the less the percentage should be. So if you are going to give them $500,000, $1 million, whatever it is, it should be less than if you're giving them $100,000 or $200,000. Got that? However, here's how it works. You give them $100,000, they invest your money for you, but they invest in items such as stocks that have no fees on them whatsoever to invest in. So if they take that $100,000 up to $200,000, they're now making 1% of $200,000. If they take your $100,000 down to $50,000 they're now making 1% of $50,000. So, the more money they make you, the more money they make themselves. But you don't want a registered investment advisor who buys mutual funds because within mutual funds you're paying an expense ratio for the portfolio manager of that mutual fund to manage the money. So you don't want to do that.You also do not want an investment advisor who, if you're going to put your money into individual bonds, you do not want that advisor to be charging you an investment advisory fee at all. That is money that needs to be kept in a separate account. Why? Because when you buy a bond, a bond already has the commission built into it. So why pay an investment advisory fee on that when you've already paid a commission? If you're going to use a registered investment advisor and you're going to need to buy individual bonds as well as individual stocks, you should have two accounts. The account that has the stocks in it gets the investment advisory fee put on it, again, absolutely no commissions whatsoever to buy or sell. And the account that has the bonds in it just has the bonds in it because the commission has already been paid when you bought it. So many of you are confused about that. I hope that cleared that up.Next, again, going back to a Roth or a traditional. You are asking me, should you fund a Roth or traditional IRA all at once if you can at the beginning of the year and dollar cost average into your investments? Or, should you fund your Roth or traditional IRA monthly and then immediately put that money into investments? Did that make sense, everybody? I hope so. But here is the answer. If you have the money to fully fund an individual retirement account, whether it's a Roth or traditional at the beginning of the year in January, can you just fund it in January, or fund it whenever you can, in a lump sum? Got that? Next, when the money is in the Individual Retirement Account, then let's say you funded it fully with $6000. I then want you to take $500 a month and put it into either the Standard and Poor's 500 Index Fund or the Vanguard Total Stock Market Index Fund, or the ETFs of either one of them. The symbol is SPY or VTI if you are going to do the ETFs. You would do that only if you have your account at a discount brokerage firm that does not charge you any commissions whatsoever to buy or sell ETFs. OK? So don't get confused about that. Don't think that dollar-cost averaging means you can only put $500 a month into your Roth. No, it means that you can if that's all the money you have, let's say you can only fund it to $500 a month, that I don't have a problem with. Then it takes you a year to fund it. But if you have the money to fund it all at once, can you do that?Next, so many of you are writing to me about the order of the debt that you should pay off. You have student loan debt, you have credit card debt. You know those are the main two debts that you have. You have car loan debt, mortgage debt, but forget those debts for now. Your main question is, should you pay off student loan debt first or credit card debt first? The answer to that question is, if you have extra money, obviously you need to keep paying on both of them. But if you have extra money, can you funnel that extra money towards your student loan debt? The reason being, student loan debt is not dischargeable in most cases in bankruptcy. Although recently, somebody just did claim bankruptcy and they did get it dismissed, but they fought like heck to get it there. So, just so you know, in most cases, not all, student loan debt is not dischargeable in bankruptcy. So, that is the most dangerous debt currently that you can have. Please do not hold out in the hopes that one-day student loan debt is just going to be discharged. That somebody's going to get in office and just say, all right, all of you, you don't have to pay your student loan debt anymore. Can you not think that is going to happen? Listen, I would love for those of you who can't afford to pay your student loan debt, really, I would love for that to happen for you. For those of you who can really afford to pay your student loan debt, I would like you to be able to continue to pay your student loan debt. I am not somebody who thinks all student loan debt should just be forgiven because I don't think that would ever pass. However, do not, and I repeat, do not, think that is going to happen. And if it does happen, it will be, a long time, in my opinion, before it actually does.Next, so many of you have been told that all you need is a will. In fact, many of you have been told that if all the money that you have is in a retirement account or your insurance policy, you do not need even a will. Because if you just simply designate on your insurance policy a beneficiary, on your retirement account a beneficiary, even on your savings account, if it's a pay on death account or a transfer on death account, where you in fact named a beneficiary. It is true that all of those assets will absolutely be passed to your beneficiary without probate. But there are other things that need to be taken into consideration.A will is there if you have minor children to appoint who is going to be guardian over your minor children. It is also there in case you have things that aren't put in your living revocable trust which every single one of you should absolutely have. How many times do I have to tell you this? The most important thing all of you could ever do is to have a trust, a will, an advanced directive, and a durable power of attorney for health care, and a power of attorney for your finances. You need all of those documents. Those are must-have documents.Now, if you want, I have the Must Have documents. Obviously, I am selling them, and I don't feel bad that I'm sitting here telling you that you should buy these because how many of you really have a lawyer that you know you can trust? How many of you really have $2500? And even if you did have $2500, why would you want to spend it when you could get the state of the art documents that were created by my own trust lawyer? Millions of these have been sold, they're good in all 50 states. They're so easy to use, so why don't you check them out just by going to www.SuzeOrman.com/offer? And that is where you will find the Must Have documents that all of you, really, in my opinion, should have. And why do I think all of you should have them, again?A will, as I said, is just for those items that you haven't put in a trust. So why do you need to trust? Listen, a trust isn't just so that you can pass everything to your beneficiaries without probate. OK? It's also there in case you have an incapacity. Who's going to write your checks for you? Who's going to pay your bills? There are all other kinds of reasons that you should have a trust. Go back and listen to one of the podcasts that talks all about trusts. And while I'm speaking about this, another thing is that a lot of you are writing to me and you're saying you don't want a trust. So what you're going to do is you're going to gift you're appreciated assets to your kids simply to avoid probate. And you're going to do that by simply putting the house or whatever you have in their name. Please don't do that. If you do that, you may be making one of the biggest mistakes out there.Let's say you have a home and you put it in your kids' names or you add your kids to the title of your house. So it's of public record, and now your kids are out and they're in a car accident and they seriously injure somebody or they even killed somebody. If lawyers wanted to, they could come and take your house from you if they sue you. So don't do that. The other reason you don't want to do it is recently, somebody wrote in and they said to me, Suze, my parents gifted me a house that their parents gifted to them years ago, and now the house is worth $800,000 or $900,000. My name is on the house and my parents are about to die. How much income tax am I going to owe? If the house had simply been passed down via a trust from grandparents to parents, the parents would have gotten a step-up in cost basis. So if the grandparents bought it for $5000, and the house when they died was worth $30,000. Their new cost basis would be $30,000. They could turn around, and they could sell it if they wanted to, no tax. However, now, and by the way, those are the actual numbers. The house now has been gifted to the child, her cost basis is $5000 on this house because that cost basis gets passed down. And now it's not even her primary residency, she's going to owe income tax on the difference between that and whatever she sells it for. Now, obviously, she's put money into the house, or they've put money into the house over all these years, but I don't think they've put $800,000 or $900,000 into this house. So if you really care about saving money, then leave your seriously appreciated assets when it's gone from $30,000 to $200,000, but leave appreciated assets to your beneficiaries via a trust. Do you understand that?Now, I also know that somebody has written in recently and they said, Suze, we used to love you. We loved you so much, but you're always so condescending, you're always hearing me say, do you got that? Do you understand that? As if I'm talking down to you. I'm not talking down to you, I've never talked down to you. I just want you to get it because this is your money. And you know how I feel about money. Your money and your life is one. Who you are and what you have is one. Really it is. You know, I feel that way. So I've never talked down to you, but I talk with you, and I'm firm with you because these are things that you cannot make mistakes about. And you're making mistakes, and I don't want you to make mistakes. I don't want to get emails that say, uh oh, I think I made a boo-boo. Uh oh, I did this. No. So when you hear me say, do you get that? Am I clear? It's because I need you to be clear. So, please don't take it as this other person took it, like I'm talking down to you and they're now no longer listening. Well, shame on them because they're probably going to go out there now and make a mistake simply because they think I'm condescending. Please, give me a break.Anyway, I want to talk about bankruptcy. Many of you are writing in and you're telling me that you have $80,000 of credit card debt, you have $100,000 of credit card debt. But you are just so ashamed to claim bankruptcy. Listen, if you make less than what you owe, you are technically bankrupt. So what does that mean? That means you're never going to get out of it. So please don't be ashamed if you have to claim bankruptcy. The only part that you should be ashamed about is if you do it again, because do you know that one out of two people who claimed bankruptcy claim it twice? So you have to think about that and do not go out there charging all of this stuff simply because you think, well, I don't care, I'm just going to claim bankruptcy on it. Those are not the people that I'm talking about. I am talking about people who all right, they charged too much, and then they lost their job. And then they got into medical debt, and then they just started to accumulate all this stuff and before you know it, now they have $80,000 or $50,000. And they're making $30,000 year, $40,000 year, or they're not making anything. So the main thing about this is there's no shame in you claiming bankruptcy if you have to do it, you have to do it. But just do it because prolonging it isn't going to help things what so ever.And last but not least, can we just talk about FICO scores? Now, I think I started this by saying, I have at least 10 things here for you. I have 10 things. I don't know how many I just did, I don't keep track, but whatever the number this is, you need to know all of these things. Let's talk about FICO scores credit scores for a second here, and what you need to get is you are not to continue to care more about your FICO score than you are the quality of your life. You're writing me and you're telling me that you're taking money out of your retirement accounts simply to pay the minimum payment due on your credit cards just so you could have a good FICO score. I don't think so. You can always rebuild your FICO score or your credit score, but what you have to understand about retirement accounts is this. Retirement accounts are safe and sound if you do claim bankruptcy. So they're not part of a bankruptcy, they can't take it from you. So, if you're really doing poorly and you don't know how you're going to pull things out, you really want to put us much money into a retirement account as you possibly can, because nobody can ever take that away from you. So stop taking money out of your retirement account to pay the minimum payment due on your credit cards and then tell me, but it looks like you're going to have to claim bankruptcy after all. That's a serious mistake, so just don't do that.So, these are just some of the things that I wanted you to know. Trust me, there are many more, but I already see that we are at about 30 minutes. I do want you to hear the entire song of "Rise Above" by Effie, and again, we're going to play it for you right now... In providing answers neither Suze Orman Media nor Suze Orman is acting as a Certified Financial Planner, advisor, a Certified Financial Analyst, an economist, CPA, accountant, or lawyer. Neither Suze Orman Media nor Suze Orman makes any recommendations as to any specific securities or investments. All content is for informational and general purposes only and does not constitute financial, accounting or legal advice. You should consult your own tax, legal and financial advisors regarding your particular situation. Neither Suze Orman Media nor Suze Orman accepts any responsibility for any loss, which may arise from accessing or reliance on the information in this podcast and to the fullest extent permitted by law, we exclude all liability for loss or damages, direct or indirect, arising from use of the information.To find the right Credit Union for you, visit https://www.mycreditunion.gov/.
Answer Yes or No to the follow statements.
I pay all my credit card bills in full each month.
I have an eight-month emergency savings fund separate from my checking or other bank accounts.
The car I am driving was paid for with cash, or a loan that was no more than three years, and I sure didn’t lease!
I am contributing at least 10% of my gross salary to a retirement plan at work, or I am saving at least that much in an IRA and/or regular taxable account.
I have a long-term asset allocation plan for my retirement investments, and once a year I check to see if I need to do any rebalancing to stay on target with my allocation goals.
I have term life insurance to provide protection to those who are dependent on my income.
I have a will, a trust, an advance directive (living will), and have appointed someone to be my health care proxy.
I have checked all the beneficiaries of every investment account and insurance policy within the past year.
So how did you do?
If you answered yes to every item, congratulations. If you are working on improving on a few items, I say congratulations as well.
As long as you are comitted to truly creating financial security, I applaud you. If that means you are paying down your credit card balances, or are building up your emergency fun with automated payments, that’s more than fine. You are on your way!
But if you found yourself saying No to any of those questions, and you’re not working on moving to Yes, then I want you to stand in your truth. No matter how good you feel, you have some work to do before you can honestly know what you are on solid financial ground.
Credit & Debt, Saving, Investing, Retirement