9 small money steps that pay off big - cnn_com

8/12/2019 9 Small Money Steps That Pay Off Big - CNN_com

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9 small money steps that pay off big - CNN.com

9 small money steps that pay off bigStory Highlights When it comes to your money, Suze Orman says start with small steps Cut spending that falls under "wants" and not "need," put that cash intosavings

Not putting enough into company 401(k) to get match is throwing money away Pay off your mortgage 5 years faster by making 13 payments a yearupdated 9:39 a.m. EDT, Fri October 9, 2009Next Article in Living

By Suze Orman

(OPRAH.com) -- Huge, scary numbers are lurking everywhere these days: Themassive federal bailout (now on the taxpayers' tab)...the unemployment rate,which is now at a 26-year high...that daunting sum you are constantly told youwill need if you want to retire comfortably...the six-figure mortgage balanceyou barely chip away at each month.

Financial expert Suze Orman says you can take baby steps to get yourself on pathto financial security.

Listen to me: Stop focusing on the big picture. Given what is going on in theworld right now, you'll only fuel your fear and anxiety.Macroeconomics matter, but your security depends far more on microfinance --thesmall choices you make with your money. Every financial worry you want to banishand financial dream you want to achieve comes from taking tiny steps today thatput you on a path toward your goals.My list of small moves that yield big dividends:1. Save a bit at a timeI get so frustrated when people tell me it's unrealistic to create aneight-month emergency savings fund, or have money saved for a home down payment,or pay off their $5,000 credit card balance. I am not suggesting that you can

snap your fingers and have everything taken care of.What I'm telling you is to move toward your goals in steps. Rather than get lostin the big picture -- "Eight months? Are you crazy, Suze? I can never do that!"-- focus on what is within your power: the sums you can sock away every week ormonth to get closer to what you're trying to achieve.Put $50 a week into a bank savings account earning 2 percent interest, and inthree years you will have saved more than $8,000. Oprah.com: Money in thebank...how does it get there?Don't Miss Oprah.com: 10 tips for a fresh financial startOprah.com: Is college worth the debt?Oprah.com: Best way to save when money is tight

2. Have a little self-discipline!Okay, so where do you find the money to put toward your financial goals? Ifyou're dealing with a layoff or furlough, I know you feel stretched to thelimit. But often when families tell me they have no money for their goals, Ilook at their spending and find lots of "wants" to cut.So pull out your three most recent bank and credit card statements, circle everycharge or debit that is not a necessity, and ask yourself, "Can I eliminate thiscost entirely?"


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If not, can you scale it back 30 to 50 percent (downgrade the cable, say, or optfor the less-pricey cell package)? Every time you cut expenses, you can put themoney toward bigger goals. Oprah.com: What to ask before you buy anything3. AutomateSo many financial dreams are thwarted by the failure to act upon goodintentions. Even if you commit to step 2 and free up money, using it wisely canbe a challenge.Complete this sentence: I had every intention of ___________, but I gotsidetracked or couldn't stick with my plan. That blank could be: (a) building aneight-month emergency fund; (b) investing in Roth IRA; (c) saving for a homedown payment; (d) paying every bill on time; (e) all of the above.The solution is easy: Put your financial life on autopilot as a form of "forced"saving. Your 401(k) is a great example of auto-investing; with every paycheck,money goes into your retirement account. You can set up the same system at adiscount brokerage or fund company to help you invest in an IRA, authorizing thefirm to pull money out of your bank account weekly, monthly, or quarterly.Autopilot is also a great way to save for a home down payment. Have $100automatically transferred from your checking account to a bank savings accounteach month and in five years at 2 percent interest you could have more than$6,300 set aside. An FHA-insured mortgage requires a 3.5 percent down payment,

so $6,300 would be enough to buy a $180,000 home.And if you suffer from late-payment-itis, set up auto bill pay through an onlinebank account. This will save you those $39 late fees on credit card payments andlift your FICO score (on-time payment history accounts for 35 percent of yourscore). Oprah.com: How to avoid hidden fees4. Max out on the company matchIn a 2008 survey of nearly a million 401(k) participants, the investmentadvisory firm Financial Engines found that 33 percent don't contribute enough totheir company plan to collect the maximum employer matching contribution. That's

literally turning down free money.The way a match works is that if you contribute to your retirement account, youremployer will throw in some money, too. One common system is for an employer togive 50 cents for every dollar the employee contributes to her 401(k), up to aspecified limit, such as 6 percent of a salary or a certain dollar amount peryear.Under those terms, if the employee contributed $3,000, the employer would kickin another $1,500. Hello! That's a guaranteed 50 percent return on yourinvestment. And $3,000 spread out over 26 pay periods is only $115 every twoweeks. That's a small step toward a big goal.If your company doesn't provide a match -- or has opted to suspend its matchduring the recession -- you may still qualify for a Roth IRA. I recommend

funding the IRA completely before you contribute to an unmatched 401(k). Withoutthe match, a 401(k) is still a good deal, but a Roth IRA is even better. Detailsfollow in the next small step.5. Invest in a Roth IRAI love the Roth IRA. Tax-free income in retirement is a truly great deal. That'sbecause income tax rates are likely to rise given all the big federal deficitsthat will need to be repaid. (And remember: Withdrawals from a traditional IRA


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or 401(k) will be taxed at your ordinary income tax rate.)If you have modified adjusted gross income (AGI) below $105,000 this year($166,000 for married couples filing a joint return), you can invest the maximum$5,000 in an IRA (or $6,000 if you are 50 or older). Above those income limits,you can make smaller contributions; you lose eligibility if you have a modifiedAGI of $120,000 or more, or are part of a married couple with a modified AGI of$176,000 or above. Oprah.com: 5 tips for mixing money and loveI know $5,000 or $6,000 is a big deal. And I promised small steps. So break that$5,000 into 12 monthly chunks. Does $416 sound more doable? If it's still toomuch, save what you can. No rule says it has to be $5,000. You can invest aslittle as $600 a year at some fund companies through an auto-investing plan, orsave until you meet the $1,000 to $1,500 minimum initial investment most mutualfunds require.6. Subtract your age from 100; Put that much in stocksNow we need to talk about asset allocation. For all your long-term investments,such as retirement accounts that you won't touch for at least ten years, youneed a mix of stocks and bonds.Stocks offer the best shot at inflation-beating gains. But stocks don't alwaysgo up. That's where bonds come into play: They have less upside potential, butthey also do not pack the same risk.So what's your Midas mix of stocks and bonds? Subtract your age from 100 andinvest that percentage of your retirement savings in stocks. The rest belongs in

bonds.For the stock portion, put 70 percent in U.S. stocks and the rest ininternational funds.As for the bonds: You should definitely have some lower-risk investments in your401(k), but rather than invest in a bond fund, look for a GIC or Stable Valuefund, which offers a guaranteed return.For your IRA accounts, I am all for owning individual bonds you can hold tomaturity instead of bond funds, which are subject to trading and carry morerisk.7. Spend $50 a month for peace of mindThat's about what it would cost a healthy 40-year-old woman to buy a

million-dollar 20-year level term life insurance policy; figure on less ifyou're younger and more if you're older. But the idea is this: A small amount ofmoney buys your family protection if you die prematurely. You can shop for termpolicies at SelectQuote.com and AccuQuote.com.8. Create the four most loving documents in existenceOne of the most tragic disconnects I see is when someone tells me she loves herfamily to pieces but hasn't set up these four must-have documents: a revocableliving trust, a will, a durable power of attorney for finances, and a durablepower of attorney for healthcare. I realize these don't sound like a "small"undertaking, since estate lawyers may charge $2,500 to create them.9. Add a 13th mortgage payment; pay off your loan five years fasterIf you're in your 50s and plan to live in your current home forever, try to pay

off the mortgage before you stop working so you remove that big cost from yourpostretirement expenses. One way to do so is to make one extra mortgage paymenta year. You can even spread the payment over 12 months.Let's say you have a $1,500 monthly mortgage payment and a 30-year fixed-ratemortgage. If you divide $1,500 by 12, that's $125, so instead of paying $1,500,you send in $1,625 each month. That will cut your repayment time by five yearsand reduce your interest payments over the life of the loan; for a $250,000mortgage charging 6 percent, you will save $61,000 ($228,000 in interestpayments versus $289,000). That $125 a month may be tough, but it's doable. It's


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one small step now, and one giant leap toward future financial security.Oprah.com: 6 money lessons from Suze OrmanBy Suze Orman from O, The Oprah Magazine 2009 E-mail to a friendShare this on:MixxFacebookTwitterDiggdel.icio.usredditMySpaceStumbleUpon| Mixx it | ShareSubscribe to O, The Oprah Magazine for up to 75% off the newsstand price. That'slike getting 18 issues FREE. Subscribe now!TM & 2009 Harpo Productions, Inc. All Rights Reserved.All About Suze Orman Personal Finance

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