Work to keep your interest rate down, your savings rate up
Suze Orman is a financial planner and author best known for her CNBC television program "The Suze Orman Show." She answered reader questions about personal finance on Boston.com last week. Here are excerpts:
Q. Hi. I am in my early 30s and own a condo with a hefty mortgage. This does not allow me to contribute to my Roth or 401K anymore. I have $20,000 combined. However my employer contributes 5 percent of my salary automatically. Is this enough for a few years until I get a raise?
A. The question should really be: How do you free up more money so that you can have your cake and eat it, too? The best advice I could tell you is the higher your FICO score, the lower your interest rates will be on everything you purchase. The more money you save in interest , the more money you have to eventually put into your retirement account. I would prefer a Roth over a 401(k) or 403(b) that does not match or after the point where the employer no longer matches.
Q. What things should I say to a creditor when asking to lower my interest? I have a very large balance credit card that's already two months overdue. The bank has jacked up the interest to a crazy one, but I feel embarrassed to ask them to lower it since I am already in over my head.
A. It is not about being embarrassed. It's now that that you are two months late, you have dramatically affected your FICO score. And the chances of them lowering your interest rates are nil. Forget about the interest rate here. Get your accounts current now!
Q. I'm a single full-time working parent of a preschooler, and a prospective first-time home buyer. I make slightly more than the maximum to qualify for soft loans or similar programs for low- to moderate-income families, but can't save enough to afford much by way of a down payment. Is it better to pay out all debt before taking on a mortgage, or are there other creative things for people like me to consider when it comes to home financing?
A. Given that I do not like what I'm seeing in the real estate market on any level, and the loan debacle is far greater than any of us know, I would not be in a rush to buy a piece of property as a home if I did not have the money to do so because you aren't going to miss out on a bargain. In fact, you may get a better one from other people who were in your exact situation who jumped in thinking that real estate would save them, versus them saving for real estate. Don't do it.
Q. We live in a town with a very good school system but struggle with whether we should send our two children to private school, which we could afford with some changes to our future plans . This would benefit the eldest, who is extremely gifted, but not necessarily the other who is bright but not categorically gifted. We figure the future value of a private K-12 education is about $500,000. For that money, I feel it would be better to give each of them a condo after a public high school graduation. Your thoughts, please?
A. You know this is a decision you have to make on your own. This is not solely a financial decision. This is a decision of what you want and how you want it for your children. And do you care more about your children than your husband's retirement?
Q. How do I save for college while in college, paying for an apartment and any other college life expense (i.e. alcohol)?
A. Oh, go and get a Bud with your friends and figure it out! Seriously speaking, what a waste if you can't afford to do things because you are blowing it on alcohol. Blow your mind, blow your money? Is that what you consider cool? Not in my book.
Q. Hi Suze, I have about $2 million in assets, excluding my house. I have 25 percent in stocks and the rest in short-term bonds averaging 6 percent. Can you think of anything I am doing that is not appropriate? I'm 61 years old.
A. You might be better in municipal bonds at 5 percent tax-free rather than taxable bonds at 6 percent. What you care about is not what you earn, it's how much you get to keep on the interest you earned. You might want to take a look to take some of the $2 million in there. Just make sure they are AAA-rated and insured.
Q. How bad is it to take a loan against a 503(b) for medical expenses?
A. First of all, it's a 403b, not a 503b. And is it a wise thing to do? No. Financially speaking, it makes no sense. However, if it is something you have to do, you just have to do it. If you have another source of money, I'd rather see you take it from there.
Q. What should I contribute to my cash value life policy?
A. Nothing. What are you doing? Why do you have a cash value life insurance policy? Unless you have a serious estate tax problem, there is no reason in my opinion to have one. Get a term insurance policy in place and then drop your cash value policy.
Q. How would you rate the purchase of a variable annuity as a part of one's retirement planning?
A. As the absolutely worst move you can make in your entire life. In a scale of 1 to 10 where 10 is the worst, I would rate it a 1 million. It is stupid, stupid, stupid. Whatever financial adviser is suggesting that to you should be ashamed.
