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Notes from Suze Orman

9-steps to financial freedom

compare to Dave Ramsey's 7-baby steps

Step 1 Think back to your formative experiences with money and consider what these memories have taught you about who you were then and how they affect who you are today.

Step 2 Replace your financial fears with new, positive, empowering messages (i.e. "I have more money than I will ever need"; "I am in control of all my affairs"; "I have the power to put my money in good hands").

Step 3 Be honest with yourself about your current financial status and decide how you want to start spending your money.

Step 4 Be responsible to those you love by taking care of these "must-do's" wills, trusts, life insurance, durable power of attorney for health care, long-term-care insurance, and estate planning.

Step 5 Respect yourself and your money by investing wisely in retirement plans, stocks, money market accounts, and mutual funds and by eliminating credit card debt. Your actions will give that respect meaning.

Step 6 You must trust yourself more than you trust others. Pay attention to your inner voice it will tell you if how and in what you are investing is right for you.

Step 7 Give a portion of your money to others. By releasing an anxious grasp on your money, you will open yourself to receive all that is meant to be yours.

Step 8 Understand and accept the cycles of money. The setbacks you may have today or next year will not keep you from financial freedom. If you hold on to your goals and dreams, you will get there.

Step 9 Learn to recognize true wealth. Money itself will not make you financially free. That comes as a result of only that powerful state of mind which tells us that we are worth far more than our money.

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Young, Fabulous and Broke (YF&B)

Credit Reports

After college, grades and SAT scores are replaced by your FICO credit score. It ranges from 500-850.

Landlords use your score to decide whether to rent to you

Employers use your score to decide whether to hire you

Your FICO score effects the interest rate you'll pay for car loans, credit cards, and a home mortgage. This can be a significant cost that could be used for other things.
Pay off credit card debt after contributing to 401(k) that employer matches.

Do NOT close credit cards —it "closes" your history.

Have a large amount of credit available and don't use it —keep your Debt-to-Credit Ratio Low

Make Employer/Clients Dependent Upon You

Buy Undervalued Assets - Sell when it Becomes Valued

Stock Market Not Undervalued Anymore

Land Not Undervalued Anymore

You are undervalued —invest in yourself. Education, working when others are playing.

Credit Cards

Good Uses
  • Food
  • Gas to get to job
Bad Uses
  • Restaurants
  • Vacations

Max 401(k)/403(b)

Never pass up free money

Contribute up to point employer matches ~6% of income. Employer's contribution does NOT count against max contribution
Contributions are pre-tax. Distributions are taxed as ordinary income when you're older and in a lower income tax bracket.
If you withdraw early, you pay taxes + 10% penalty
There is also a Roth 401(k) where income used to invest is taxed, but distributions aren't when you're old.
A 401(k) can roll over to another employer's 401(k) plan or to a traditional IRA at an independent institution.
A 401(k) can Rollovers as Business Start-Ups (ROBS) into a C Corp.
There are no income restrictions for 401(k) plan participation.

Max Roth IRA Contribution

If you don't own a home

The income used to invest is taxed, while any gains in the future aren't taxed.

Use Discount Brokerage to invest in any ETF, mutual fund, bond, stock
We are facing record deficits. Tax rates are going to increase. Contribution is taxed now —not later.
You can take 100% of it out tax free --after 59.5 years old (and > 5-years)

Traditional IRA

You can individually invest, in addition to a 401(k) up to a maximum combined contribution limit

Combined Traditional IRA and Roth IRA Contribution Limits

Buy a house

Save for a down payment (10% nowadays)

The best investment in your life [as long as you don't end up in foreclosure → add 45% to cost of mortgage (representing maintenance and repairs) to see if you can afford the house]

Private Mortgage Insurance (PMI) costs $45 per $100K of mortgage

Normal appreciation is 4-5% (4% of a $100K home = $4,000. If you put $10,000 down, you made 40% ROI —not including points & closing costs)

If you live in a house for > 2-years the 1st $250K of appreciation is tax free: $500K if jointly owned.

If > $500K of appreciation (jointly owned) when you sell you're charged the capital gains rate.

Tax BracketCapital Gain Tax Rate
Short Term Long Term
10% 10% 0%
15% 15%
25% 25% 15%
28% 28%
33% 33%
35% 35%
Short term gains on stock investments are taxed at your regular tax rate; long term gains are taxed at 15% for most tax brackets, and zero for the lowest two.

8-month Emergency Fund

Student Loans

Lowest Rates Historically

Invest in Self

Do not go back to school because you don't know what to do. Do NOT accumulate more debt.

If "consolidated" (locked / fixed rate), @ 2% interest rate should be the last debt paid off. Deduct up to $2,500 of the interest from taxes.

Bankruptcy

Most people that declare it once, declare it twice.

Courage to be Rich

True Cost of Owning a Home

30-year mortgage, $125,000, 7% interest → $830/month

Mortgage830
Insurance85
Property Taxes197
PMI (< 20% down payment)43
Incidentals50
TOTAL$1,205
Increased Costs Compared to Apartment near work
Utilities
Commute (gas, parking, wear & tear)

30 vs. 15 Year Mortgage

30-Year15-Year
Loan$125,000$125,000
Interest Rate7%6.5%
Loan$830$1,083
Monthly Difference = $253
Months360180
Balance after 10-years$107,265
Total Cost$298,000$194,940
Total Savings = $103,860
One extra mortgage payment on a 30-year loan drops it to 22-years,
on a 15-year loan drops it to 12-years

Owning home outright gives security —still need to pay taxes and maintenance.

Suffered a Loss (widow, divorce)

Courage --knowing when not to do anything: At least 6-months to a year after a loss

You are in a state of shock, grieving. Do not make decisions during this period that affect the rest of your life.

Other than paying off house, NO new purchases or investments!!!!

Traditional IRA

Tax deductable
10% penalty U.S. + state + regular taxes if less than 59.5 years old.
Mandatory withdrawals at 70.5 years old (50% penalty if you forgot to take it out).
Income tax for beneficiaries —five years to wipe it from account.

Roth IRA

In addtion to 401(k). Can buy as late as April 15.
The best place to save for retirement, bar none.
Buy some aggressive stock that explodes in value --all tax free.
Can buy them anywhere: discount brokerage, full service brokerage house, bank, mutual fund company.

Maximum of $____ per year.
No mandatory withdrawal

Can withdraw contributions at any time without any taxes or penalty, although the gain has to stay in the account.
No income tax for beneficiaries.

Annual vs Monthly IRA Funding
DecemberJanuary
Age 25$2K @ 8%$166/mo @ 8%
Age 65$518,000$535,000
Difference = $17,000

Modified Adjusted Gross Income (MAGI)

Financial Clutter, What To Keep And What To Get Rid Of

  • Sales Receipts Keep till warranty expires or can no longer return or exchange
    (Unless needed for tax purposes and then keep for 3 years)
What to keep for 1 month
  • ATM Printouts (When you balance your checkbook each month throw out the ATM receipts)
What to keep for 1 year
  • Paycheck Stubs (You can get rid of once you have compared to your W2 & annual social security statement)
  • Utility Bills (You can throw out after one year, unless you're using these as a deduction like a home office --then you need to keep them for 3 years after you've filed that tax return)
  • Cancelled Checks (Unless needed for tax purposes and then you need to keep for 3 years)
  • Credit Card Receipts (Unless needed for tax purposes and then you need to keep for 3 years)
  • Bank Statements (Unless needed for tax purposes and then you need to keep for 3 years)
  • Quarterly Investment Statements (Hold on to until you get your annual statement)
What to keep for 3 years
  • Income Tax Returns (Please keep in mind that you can be audited by the IRS for no reason up to three years after you filed a tax return. If you omit 25% of your gross income that goes up to 6 years and if you don't file a tax return at all, there is no statute of limitations.)
  • Medical Bills and Cancelled Insurance Policies
  • Records of Selling a House (Documentation for Capital Gains Tax)
  • Records of Selling a Stock (Documentation for Capital Gains Tax)
  • Receipts, Cancelled Checks and other Documents that Support Income or a Deduction on your Tax Return (Keep 3 years from the date the return was filed or 2 years from the date the tax was paid -- which ever is later)
  • Annual Investment Statement (Hold onto 3 years after you sell your investment.)
What to keep for 7 years
  • Records of Satisfied Loans
What to hold while active
  • Contracts
  • Insurance Documents
  • Stock Certificates
  • Property Records
  • Stock Records
  • Records of Pensions and Retirement Plans
  • Property Tax Records Disputed Bills (Keep the bill until the dispute is resolved)
  • Home Improvement Records (Hold for at least 3 years after the due date for the tax return that includes the income or loss on the asset when it's sold)
Keep Forever
  • Marriage Licenses
  • Birth Certificates
  • Wills
  • Adoption Papers
  • Death Certificates
  • Records of Paid Mortgages
* These documents should be kept in a very safe place, like a safety deposit box.

Marriage

Arguments about money are the #1 reason for divorce. Practice "Safe Money" —a play on "Safe Sex". Become as intimate about your finances as other aspects of the relationship. Love doesn't conquer all. Note the other person's habits, attitudes, and behaviors: their money hygiene.

1:2 couples gets divorced. You spend more years divorced than married.

The time to plan the divorce is before you say "I do". You won't be feeling kind, generous, and caring.

Have a pre-nuptial agreement.

  • Don't write or sign under duress —i.e. the day of the wedding.
  • Sign it 6-months to 1-year before marriage.
  • Have separate lawyers represent you.
  • Don't undervalue/overvalue items.
  • Include clause: you're not responsible for debt acquired individually without your signature. File with credit card companies.
  • It's just a piece of paper: until you need it.

Jules Bartow