In this shaky economy – with foreclosures, layoffs and the Dow diving daily – it’s more important than ever to take control of your money. Easier said than done? We talked to personal finance wizard Suze Orman about which 10 money mistakes we’re making and how to start reversing them today for a more secure future. Plus, learn how well you manage your finances with our quiz...
Women all want financial security, but figuring out a 401(k) from a 529 B plan puts most of us to sleep. So we leave money management to our husbands, boyfriends or fathers.
Bad idea, says money management guru Suze Orman, author of The Money Class: Learn to Create Your American Dream and Suze Orman's Action Plan: New Rules for New Times (both Spiegel & Grau).
Take care of yourself financially, she says. It’s essential to your future and your ability to care for those you love.
Most women feel insecure about their finances, whether they’re moms in charge of a household or Fortune 500 execs running a company. Why? Because women have been taught to not manage their money, Orman says.
Orman’s books offer current information on the new legislation and FICO practices, as well as tips to getting out of credit card debt, rebuilding your retirement plan and living within your means.
Here are Orman's top 10 most common mistakes women are making:
1. You fail to go with your gut.
This is the mother of all money mistakes. The need to nurture and protect others overrides your desire to protect yourself, so you make important money decisions to spare their feelings.
“Someone will come to you and say, ‘I need to borrow $5,000.’ You'll think, ‘I won’t lend the money or co-sign,’ and yet you say ‘OK,’” Orman says.
Too often, the borrower will default, and you lose money or points on your credit score.
2. You save for your child’s college before your retirement.
“Mothers come up to me constantly and say, ‘Suze, where is the best place I can save for my child’s college education?’” They need to first consider their retirement, Orman says.
If you don’t earn enough to stash money in both accounts, retirement comes first.
Why?
So you won’t become a burden on your kids later in life. As Orman points out, plenty of college loans are available, but there are none for retirement.
3. Your children are beneficiaries on your life insurance policy, even though they’re minors.
Life insurance companies normally won’t pay out to children under age 18, Orman says.
So if you die, the $500,000 policy that you left to your 3-year-old “goes into a blocked account in the bank, where the kid can’t get at it,” she says.
Instead, create a trust account and name it the policy’s beneficiary. Inside the trust, you can specify to whom, how and when the money should be distributed.
4. You believe a will is enough.
It’s not. A will is simply a document that states how your assets will be distributed after you die.
Instead, you need a living revocable trust with an incapacity clause.
Why?
“Imagine you’re in an accident or you have a stroke. You’re totally incapacitated. Who is going to pay your bills? Write your checks for you?” Orman asks.
Even if you’re married and plan to stay that way, you’ll probably outlive your husband. A trust with an incapacity clause allows you to choose the best person to look out for you and your interests.
(For more information, go to SuzeOrman.com and click on the will and trust kit link.)
5. You buy the wrong kind of life insurance.
"Women tend to have whole life universal or variable life insurance," Orman says.
Such policies offer the death benefit and built-in savings. You can get back at least some, if not all, of the premium by cashing it out while you're alive or by borrowing against it.
Still, she says, you can do better. If you want to pass money to your kids and provide them some sort of savings, create your own investment fund.
"The only type (of insurance) you should ever have...is a term life insurance policy," Orman says. Term policies offer only death benefits, and they pay your beneficiary after you die.
How long a term should you buy? Typically, you'll want coverage until your youngest child is 23 years old.
6. You fail to keep the beneficiaries on your or your husband’s accounts up to date.
This simple oversight can lead to financial tragedy.
Review your retirement account, your IRAs, your pension, your life insurance – and your husband’s – especially if this is the second marriage for either of you.
If you don’t?
“He dies, you think you’re going to benefit, and it all goes to the ex-wife,” Orman says.
7. You leave the family finances to your husband.
Don’t blindly believe in your husband’s good intentions and financial prowess. Immerse yourself in the family finances. If he’s been in charge until now, you may find he’s doing a great job – or not.
When he dies or your marriage dissolves, you don’t want to find out that you should've worried, says Orman.
8. You believe a prenuptial agreement protects only him.
A properly executed prenuptial agreement will protect you both if your marriage happens to become the nearly one out of two (or two out of three in the case of second marriages) that fails.
The best time to plan for the undesirable? When romance is in full bloom.
9. You discount yourself.
Maybe you run your own business and fail to raise your rates even though your expenses are rising. Perhaps you accept a small raise, despite the company’s growth and your contribution to it. Or you might allow clients to pay discounted rates for your services.
If you do any of these, you’re putting yourself on sale – cheap.
Instead, value yourself properly, Orman says, and those around you will pay you accordingly.
10. You can’t say no.
You work, you take care of your family and yet you volunteer whenever you’re asked.
Today, with women making up half the workforce, your time isn’t as abundant as your mother’s was. Volunteering is admirable, but don’t overdo it.
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