The wisdom of the Wise on Making, Saving, Investing, and Enjoying your money.
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Nine Steps to Financial Freedom, the : Practical and Spiritual Steps So You Can Stop Worrying, by Suze Orman, 338 pp.. (Also available in Audio)
Suze Orman combines wisdom with heart to offer a book that not only gives sound advice, but explores the emotions and memories that subconsciously block our efforts to get ahead. Life is more than 'get all you can; can all you get; sit on the can' (as some financial books seem to assume). It's about taking charge of our finances so that we can experience personal freedom, provide for those we're responsible for, and help the less fortunate.
She draws from her experience as a Certified Financial Planner® professional, vice president of investments for Prudential Bache Securities and account executive at Merrill Lynch.
Her nine steps are:
STEP 1: Seeing How Your Past Holds the Key to Your Financial Future
Think back to your younger days. Were there events or words spoken to you that influence your attitudes toward money? Perhaps you lost something precious and to this day you fear losing money, even in conservative investments. Perhaps significant friends or adults made you feel that you were inferior and could never amount to anything. Could these memories be hindering your ability to get ahead?
'...in my experience, most peoples' biggest problems in life - even those that appear on the surface not to be money related - are directly connected with their early, formative experiences with money.' (p. 9)
STEP 2: Facing Your Fears and Creating New Truths
Make the connection between your memories and the fears that followed. Perhaps you're afraid of losing everything and becoming a bag lady. Maybe you fear that if your spouse leaves, you can't support yourself. Do you fear losing your job and being qualified for nothing else?
After you articulate and face those fears, retrain your mind by replacing your fears with new truths. Suze grew up with the belief:
'You'll always have to do without, so you had better learn how.'
She created a now truth for herself by writing, about twenty-five times a day, a new truth:
'I am young, powerful, and successful, producing at least $10,000 a month.'
Her old belief had crippled her with fear and feelings of inadequacy. Her new truth encouraged her with 'a message of endless possibility.'
Now, exchange your old, debilitating fears for a new truth that you can repeat to yourself until you believe it and are changed by it.
STEP 3: Being Honest With Yourself
We can't take control of our finances unless we first take stock of our financial condition. In order to do this, we must discover how much we spend each month. Only then can we compare our income with our spending and know how we're doing financially.
'Most of us believe, or deceive ourselves into believing, that we need about $1,000 to $1,500 a month less than we actually do need to go on living the exact same way we live right now.'
Why is our projection so far off? We forget to include expenses that don't occur every month, such as new glasses, vacations, insurance premiums, or birthday parties.
The solution? First, determine how much you're spending. Tally up all your ATM statements, canceled checks, credit card statements and anything else you need to discover how much you spent over the last two years. Make categories for each month such as automobile, food, etc. Divide each category by 24 to discover how much you spend per month in each category.
Second, add up all your income. Include salaries, alimony, interest, rental income that you expect over the next year.
Third, subtract to find the difference between your income and spending.
Fourth, if you find that you don't have enough money to meet your obligations, save and give the way you want, then you've got two options - make more or spend less.
Perhaps you need to seek a new job with better pay. More likely, you need to spend less. Look over your spending in each category to decide exactly what you want to spend, for example, on food or clothing. You may be shocked to discover that, by bringing a sack lunch to work three times a week instead of eating out all five times per week, you can save a substantial amount over time. Add it up! Cut and color your hair every nine weeks instead of every eight weeks. You'll be amazed when you add it up.
Remind yourself of your specific changes in spending by posting the categories on the fridge, or place a yellow sticker in your checkbook.
Begin keeping track of what you spend each month in those categories. Find a system that works for you - perhaps making a chart. And don't feel too bound. If you decide to spend more on one category than you've allotted for the month, simply spend less in another category to make up for it.
STEP 4: Being Responsible to Those You Love
People come first. That means you need to provide for those you love in case of disablement or death. (Suze spends over 80 pages discussing your options in detail. Essential reading!) If you love them, do the following:
Set Up a Good Will and/or Trust
If you own property, a business, or have children, a will might not be enough. Consider transferring your assets into a revocable living trust. Although you can do it yourself, Suze recommends hiring an attorney to do it for you.
Have a Durable Power of Attorney in Force for Health Care
You need to specify your wishes in case an accident or illness puts you in a vegetative state. Do you want your life unnaturally prolonged or not? Who will be your agent or agents to make a decision, if one has to be made?
Have Adequate Life Insurance
Rule of thumb: '...figure you need about $100,000 in insurance for every $500 of monthly income required.'
You won't need life insurance by the time you're sixty-five years old, at the latest.
For the vast majority, get term insurance.
Get Long-Term-Care Insurance
'...one out of three people above the age of sixty-five will spend some time in a nursing home.' The average length of stay is 2.9 years. It can cost upwards of $4500 per month. Long-Term-Care insurance will pay for that, as well as home health care (check your policy). Get it when you're about fifty-four years of age.
Make sure you get a quality insurance company. You can find ratings at these sites:
Get Long-Term Disability Insurance
Workers' compensation covers you only if you're injured while performing your job.
Plan Your Estate Well
STEP 5: Being Respectful of Yourself and Your Money
If your company retirement plan is good, invest the maximum you can each month. Suze counseled a large number of employees from the same company who were being offered early retirement. She soon discovered that most of them either had around $400,000 in their 401(k) retirement plans or had $150,000. That's quite a difference! What caused it? The people with $400,000 had put the maximum amount allowed into their retirement each month. The ones with $150,000 had put in only up to the amount that the company would match.
Here's the problem you must overcome:the more you make, the more you spend.The solution lies in the corollary: the less you make, the less you spend.
'...there is a simple and remarkably effective way to make yourself spend less. You invest more. By putting more money into your retirement accounts, your take-home check will be less and you will quickly train yourself to spend at a lower level, just as you used to do when you were making less money.' (pp. 140,141)
Suze counseled a couple who were doing remarkably well on a modest salary. They were investing well for retirement and their children's education. She asked the husband how he did it. He replied, 'We only spend what we see.' Besides having his company take out the maximum for his 401(k), he also has the company send money directly to his credit union, which in turn sends it directly to a mutual fund. They never see any of that money.
You're not taxed on the earnings that go directly into your 401K. Thus, you have more to invest and it multiplies more quickly. You pay tax (as ordinary income) when you take it out.
Diversify. Don't put all your money in your company stock, even if it's a great company.
If your company doesn't offer a retirement plan, take out an IRA (Individual Retirement Account) and invest the maximum allowed by the law each year. A Roth IRA differs in that you don't get a tax deduction for putting the money in, but you don't have to pay tax when you take it out. It grows tax free.
If you're self-employed, you may open an SEP (Simplified Employee Pension Plan), a Keogh, or a SIMPLE (Savings Incentive Match Plan for Employees).
If you won't need the money for at least ten years, invest the majority of your money for growth - good no-load index funds and managed growth mutual funds, and a very small portion in an international fund.
Dollar cost average - investing every month, whether the market is going up or down.
Don't carry credit card debt! If you can't handle credit cards, cut them up.
STEP 6: Trusting Yourself More Than You Trust Others
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Do what you feel is right for you, not being swayed by what 'everybody else is doing.' If you don't feel comfortable investing in the stock market, don't do it. If you don't feel comfortable selling when 'everyone' is selling or buying when 'everyone' is buying, don't do it.
It's easier than you may think to take charge of your own investments, rather than paying an advisor to do it for you.
Go with managed or index funds? '...I would just stick with index funds if I did not want to be actively involved with watching everything about the fund I was in.' Index funds tend to beat managed funds over time, because of the lower expenses.
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Go with no load funds.
STEP 7: Being Open to Receive All That You Are Meant to Have
Suze discovered that by giving to those in need, she made herself happier and ended up receiving more. She looked over her clients and discovered that the ones who gave regularly have more money than those who didn't give. Whenever she got new clients who were hurting financially, but she thought that they might be open to the concept, she encouraged them to begin giving. The results were unbelievably positive.
Give to your parents if they have needs. Giving to friends and other relatives can cause problems. Giving to charities can be the purest gifts.
STEP 8: Understanding the Ebb and Flow of the Money Cycle
No matter how well you plan, money will have its ups and downs. First, take the long view. Since you're planning for the future, this year's problems are probably not devastating. Second, even events that seem tragic today can turn into something positive, if you let them. She gives the beautiful story of her father, who suffered financial setback after setback, only to find success in his latter years, often because of the setbacks rather than than in spite of them.
STEP 9: Recognizing True Wealth
One day you'll be old, looking back at what seems important in retrospect. At that time, what in life will have been of the most value? Probably not your net worth. So don't measure your self worth by your net worth. Decide what's really important in life and put it first.
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The 9 Steps to Financial Freedom, by Suze Orman, Book Summary