Personal Finance Expert Gives Soldiers Advice They Can Bank On

By Samantha L. Quigley
American Forces Press Service

Sept. 30, 2009 - Personal finance expert Suze Orman said she doesn't hold much hope that the economy will recover as quickly as the troops she met at Walter Reed Army Medical Center here yesterday. "I don't think it will," she told those gathered on the Walter Reed campus for a Financial Readiness Road Show. "I've stood up here for too many years and I have said, 'If we are not careful, the rich are going to get richer, the poor will get poorer, and the middle class will disappear.

"Welcome to 2010, where that's about to become a reality," she quipped.

But hope is not lost, she said. People can save themselves if they make the right financial moves and look at their situations realistically.

Orman started her presentation by asking the crowd what questions she could answer for them. The queries, varied though they were, focused on investing.

Then she asked everyone in the audience who was carrying debt to stand. The majority stood.

"I find that very funny," she said. "How can I talk to you about money when you don't have any? But you can't talk about having [money] until you talk about what you do have, and what you do have is debt."

Then the floodgates opened, and Orman began laying down the law and the path to financial freedom.

It starts with a strong financial foundation, an emergency fund equal to eight months of basic living expenses, she said, adding that this is the top priority, even before paying off credit card debt.

Next up was credit cards. When those balances go down, credit scores, go up, she told the group, using the Fair Isaac and Co., or FICO, credit-rating score in her explanation.

"[Your FICO score] is probably the most important thing for you to know, bar none, in your personal financial history," she said. "FICO scores go from 300 to 850. Anything under 500 -- forget about it, people. You are a serious FICO mess." A score of 760 or above is the goal these days, she added.

That score affects just about every aspect of a person's life, from mortgage and car loan interest rates to getting a new job, Orman said. Good scores are the results of always paying bills on time, never going over a credit limit and not charging credit cards up to their limit.

While that contributes to a good FICO score, 30 percent of the score depends on the debt-to-credit-limit ratio.

"Let's say you have five credit cards, each with a $2,000 credit limit," she said. "That is a $10,000 credit limit in totality. If you had charged $2,000 on each one of these cards, you would have a $10,000 credit limit [and] $10,000 in debt. That is 100 percent debt -- [the] what-you-owe to credit-limit ratio."

But if all but one of those cards gets paid off and the creditors allow the cards to remain open -- which is not always the case today -- then the ratio goes down and the FICO score goes up, Orman said.

"What's so sad is that the creditors now are closing your credit cards down for you, and that is hurting your FICO score," she said. "When your FICO score goes down, everything else goes up, including your car insurance premiums."

Worse than credit card debt is student-loan debt, Orman told the audience. Interest rates are rising on those loans, and they're the first ones people stop paying on when things get tight.

But that's a big mistake, she said. Unlike credit cards, which are unsecured debt, student loans are debts that "will follow you to your grave." They can't be discharged, even in bankruptcy.

After discussing the emergency fund and elimination of debt, Orman turned her focus to retirement, specifically the Thrift Savings Plan, noting the difference between the plans offered to military members and the Defense Department's civilian employees.

"They don't match your contribution," she said to the servicemembers. "If you happen to be a civilian in the military and [you] put in a dollar, they match [the] contribution."

Orman's said servicemembers may be better off investing in a Roth IRA, if they qualify. The contributions are taxed once up front, and any original contributions are eligible for withdrawal without taxation or penalty. Another plus to the Roth IRA is that contributions are taxed under the current tax brackets, which Orman described as the lowest in history.

"The question becomes, what sense does it make to put money away at the lowest tax brackets possibly of your life ... to possibly and probably take it out years from now at what might be the highest tax brackets of your life?" she asked them.

One the emergency fund is established, credit cards paid down and retirement is squared away, Orman said, it's time to look at investing, and a down market is the time to do that.

Orman said she doesn't understand why some long-term investors see a down market as a bad thing. "Rather than liking that the stock market is down, especially when you don't need your money right away ... you're freaked about it," she said. "Wouldn't you rather buy a great stock, mutual fund, or whatever at $5 a share, so that if you're investing $100 a month, you're able to buy 20 shares versus the same stock that was at a $100 a share, so every time you invested you were able to buy one share?"

She used General Electric stock, currently about $16 a share, down from $30 a share a year ago, as an example. Before the market started to rebound, she said, that stock was $6 a share.

"Think how many shares you could have purchased. You stop investing when the market is down," she scolded. "You start investing when the market starts to go up and you feel better. Mistake, mistake, mistake."

Regardless of where the market is, investment should be a regular occurrence, whether it's monthly, quarterly or yearly, she said.

"There's nothing wrong with you investing some of your money ... across the board. You should have some of your money invested overseas," Orman said, adding that precious metals also might be a consideration.

"Time is the most important financial ingredient in any financial freedom recipe," she said. "Every single day you decide to waste, every single day you decide you don't want to get involved with your money ... you are changing the outcome of your financial future."

Orman said she doesn't think the real estate market has hit bottom yet. According to a National Association of Realtors study, 50 percent of first-time home buyers in the United States this year said they did so only to take advantage of an $8,000 tax credit. That could be the cause of the real estate market boost, she said.

She also encouraged those in the audience to plan for the unforeseen by having a will and a living revocable trust.

"You can download over $2,500 worth of state-of-the-art documents [from her Web site] that will protect you [and] your family in every possible situation," she said.

The session proved to be a learning experience for one soldier who is just setting out on her financial path.

"I need to work on my credit score. I'm not in that much debt," Army Spc. Laquinta Gray said. "I'm just starting off, so it's not that much, but she was telling the truth. She didn't sugarcoat anything, which is a good thing."

Gray said she needs to focus on her credit cards to get her financial house in order.

The wounded warriors at Walter Reed are not exempt from life's financial realities and need to focus on their whole financial picture, Orman said, adding that she understands they're still in their recovery phase and are not really thinking about their finances.

"The problem is, that ends. They then leave. Now what happens?" she asked. "Wealth is something that if you don't have it, it doesn't matter if you're healthy. It doesn't matter how you're feeling. You will feel so financially sick inside that it will get you physically sick."

Her advice to them: "These men and these women and these families have got to give as much attention to their money as they do everything else, but it's not part of the equation for them. I've got to make it be part of the equation for them, or really, they're going to end up wishing something that we don't want them to wish."

The Financial Readiness Roadshow was co-sponsored by the deputy undersecretary of defense for military community and family policy. The shows are designed to help servicemembers and their families make direct contact with financial counselors to learn about budgets and spending plans, credit management, housing loans and foreclosures, savings and investments, financial, estate and retirement planning.