Suze's 4 Rules for Financial Wellness
This month I'm asking you to be as good to yourself as you are to those you love. Here are a few guidelines to follow the next time you're considering a gift—whether it's a cashmere sweater wrapped under the tree or the assets you'd like to leave behind.
Crunch the Numbers
The question isn't what you want to give—I know you want your loved ones to have it all, and I appreciate how big your heart is. The question is what you can afford.
The right amount to give is what you can spend today without compromising your own needs. The bottom line: Under no circumstances should you incur debt you can't immediately pay off in order to give a gift. That means no credit card balances rolling into January. I understand the tug of holiday tradition—you always get every niece and nephew a Hanukkah gift. But in this rough economy, you may need to rethink your approach. Sit down and calculate exactly what you can comfortably spend, and be vigilant in sticking to that amount.
Protect Your Reserves
Tending to your emergency savings fund and your retirement nest egg are two important acts of generosity. Your long-term financial security is what will enable you to continue extending yourself to those who depend on you—whether you're giving your money, energy, time, or compassion.
Secure Your Estate
If you intend to leave your family an inheritance, you need to plan today. A will is helpful, but to ensure the smoothest transition of your assets to your heirs, a revocable living trust is your best bet.
Right now the federal estate tax is uncertain. It disappeared in 2010 but is scheduled to reappear in 2011, when it will be levied on estates valued at more than $1 million. Unless Congress restores the estate limit to its 2009 level of $3.5 million ($7 million for married couples), many of you could leave your heirs liable for 55 percent of all assets above that million-dollar limit. Those of you with sizable home equity and other holdings that might put your estate over $1 million should consult an estate attorney, who can help you minimize your family's exposure to the tax.
Give the Greatest Gift of All
You're probably eager to help your grown children make their way during these very tough times. While it's important for them to be independent, helping them with their long-term financial goals—by making a contribution to a house down payment fund or Roth IRA, for example—is a great way to reduce the size of your taxable estate. By gifting some of your assets while you're alive, you lower your exposure to the federal estate tax I discussed above. In 2010 you can give $13,000 per child without either of you incurring any tax liability. If you're married, you and your spouse can each give $13,000, for a total of $26,000 per year.
The maximum IRA contribution for 2010 is $5,000 (or $6,000 if you're 50 or older). If you were to gift your 25-year-old daughter $5,000 for her Roth IRA, that one-time gift could be worth nearly $70,000 when she retires. And if you continued to give that amount for five consecutive years—for a total transfer of $25,000 to your child—it could be worth more than $300,000 in her Roth IRA when she turns 70. That's not just a gift—that's a legacy.
Next: How to know when it's right to lend money
More Advice from Suze
- How to avoid the common emotional pitfalls of mixing family and money
- Get the 411 on your 911 fund
- 7 deals you should never make
- Can anything be done about a botched inheritance?
- 9 small financial steps that will pay off big in the future
Ask Suze your questions about debt & saving money
Suze Orman's most recent book is Suze Orman's Action Plan: New Rules for New Times (Spiegel & Grau).