Suze Orman's (Ridiculously Easy) Financial To-Do List
Boost Your Emergency Fund to Cover Eight Months of Living Expenses
Why it's important: By now I am sure you have started saving. The next step is to keep at it until you have at least eight months' worth of living expenses.
Do this now: Go to MyFDICInsurance.gov for banks and NCUA.gov for credit unions to verify that your emergency fund is tucked away at an institution that is federally insured. Never invest your emergency savings in the stock market. Safe, not sorry, is all that matters.
Get the Maximum 401(k) Match at Your Current Job
Why it's important: If you left it to your company to auto-enroll you in the plan when you were hired, there's a good chance your contribution rate is too low to max out on the match.
Do this now: Call your human resources department or the company that runs your plan; boost your contribution so you qualify for the max match.
Roll Over 401(k)s from Former Employers into an IRA
Why it's important: Once you leave a job, you can move your 401(k) to a brokerage or fund firm. You can roll over 401(k)s from multiple jobs into one new IRA; that's a great bookkeeping assist. An IRA rollover also frees you up to invest in low-cost funds, exchange-traded funds (ETFs), stocks, and bonds.
Do this now: If you don't yet have an account at a discount brokerage or no-load mutual fund company, pick one and then ask for its IRA rollover kit.
Fund a Roth IRA
Why it's important: After you max out on the company match in your 401(k), turn your retirement investing attention to funding a Roth IRA. In 2010 the maximum is $5,000 ($6,000 if you're 50 or older) for individuals with modified adjusted gross income (MAGI) below $105,000 and married couples filing a joint return with MAGI below $167,000. Reduced contributions are phased out for individuals once MAGI hits $120,000; for married couples, eligibility disappears with MAGI above $177,000.
Do this now: Don't get thrown by high minimums. Ask if there is a program that lets you invest small monthly sums of $50 or so. Sign on for an auto-investment plan and you may get around the advertised "initial minimum investment."
Leave Your Retirement Funds Alone
Why it's important: Can't handle the mortgage? That's no reason to raid your retirement funds. When that money runs out, you'll still face foreclosure, but you'll have lost your retirement savings, too.
Do this now: Don't cash out your 401(k) when leaving a job. In addition to an early withdrawal penalty (if you're under age 55), your shortsightedness will cost you future gains. Go to MoneyChimp.com and click on the Calculator tab. Under "current principal," input the value of your 401(k). Leave "annual addition" blank. For "years to grow," enter the difference between your age and 65. For "interest rate," use a conservative 5 percent. Calculate the future value. The difference between that and the current value is what you'd give up by cashing out.
Convert to a Roth IRA
Why it's important: As of January 1, anyone can convert a traditional IRA to a Roth IRA (previously there was an income limit). The advantage is that money in a Roth can be withdrawn in retirement with no tax due. Withdrawals from traditional IRAs will be taxed at your ordinary income tax rate.
Do this now: Convert in 2010 and you can spread your tax bill over the next two years. If you have both deductible and nondeductible traditional IRAs, ask a CPA to determine your tax liability.
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