Questions 1-5: Yes or No?
1. Do you have an eight-month emergency fund?
2. Do you have all four essential documents in place: a will, living revocable trust, durable power of attorney for healthcare, and financial power of attorney?
3. If your employer offers a matching contribution to a retirement plan, do you contribute enough to qualify for the maximum match? Or if you don't have matching contributions through work, are you contributing to your IRA?
4. In the past 12 months, have you paid every bill on time (and if you're in debt, are those payments high enough to help reduce your debt)?
5. In the past 12 months, have you used annualcreditreport.com to obtain free credit reports from the three major credit bureaus, and confirmed that the information is correct and clear of any suspicious activity?
Suze says: Any answer marked no should be transferred to the top of your financial to-do list. I promise that the minute you can earn a perfect 5 out of 5 in this section, you will get an immediate payoff: the calm and satisfaction of knowing you are in control of your financial life.
Questions 6-12: What's Your Money Mentality?
6. When it comes to planning for retirement, where do you stand?
A: I know saving is important for my future, but I haven't started yet.
The longer you wait to start saving for retirement, the harder it will be to have any shot at meeting your goals. Your financial immaturity now means you're not taking advantage of one of the best investment tools: time, and the power of compounding over many years.
B: I'm saving as much as possible, but I don't know if I'm on track.
Good for you! I'm impressed you're saving as much as possible. Now do yourself a big favor and get a handle on whether you're on track to meet your goals. The free online Retirement Income Calculator at T. Rowe Price is a great resource (www.troweprice.com/ric/ricweb/public/ric.do).
C: I've crunched the numbers to understand how much I will need to retire comfortably, and I know what I need to be saving today to have a good shot at meeting that goal.
Congratulations. Your retirement strategy rates an A+ in my book.
7. Someone begs you to cosign a loan. You say yes:
A: If it's someone you really love and trust.
This is the equivalent of needing financial potty training! When you cosign a loan, you become legally responsible for repaying that debt—no matter what. This isn't about love or friendship. This is about protecting your bank account and your FICO credit score.
B: If you have enough extra savings to treat the loan as a gift, if it came to that.
This is the only scenario that truly makes the grade as far as I am concerned. You understand that the only money you can ever afford to lend is money you can afford to lose.
C: If the borrower agrees to make automated payments and send you an electronic confirmation at least seven days before each due date.
Trying to build in a safeguard shows that you understand the risk you are taking. But safeguards won't mean much if the person you cosign with is suddenly injured or unemployed. Remember, it's your money and FICO credit score on the line.
A: Math makes me wince, but I know it's more than $100.
We all have to be our own best financial adviser, and if you don't understand the impact inflation has on your family's finances, you're going to pay a steep price.
Pretty good! While 3.5 percent times 20 years is indeed $70 in interest, you're missing one important factor: compounding. Each year the 3.5 percent interest is added to an increasingly larger balance, so over the full 20 years, the total rise in costs will be more than $170.
C: Nearly $200.
Yep, the cost of living will nearly double in two decades if inflation averages 3.5 percent (which, by the way, it has, roughly, over the last 75 years). It's important to keep the impact of inflation in mind for retirement: Once you stop working, your portfolio would need to earn an average of 3.5 percent a year just to allow you to maintain your current standard of living.
9. Erica and James are in their 30s with one child and annual living expenses of $38,000. James is a stay-at-home dad, and Erica has a great job that pays $75,000 a year. She has a life insurance policy through work, with a death benefit equal to one year's salary. What size death benefit should they consider when purchasing additional life insurance?
A: 25 times their annual living expenses, or $950,000.
You've been paying attention. My advice is to buy a term life policy with a death benefit equal to 25 times the family's annual living costs (SelectQuote and AccuQuote are two good online resources). But with this answer, you've prepared for only one death. What happens if James dies prematurely?
B: $950,000 on Erica's life and an additional policy on James's life as well.
Excellent choice. All families need to think through what the added expenses would be if the stay-at-home parent were to die prematurely. Add those costs to the current annual living expenses, and the death benefit should be 25 times that new number.
C: They don't need to buy extra life insurance. The company policy is plenty.
That will barely cover two years of James's living expenses. And how would Erica cover childcare if James were to die? The policy through work is woefully inadequate.
10. What percentage of women who are 65 years old today will still be alive at 85?
A: 10 percent.
B: 25 percent.
Close, but you're still underestimating our average longevity.
C: 50 percent.
Right! This statistic should give you serious pause about planning for early retirement. If you stop work in your 50s, you may need your retirement savings (along with Social Security and any pensions) to support you for 30-plus years. That is asking a lot.
A: I am not buying a home or a car, so I don't need to know this.
Are you kidding me? Your FICO credit score isn't just about purchases and loans. A version of your credit score is usually used to determine your car insurance rates. Cell phone companies may require you to leave a fat deposit if you have a low FICO score. And if you're a renter, landlords may check your credit score to help determine whether you'd be a responsible tenant—and they can legally deny your rental application if they don't think your score measures up.
B: Anything above 700.
A score of 700-plus is mighty fine, but since the financial crisis hit, the bar for what's considered a good credit score has gone up.
C: 740 or higher.
You're speaking my language. A FICO score between 740 and 850 is considered the gold standard.
12. A friend has $20,000 in credit card debt and the interest rate is above 20 percent. Your advice is to:
A: Pay at least the minimum due each month, and scour the budget to see if she can curb spending and pay even a bit more.
You understand the importance of making timely payments (which accounts for 35 percent of your FICO credit score), and it's smart to do everything possible to boost the payment above the minimum.
B: Take a withdrawal from her 401(k) or IRA; paying off debt that carries such a superhigh interest rate is one of the few times it's okay to borrow against your future.
It never makes sense to touch your retirement savings to pay off an unsecured debt.
C: Contact the National Foundation for Credit Counseling (nfcc.org) to get professional advice on whether she qualifies for a debt management plan.
Sometimes the smartest way forward is to ask for help, and the counselors at the NFCC are a tremendous resource for people struggling with debt. In many cases, they can help consumers enroll in a debt-management plan administered by an NFCC counselor that helps settle debts within a five-year time frame.
Next: Take Suze's quiz—and find out what your financial age is