The Money Class (17 page)

Understand that you will pay more for financing
. If you want to take out a mortgage to invest in real estate, be prepared for an entirely different set of lending rules compared to buying a home for your personal use. Lenders will often insist that your down payment for a real estate income property be at least 30% of the purchase price, and the mortgage rate will also be higher than the rates charged for a home you live in.

There’s little help if you fall into financial trouble
. All the various federal programs we have in place today to help are only for mortgages used for a primary residence. Investment properties are not eligible for any assistance. That makes perfect sense. Aid should be to help families stay in their homes, not to come to the rescue of investors and speculators.

WHAT TO DO WITH AN INVESTMENT PROPERTY THAT IS UNDERWATER

For those of you who already own an investment property that is currently worth less than your outstanding balance, I want you to carefully consider your options.

If you are just 10% or so underwater and the rental income is still enough to cover your carrying costs, then I would not advise you to sell right now even if your lender agrees to forgive any unpaid mortgage balance. It is important to understand that the IRS will not forgive that shortfall. The valuable tax break that is in place through 2012 that exempts homeowners from owing income tax on the difference between their mortgage balance and their sale price does not apply to income properties. If you sell an income property at a loss you will still be handed a 1099 tax form that reports the difference between the mortgage balance and the sale price as “income” that was paid to you. So let’s say you have a $250,000 mortgage and your property sells for $175,000. Even if the lender agrees to not come after you for the $75,000, that $75,000 will be reported as taxable income to the IRS.

And let’s not forget that as a seller you will have to pay the agents’ fee—typically 6% of the sale price—and other closing costs. That just adds to your loss at this point.

If you are more deeply underwater, or the gap between the current rent the property can generate and your mortgage is too big a monthly cost, then I ask you to read my advice from earlier in the chapter on how to navigate your way through a short sale or foreclosure.

LESSON RECAP

• Recognize that a home is not a liquid investment.
  
• Base your housing decisions on the expectation that long-term price appreciation will likely match—or slightly exceed—the inflation rate.
  
• Consider a rental if you are not sure of your long-term plans.
  
• If you are considering a mortgage modification, understand the many risks.
  
• If you are 10% to 20% underwater and can afford your mortgage, stay put or agree to cover the entire mortgage if you want to sell.
  
• If you want to sell, stand in the truth that you should pay the difference between the mortgage cost and your sale price.
  
• If you are 40% to 50% underwater, walking away may indeed be the best move—but understand the liabilities if you go this route.
  

CLASS

CAREER

THE TRUTH OF THE MATTER

The American workplace has been undergoing some dramatic changes—general trends that have been playing out over decades and painful contractions brought on by the recession that took hold in 2008. If you are among the nearly 15 million Americans out of work or the 9 million getting by with a part-time job as of late 2010, you are feeling the pain of these changes most acutely. But even those of you lucky to have work—and work you love, I hope—must recognize that changes in our economy will present new challenges over the course of your career as well.

The American Dream of the last century seemed to promise jobs for everyone willing to work, a paycheck every Friday. That particular American snapshot, from where we stand today, indeed seems like it comes from a bygone era. In the simplest of terms, we have a far greater supply of workers than we have jobs, and this will not change for a long time. While I believe we have turned the corner in terms of job losses, it could be years before the massive backlog of people looking for work will find employment. As I write, the most recent jobs report cited a net monthly gain of barely 100,000 jobs. That is far less than we typically have during an economic recovery. But here’s what you need to understand: If new job growth were to stay at that monthly pace it would take more than a decade for everyone looking for work to find work. Even if we saw the pace of job growth rise to 250,000 a month the backlog would still take five years to work down.

Here is the harsh reality: I do not believe we will see a dramatic acceleration in new job creation. In the private sector, employers are focused on getting more out of their current workforce—through technology and longer hours—to meet any pickup in their business. This is what is known as productivity. You better believe companies are more interested in boosting productivity before they begin to hire aggressively, and I expect this trend to continue in the coming years. And when employers do decide to hire, the reality is that many will be looking to fill holes with “temporary” contract workers who work full-time jobs, but without benefits.

The situation in the public sector is even more dire. Given the political climate in Washington, it’s hard to envision any substantial expansion in the federal payroll in the coming years. And the severe budget deficits and reduced revenues that state and local governments are experiencing makes it unlikely they will be able to go on a hiring binge anytime soon.

Adding to this job shortage is the fact that the workforce is growing older and people are staying in their jobs longer, so there is less turnover. The Bureau of Labor Statistics reports that the percentage of Americans age 55 and older still working increased from 29% in 1993 to a record 40% in 2010. And the BLS forecasts that trend will continue; it estimates 43.5% of the 55-plus contingent in 2018 will still be working. Many older workers are deciding they want—or need—to stay in their jobs past traditional retirement age—a move I endorse—in order to save more for retirement. That has the potential for creating a traffic jam on the career ladder; it’s harder to move up—and make more money—if the rung above you is still occupied.

Will we see new jobs created in the coming months and years? Of course. Though we will no doubt face ongoing bouts of volatility in the markets, I do believe the worst of the economic slide is behind us. But all that means is that the patient—our economy—is out of the ICU but still has a long slow road of recovery ahead. When it comes to finding work and reaping the rewards of gainful employment in this current economy, I don’t think anyone would assert that the American Dream is alive and well. However, I am a firm believer that ingenuity and invention often spring from adversity. And I can tell, even from the calls and letters that come in to my CNBC show, that many of you are figuring out ways to bring about change for yourself. Small businesses are springing up; locally produced food and goods are in demand; people are heading back to school to acquire new skills or to bring more to the job they’re in. The American entrepreneurial impulse is strong—stronger now than it’s been in years.

I felt it was important to account for work as we try to define the various aspects of the New American Dream because it was built into the American promise of opportunity: Hard work and dedication bring rewards. But there is, of course, no one-size-fits-all advice to be had in this category. You may be rising in your career but find that your job promotion came with more work and no increase in salary; or maybe you are frustrated that despite your strong performance, you haven’t gotten a raise in four years and instead are told you should feel lucky just to have a job in this economy; or maybe you are just plain exhausted from having to work two jobs to make ends meet. All of these various states of employment are affected in one way or another by our sluggish economy. It’s hard to think of an industry that has been untouched by the recession. And so no matter what your status, this is an opportune time to take stock of your working life.

I’ve organized the Career Class into three lessons that cover the gamut, in broad strokes:

• Advice for the Employed
  
• Advice for the Unemployed
  
• Starting (and Running) Your Own Business
  

LESSON 1.
ADVICE FOR THE EMPLOYED

“Hope for the best; plan for the worst.” I put my faith in that credo. You might have heard me repeat it in the context of discussing the need for life insurance, but it is also an excellent guide for how to manage your career in this era of slow economic growth. If you are being honest with yourself you would look at the continuing fallout from the financial crisis—nearly one in five Americans is either unemployed or underemployed as of late 2010—and consider for a moment what if it were you. In fact, that may be the best career strategy for these times: Behave as if a layoff or furlough will happen to you. Hope that it never happens, but if you plan as if it will, you and your family will be well prepared to weather any setback and get back to work as fast as possible.

BUILD YOUR PLAN-FOR-THE-WORST FUND

Yes, I am talking about having an emergency savings fund that can cover up to eight months of your living expenses. Back in 2008, when I began to insist that everyone increase their savings fund to an eight-month cushion, I took a lot of heat.
Why do I have to save so much when everyone else says three months is enough?
you asked me. When I appeared on
The Oprah Winfrey Show
in January 2009 I suggested that families in which both adults were working should experiment and see if they could handle their expenses if they lived off just one income; for individuals my recommendation was to pretend you had a 50% pay cut and see if you could still cover your bills. I knew it would be a stretch, but I wanted everyone to understand what could happen if they faced a layoff. Besides, by making do with just 50% of your current pay you would be able to shovel more—faster—into an emergency fund. Oh, the pushback I got from so many of you! You told me I was being too pessimistic and dramatic. You told me that it was impossible, that you could never live on less than you are living on now. You told me that you had worked for 20 years for your company and there was no way you would lose your job. And then the unthinkable happened. I’m sorry to say, I was right. As of fall 2010, more than 40% of unemployed Americans have been out of work for more than six months, and nearly one-third have been unemployed for more than a year.

That is why I asked you then and I am asking you now to build an emergency fund that could pay your family’s bills for at least eight months. Yes, I realize you may collect unemployment benefits, but typically these payouts cover just a fraction of your prior salary. Do not skimp on your savings because you think unemployment insurance will be all you need.

I understand it will take time for you to build up eight months’ worth of expenses in your savings account. But don’t get overwhelmed and give up before you start: The immediate goal before you is to focus on how you can trim your spending so there is more left over each month to dedicate to your “plan for the worst” fund.

LIVE BELOW TODAY’S MEANS

I hope each and every one of you has uninterrupted career success that brings you a steady stream of raises and promotions. But I never want you to base your current lifestyle on the notion of what you think you might be making years from now. There is no guarantee your salary five years from now will be appreciably higher than it is today. Maybe yes, maybe no. I want you to make financial choices today that are affordable based on what your household income is today, not what you hope it will be in the future.

As an example, let’s all remember what was happening with real estate in 2005 and 2006. Buyers were guided into negative-amortization loans or option ARM loans that offered super-low initial rates that wouldn’t move higher for three or more years. The standard advice back then—advice I warned people not to heed, by the way—was that it was smart to get one of these loans because you would surely just refinance into a different mortgage before it came time for your mortgage to adjust to a higher rate, or you would be able to sell the house at a nice profit and walk away with money in your pocket. Except it never was a sure thing. And much of the housing crisis we are still dealing with—and will likely be dealing with for years—is a result of the fact that so many people who took out those mortgages and bet they would be able to flip or refinance before the adjustment lost the bet, big-time.

Don’t make the same financial bets with your career by living beyond your means today based on the risky assumption that you will be making a lot more in the future. I hope you will be making more. A lot more! And if that is what occurs, then you can revisit your spending when you in fact have that money. But please do not borrow more today than you can honestly afford today. I’d much rather you rent or buy a smaller, less expensive home, or purchase a less expensive car today, than stretch to buy something that you know deep down is an act of living beyond your means.

VACATION STRATEGY

I also want you to think through your vacation strategy. In these very challenging times, when you are being asked to do more than ever before at your job, there is no question that you need a break. My advice is to take every vacation day you are entitled to! Particularly if your employer is unable to give meaningful raises, then time off becomes a valuable currency. Time away from the job is important for your health and important for your family. But I am not giving you permission to spend whatever you want. Your vacation must be an affordable vacation. The cost is not “just” $1,000 or $2,000 or $3,000. That is $1,000 or $2,000 or $3,000 that isn’t going into your Roth IRA, your child’s 529 college plan, or your emergency fund. And don’t you dare take any vacation that you cannot at least pay for up front in cash. There is absolutely no excuse for planning an expensive vacation that you “pay” for by putting it on a credit card because you’re not able to pay for it immediately. I don’t care if that card charges you just 5% or 10% interest—though let’s stand in the truth and admit it, more likely you’re paying 15% or higher. Taking on debt for a vacation is an act of financial dishonesty: no ifs, ands, or buts. You are denied! Do you hear me?

I am asking you to balance your vacation dreams against your other financial dreams. How about a less expensive vacation so you still have more to put toward your longer-term goals? I also want to recommend you think about a stay-at-home vacation. Pry yourself free of the BlackBerry or iPhone and make it clear to everyone you work with that you are indeed on vacation and are to be contacted only if there is a true emergency. Then plan every day just as you would a getaway. Yes, you are absolutely allowed to go to the movies and enjoy some meals out; it’s okay to spend some money. The goal is simply to spend a whole lot less than you would on a vacation that includes airfare, a hotel, and three meals out every day. If you happen to live in a big city, why not plan a few days doing all the things tourists do but you never seem to have the time for? Some of my most memorable time off is playing tourist when I am at home.

GRAB YOUR FULL RETIREMENT BONUS

Look, you and I both know, big bonuses have become rare in recent years. So tell me this: Why are so many of you turning down a
guaranteed
bonus every year because you aren’t being smart with your 401(k)? As I explain on
this page
, if your employer offers a 401(k) matching contribution, be sure you are contributing enough to get the maximum match. Do you see my point? That match is a bonus. Many plans offer a 50-cent match for every dollar you contribute, up to a set maximum. For example, if you make $50,000 and your employer offers a 50-cent match on every dollar you contribute up to the first 6% of your salary, that’s $1,500 a year in a matching bonus you could be collecting ($50,000 × 6% = $3,000; 50% of $3,000 is $1,500). Yet about 20% of workers eligible for a match do not contribute enough to earn the maximum match. It never makes sense to turn down free money; and in a world where raises and bonuses may be meager, making sure you grab the full matching contribution is crucial. Who knows, at your next job you might not have a 401(k) or maybe your employer will not offer a match. Take advantage of this great deal while you can.