Suze Orman, the doyenne of the dollar biz and daytime host of The Suze Orman Show, sat down with Elizabeth Street to give financial advice to mothers on everything from first-borns to first credit cards. Without further ado! —Maria Denardo (@DailyMariaD)
Elizabeth Street: What can expectant mothers do to prepare financially before their baby arrives?
Suze Orman: It’s not just about having the bassinet, the crib, the stroller, the clothes, and all the things that will make the baby look great and welcome in a home. You always have to be prepared for the what-if of life. Before the baby arrives, expectant parents should have a revocable trust in place. Since minors cannot inherit money, a will does a baby no good; parents need to have term life insurance on themselves and cite each other as the primary beneficiary and the revocable trust as the contingent beneficiary.
ES: What’s important to set into place after the baby is born?
Suze Orman: The term life insurance should be in place until the baby is at least 23 years old; the revocable trust should remain in place forever. After the baby is born, it’s important that the parents have their financial priorities in place. They need to make sure they have their own eight-month emergency fund, and they’re fully funding their retirement accounts. The parents need to be out of credit card debt, and on track paying off their student loans. If they have a home, then they need to have a fixed rate mortgage on that home. If everything is in place and going well, then they can put money away in a 529 plan for the child’s education.
ES: If one parent decides they want to stay home to help raise the children for 1 to 5 years, how can they prepare for the change?
Suze Orman: If you have the money and can pull it off, it’s one of the greatest things you can do. But parents have to sit down and realistically figure out if they’ll have the money to live the lifestyle they want or need with only one salary coming in after taxes. The majority of parents that call into The Suze Orman Show—where one parent decided to stay home with the kids—racked up credit card debt, realized they didn’t have the money to live on one income, and had to go back to work. The burden of credit card debt is not worth it because while you may be staying at home with the child, you’ll be transmitting to the child financial worry, fear, shame, and anger that the child will then take on emotionally.
ES: Is a 529 plan the best way to save for a child’s education?
Suze Orman: Bar none! If the parents have everything in place, and know they’re going to have a baby, then they can start saving before the baby is born. The sooner, the better because time makes the process easier. The longer you have to save until the child goes to college, the less money you need to put in since you’ll have more time for the money to compound on its own.
ES: Should parents co-sign college loans for their kids?
Suze Orman: If there isn’t enough money for a child to go to school on a federal loan, that means the child needs to take out a private student loan that the parent may have to co-sign. That could be one of the biggest mistakes they will ever make in their lives for the following reasons. First, in most cases, a private student loan cannot be discharged in bankruptcy. Also for many of the private student loans if you co-signed the loan and your child dies, you are still obligated to pay the fee every month until the loan is paid off, even when the child is no longer living. On a federal student loan, upon the death of a child or parent co-signer, the student loan goes away. Second, the interest rate the bank can charge on a private student loan can go as high as the bank wants it to go, which is very different than a federal stafford loan that can’t exceed 6.8 percent. You could actually get a private loan with a 16 percent interest!
ES: What is the Approved Card and how can it benefit mothers?
Suze Orman: What people don’t realize is that if they fall onto hard times and bounce a few checks, they get placed into the Chex system. Once you’re in that system, you can’t open a bank account, checking account, or a credit union account. So one of the only ways for you to transact business online would be via a pre-paid card, which is where the Approved Card comes in. It doesn’t require any credit checks. It’s simply a card that you can load money onto each month, but it’s not attached to a checking account like a regular debit card. It’s a great tool for children who are 13 or older as well because you’re going to want to start teaching them about how to handle plastic without getting into trouble. For $3 per month, not only do you get a card, but you get three additional cards that you can give to your teenagers. You can transfer money from your card onto their cards; every time they use it, you get a text and email showing you what exactly your child is spending with this money. If they try to use it and there’s not enough money on it, they’re denied. You can pay bills online for free, do card-to-card transfer for free, and with a monthly deposit take withdrawals out of any Allpoint ATM for free.
ES: What is the top financial mistake parents make?
Suze Orman: They don’t talk to their kids about money. For instance, many parents give a child an allowance without telling them why. If you ask most kids why they get an allowance they’ll say, ‘Because I was born!’ If you ask them why they get more of an allowance this year over last year they’ll say, ‘Because I’m older.’ Children need to understand the value of money and how it works.
ES: What other financial snafus should parents avoid?
Suze Orman: The other mistake parents make all the time usually happens on Monday mornings when they’ve spent the entire weekend with their kids and had the best time. When the child is maybe three or four and asks the parents to stay home, the parents say the following, ‘Honey, I Iove you so much and I hate that I have to leave you. I hate that I have to go to work but I have to go to work to make money.’ You’ve just taught your children to hate work and to hate money. Instead, you can say, ‘I love you so much, but Mommy is happy to go to work. Because I go to work, I get to make money. Because I make money, we get to do all the fun things we did this weekend. Isn’t that great?’
ES: How can single mothers who live paycheck to paycheck realistically save money?
Suze Orman: There’s something fascinating about single mothers. They have an extraordinary desire to provide and survive. A lot of the times, single mothers rise to the occasion. I don’t worry about single mothers as much as I worry about mothers that have a partner because they cater to everyone’s needs, except their own. They’re taking care of their spouse, their children, the spouse’s parents, their parents—everybody.
ES: What words of wisdom do you have for the married mothers?
Suze Orman: Most women pay the household bills, but aren’t very involved in other aspects of the money, even today believe it or not! The reason they get involved in the household bills is because the house holds everything they love: their spouse, their children, their pets, their plants. My biggest advice would be to understand every aspect of your entire financial situation. Do you have enough insurance if something happened to you? Do you have a will? Do you have a trust? Where is your money invested? Are you spending more money than you should? The time to learn about your money is not when you suffer an emotional loss and something has happened to your spouse.
ES: Let’s talk about stay-at-home moms. Should they have separate bank accounts from their partners?
Suze Orman: You bet she should! Stay-at-home mothers work harder than any job out there. Yet, they’re not financially valued because they’re not bringing in any money. It’s typical in a relationship that the one who brings in the money makes the decisions about the money. But it shouldn’t be that way. There should be a sum of money that’s placed in the mom’s account for the mom only. I’ve got news for you: if the spouse that works outside the home is bringing back $4,000 per month, $2,000 should go in each account. And if Mommy is the one paying the bills, she should pay them equally from both accounts, not just her own, so they each have the same amount of money left over after the bills are paid.
ES: What’s the number one advice you’d give to all mothers?
Suze Orman: Give to yourself as much as you give of yourself. In the same way that you hear the flight attendants on an airplane tell you to put the oxygen mask on your face first then your child’s face, the same is true for money. In case anything happens, you’ve got to have the financial oxygen mask on your face first!