The Money Book For The Young, Fabulous, And Broke: Chapters 4 – 6

The Money Book For The Young, Fabulous, and Broke is an attempt by Suze Orman to take personal finance ideas that traditionally appeal to older generations and make them palatable to Generation Y. The back states clearly that this isn’t your parents’ personal finance book, but is there anything really interesting or different about the book that makes it stand out from the crowd? This week, let’s find out!

Chapter 4: Making The Grade On Student Debt
Student loans may be the best investment you make in your life, because a college degree increases your earnings potential by a large amount. However, walking out of school into an uncertain marketplace with a load of debt is certainly frightening. However, there are also a lot of things working in your favor: a low interest rate, tax-deductible interest, and the fact that you’re now holding a college degree are all big positives. If you don’t have a degree, but you think you’re capable of earning one, student loans are well worth it. As for consolidation, you should do this when the interest rates are low and you can lock in a rate; otherwise, it’s not worth it.

Most interesting problem: I have a little money left after paying my monthly bills, but I don’t know if I should use that cash to pay off my student loans or to invest in my 401(k) or a Roth IRA. If your company’s 401(k) gives you a match, you should invest in that above everything else. If you’re not doing that, you’re basically saying “no” to thousands of dollars in free money. Sure, you don’t get to spend that money now, but your older self will thank you profusely for it, as every dollar you invest that’s matched at age 25, growing with 10% annual return, becomes $90.52 when you’re 65. That’s an unbelievable rate of return and one you should be taking advantage of every step of the way.

Chapter 5: Save Up
This chapter’s focus is on the concept of living a bit frugally so you can afford important things like a cash emergency fund and also have the ability to save for major purchases, such as automobiles (so that you aren’t eaten alive by yet another loan with a strong interest rate). Most of the ideas in this chapter are pretty low key and sensible, but it takes commitment not to just take that new extra money and spend it on other stuff (I know that’s what I used to do – if I saved $25 by eating at home for a week, I could suddenly “afford” a new book). The chapter seems to be missing one important part: taking that newfound money and automatically depositing it into an emergency fund account.

Most interesting problem: I want to start a savings account, but everyone tells me I should pay off my credit cards first. This is generally true, but the real answer comes from comparing the interest rates. If your savings account returns 5% and you have a 4% credit card, then you should have your money in a savings account. However, most people have credit cards with interest rates in the 18% range and a savings account that’s far, far lower – if this is you, get those credit cards paid off as soon as possible.

Chapter 6: Retirement Rules
If you haven’t figured it out yet, I quite like this book; I think it really hits the target audience on the head, and nowhere else is this more true than in this chapter. Right at the front, in a huge font, it says “Unlike your grandparents and maybe even your parents, you are going to be pretty much on your own for funding your retirement.” This book is out there getting this vital message across to Generation Y, and for that I’m quite impressed. If the point wasn’t clear enough, another huge font header a few pages later says “You have been dealt a tough hand, and that requires getting an early jump on your retirement savings, because your best friend right now is time.” The chapter is filled with pretty typical retirement information: start an employee-matched 401(k) or 403(b) plan immediately and also get a Roth IRA if at all possible. But the message is very loud and clear: you’d better get started because the baby boomers are going to suck the pot dry before you get old enough, so it’s up to you to save for yourself.

Most interesting problem: I have credit card debt that I am paying 18% interest on. I wonder if I should borrow money from my 401(k) to pay off that debt. In short, no, because doing this will eat you alive with taxes. The money you paid into the 401(k) was pre-tax money, but you’ll pay back the loan with post-tax money, which basically amounts to a 25% interest rate (or so) on the loan on top of what they quote you. In other words, it’s actually much worse than most credit cards. Focus instead on trying to raise your credit score, then transfer that amount off to another credit card.

The Money Book For The Young, Fabulous, And Broke is the sixteenth of fifty-two books in The Simple Dollar’s series 52 Personal Finance Books in 52 Weeks.

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