The first book that I read with regards to learning about personal finance was Suze Orman’s “The Money Book for the Young, Fabulous & Broke”. I had heard her name numerous times while reading Yahoo! Finance and figured it might be a good place to begin my knowledge base. That’s exactly what I gained from reading this book. Orman’s focus for this book is personal finances for young adults. She uses a unique format that makes for a quick read by providing a rundown of the chapter topic, answers to common questions about the topic and a chapter summary. The book starts out discussing one of the most important aspects of personal finances, your credit score. Orman then follows up with digging out of debt, saving, retirement plans, investing and big ticket purchases.
Orman begins with the FICO score because it affects almost all aspects of your personal finances. A better FICO score will lead to better credit card rates, mortgage rates and car loan rates. Also, FICO scores can impact your car insurance, ability to get an apartment or even a cell phone. In today’s economy your FICO score is even more important. Orman recommends checking your credit score once a year and challenging inaccuracies. To maintain or achieve a high score she recommends that you most importantly pay your bills on time even if it’s only the minimum.
Credit and Debt
A good portion of the book is devoted to discussing reasons to never get into debt in the first place and how to get out of it. Orman recommends using credit cards to purchase necessities only. Using credit to buy wants can end up costing you more than twice the amount of the original purchase by the time you pay it off. Orman warns that credit card companies are not your friends, as they will use any failures to increase rates and make more money, even if you have been paying that credit card off on time.
To eliminate debt, Orman recommends transferring debt to cards with lower interest rates, however, remember to look into all fees and introductory teaser rates. If you have already dug yourself a giant debt hole, bankruptcy is not the solution. Bankruptcy will wreck your credit score and ruin your finances for years. The best solution is to put your head down and start paying down the debt.
Orman discusses the advantages and disadvantages of student debt compared to credit card debt. Student debt interest is tax deductible. Also, you may be able to lower your interest rate by having your loan payments automatically deducted. One major disadvantage is that student loan debt will not be forgiven if you declare personal bankruptcy. Orman breaks down the pros and cons of consolidating multiple student loans.
Orman correctly states that there are two ways to save more money: spend less or make more. As recommended in every book I’ve ever read, she recommends investing in your 401k up to the company match. Orman also stresses the importance of building an emergency fund, which is one of my current financial goals.
Retirement and Investing
In addition to investing enough to get your company match, Orman discusses the intricacies of 401ks and IRAs for retirement accounts. Additionally, she breaks down the idea of compounding and the significance of early investing with small amounts that will turn into large amounts. Some of the most difficult and confusing situations in personal finances is rollovers. Orman does a great job explaining how to correctly perform rollovers and provides examples.
After discussing various retirement accounts and situations, Orman delves into the different investment options. She stresses that stocks are a great investment for funds that are not needed within 5 years. Also, she discusses the advantages of diversification to weather economic storms and even outperform the market. For the young adults that this book targets, Orman recommends a mostly, if not all, stock portfolio using index funds, especially if you can only make periodic small investments.
Car and Home Purchases
Orman offers up a common theme for all big ticket purchases: only buy what you can afford. Do not buy a BMW if you can not afford the payments. Do not buy a house if you can not afford the payments. It’s even more important for cars as they are depreciating assets. With regards to cars, Orman recommends buying a car instead of leasing because once the car is paid off you will have extra cash for other debt or savings goals.
Buying a home can be a very involved and confusing process, which I can testify to first-hand. Orman breaks down the costs of owning a home, closing costs, private mortgage insurance, getting prequalified and price negotiations.
Overall, I found Orman’s book to be very informative. As a young adult, I did not know most of this information prior to reading this book. If you’re looking for a book to provide you with the basics for getting your personal finances under control, then this is the perfect book for you. If you’re looking for any in depth coverage on any of the above topics then you will want to look for books that specialize in those particular topics. In my opinion, this book should be read by all young adults as it covers everything you need to know about personal finances, although not in the depth that will make you an expert.