10 Crucial Money Moves for 2005 A Suze Orman exclusive 1. Clean Out your Closets. Believe it or not, cleaning out closets can be the beginning of a veritable revolution in your personal financial state. It's an effort to expose and then to fix those reckless spending habits that cause so many money woes. Getting started does require a willingness to confront one's hoarding reflex, which I realize can be quite strong for a lot of us. Trust me, though, the rewards will be worth it. Pull out every piece of clothing in your bedroom closet that you haven't worn for a year, or anything that still has the sales tag on it. Same with the stuff in every other closet in the house, as well as the garage and attic. Every garment, gadget, and gizmo you don't use gets hauled out into one big pile. I bet for many of you the size of this pile is shocking. I would also bet the value of all your junk often matches up remarkably well to the size of your credit card balance. I am perfectly comfortable labeling it junk. No matter how high-end an item may be, if you don't use it, it's junk. I'll leave it to you whether you want to sell it online or donate it to charity. I like the charity route. It feels good, and you get a nice tax deduction. But the real point of this exercise is for you to take a picture of all that stuff. Get out the camera and photograph your junk pile. Then keep a print in your wallet. On shopping excursions, pull it out and take a look whenever you find yourself tempted by a questionable item. Hold the picture up to the temptation while you ask yourself, Do I really need this thing? If the chances are good it's just going to end up in next year's junk pile, why not skip the purchase? This is the single best "investing" move you can make in 2005 or any year. Cutting down your expensesespecially on stuff you really don't needgoes straight to improving your bottom line. 2. Pay the Minimum Amount Due on your Credit Card on Time. I didn't say you had to pay the entire billthough that would be awfully smart if you are ableI just told you to get the minimum amount due paid on time. That's all you need to do to keep the credit-scoring folks happy. This kind of basic timeliness with your bills determines about 35 percent of your FICO score. I hope you know by now that your FICO score determines the interest rates you will be offered on every type of loan, from homes, to cars, to even the interest rate on your credit cards. You do appreciate that lower interest payments are just as good for your bottom line as a winning stock investment, right? 3. Do a Balance Transfer to a Low Rate Credit Card. I wish just once those market pundits would admit that by far the surest and best investment so many folks can make would be simply to get the interest rate on their credit cards lower. The average credit card interest rate is 15 percent these days. Get that down to 5 percent or even lower and you have saved yourself a chunk of money. If your FICO score is 720 or higher, you should be able to do a balance transfer to a card that charges zero interest during an introductory period of six months or so. If you anticipate you will still have a balance after the six months, make sure you understand what your standard rate will be after the initial period. And before you actually do the transfer, call up your current card company and tell them you are going to hightail it to another card unless they match that offer. With a good FICO score, you have a lot of bargaining power. 4. Get the Company Match on your 401(k). Between 1999 and 2003, participation rates in company retirement plans dropped from 80 percent to 70 percent, according to the Profit Sharing/401(k) Council of America. That kills me. First, everyone needs to be saving for their retirement. But what really bugs me is that when you don't participate, you may well be turning down free money. If your company offers a company match on your contributions and you aren't participating in the plan, you are essentially turning down a bonus every year. Sign up right now for 2005 and make sure you contribute at least enough to get the maximum company match for the year. Your HR department will explain how your plan works and what amount you need to fork over to get the company's match. If you find yourself feeling a cash crunch, remember you can suspend your payments as soon as you've maxed out on the company match. Just make sure you rejoin again in time for the 2006 matching contribution. 5. Invest in a Roth IRA. If you are single and your adjusted gross income is below $95,000, or you are married and file a joint tax return with adjusted income below $150,000, you are seriously deranged if you don't invest in a Roth. Those are the income limits to be able to make the full contribution in 2005which, by the way, rises to $4,000 ($4500 for those of you who are 50 or over) this year. There's no up-front tax break when you invest in a Roth, but your money grows tax-deferred, and when you start to make withdrawals there is absolutely no tax. Not one penny. The only rule to withdraw all of the money tax-free is that you must have had the Roth for five years and be at least 59 ½ years old when you start your withdrawals. That is an incredibly nice offer from Uncle Sam; he's not nearly as gracious with your 401(k) and a traditional IRA, which will both be taxed at your income tax rate. And here's a neat kicker: the money you contribute to a Roth is always 100 percent yours. You can pull it out at any time without a tax or penalty. Ideally, you will never need to touch your retirement savings, but it's nice to know you have this back-up emergency fund in place. 6. Sell any Stock that is more than Five Percent of your Portfolio Value. There are no sure bets when investing in stocks. Don't get me wrong; I think investing in stocks can be one of the best ways to help you reach your long-term goals, such as being able to afford retirement. But what I can't stand to see is when people make big bets on a single stock. It's like walking to the edge of a cliff, dangling one foot over the precipice, and daring the wind to kick up. Just ask those ex-Enron employees who had all their money invested in company stock. And it happened again last month with Marsh & McClellan employees; the insurance stock cratered last month amid an investigation by New York State Attorney General Eliot Spitzer, and so did the net worth of many employees who were overloaded in company stock. I realize some companies still have their heads stuck in the sand and distribute their 401(k) matching contributions in company stock. I think that's nutsand employees should be raising a stinkbut if that's the case you should do everything you can to reduce your exposure to company stock in other accounts. If you don't have to take the match in company stock, don't. If you participate in an ESOP (Employee Stock Ownership Plan) or have stock options, focus on selling the stock as soon as possible and reinvesting in a different stock. 7. Raise your Insurance Deductibles. Yep, you read that right. I want you to increase your deductible to save money. Boost the deductible on your car, home, and health insurance, and your premium can drop 10 percent or more. If you currently have a $250 or $500 deductible, think about raising it to $1,000, or even higher. It's also a practical move given the nature of insurance today; the sad truth is that if you have a low deductible and make a lot of claims, it's only a matter of time before your insurer marks you down as trouble. Eventually you'll see your premiums rise or you could even see your policy cancelled. 8. Pay off your Mortgage Ahead of Schedule If you Don't Plan to Move. Those of you in your fifties who are constantly crunching the numbers to see if your investments will cover you in retirement, should look at the other side of your balance sheet. If you reduce your expenses in retirement, you will need less income. And the biggest expense for most of us is the monthly mortgage payment. So if you are in a home you intend to stay in, I want you to concentrate on getting your mortgage balance paid off as soon as possible. Not only will it save you tens of thousands of dollars in interest payments, but when retirement hits you won't have to worry about making that big payment. To accomplish this, start sending in something extra on your monthly mortgage check; just make it clear to the lender that the money is to go toward paying down your principal. 9. Check your Credit Reports. It's no news that identity theft is a huge problem. Just look at the millions being spent in advertising by credit card companies desperate to tell us what they are doing to protect their customers from it. But the reality is that the problem is not going away, so you need to do some preventative work of your own. At least once a year you should check your credit reports to make sure there aren't any accounts you don't know about. A favorite ID scam is for thieves to steal your financial info and open an account in your nameone that you'll have no idea even existsand then run up a huge bill they can walk away from, leaving you holding the bag. Since the account is in your name, your FICO score will plummet because of the unpaid bills. The good news is that you can now get one free credit report each year from the three major credit bureaus. Don't fall for all their offers of "extra" services. You just want the free report. To obtain your reports from Equifax, Experian, and Transunion go to www.annualcreditreport.com or call 1-877-322-8228. The freebies are being phased in state by state through the next nine months. Here's the schedule for when you can get your free report: Currently Available: Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington, and Wyoming.. March 1, 2005: Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, and Wisconsin. June 1, 2005: Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, Oklahoma, South Carolina, Tennessee, and Texas. Sept 1, 2005: Connecticut, Delaware, District of Columbia, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, Vermont, Virginia, and West Virginia. 10. Teach your Kids about Money. I am currently putting the finishing touches on a new book for young adults. And while I was doing my research the frustration I heard from these folks was startling. A lot of them got into a big financial hole in college when they went crazy with the credit cards offered to every freshman on the first day of orientation. Before they knew it, they were a few thousand dollars in debt. And many of them are still trying to pay off those balances. It's a lousy way to start your financial life as an adult. If you have a teenager, I want you to start teaching them about basic money managementand especially how credit cards workASAP. It is such a crucial bit of education that no one seems to focus on until it's too late. If you have a good FICO score, I also want you to add your kid to your card as an authorized user. Not only will you be helping them build a great credit score for themselves, but you can give them a tutorial in how to use the card responsibly. Give them a monthly limit and then review their spending at the end of the month. Show them how an unpaid balance leads to big interest payments. A bit of teaching now is going to save your kids a whole lot of frustration down the line. I hope the coming yearand every year afteris full of abundance for you. And I'm not just talking about money. Remember: People first. Then money and things. Happy New Year.