Christine Koh

Hello!

I'm Christine Koh, a music and brain neuroscientist turned multimedia creative. I'm the founder + editor of Boston Mamas, co-author of Minimalist Parenting, co-host of the Edit Your Life podcast, and creative director at Women Online. Drop me a line; I'd love to chat about how we can work together!

Chatting With Suze Orman

suzeorman.bmpOnce upon a time I was financially savvy. My checkbook was perfectly balanced, I paid off my school loans well in advance, and I did my own taxes. Then as the years passed and Laurel entered our lives, it was all about divide and conquer; I focused on domestic jobs and Jon took over the finances. And then one day I realized I was an independent businesswoman absurdly paralyzed by the prospect of dealing with my finances.

Given said paralysis, I have a habit of tuning out financial talk, but yesterday, on an amazing call with finance expert Suze Orman, it wasn’t long before I was hanging on to her every word. Here's the amazing advice Suze shared, spanning women in business, student loans, saving for your child’s education, and home and personal finances. Also, at the conclusion is a gift from Suze (expiring at midnight 4/25)!

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WOMEN IN BUSINESS

On women financing their business through own savings.

It’s not wise to finance a business – particularly a brand new business – through savings UNLESS you have so much savings that you can make the investment and still have an 8-month emergency fund, your retirement account, and be free of credit card debt. Women tend to take all of their resources (e.g., severance packages, credit card advances, loans from 401K, home equity) to start a business they haven’t done the thorough research for regarding how much working capital is needed, what the expenses are, and what it will take if not one sale is made. And then if the business fails, these women are left with nothing. And that nothingness and fear of nothingness renders them powerless in other aspects of their lives.

Where do you go for funding?

The real decisions to be made are: a) whether the business a viable one; and b) what it will take to run that business; and c) if you don’t have the capital in excess, where do you get it? If your credit is good, you could get a small business loan or possibly borrow from your credit card (if you can get a favorable interest rate). But if you’re going to run a business, hopefully this means you have the ability to borrow money from a legitimate entity (e.g., bank, small business administration). If you don’t have the capital or have to go into serious debt or use all of your money up, now may not be the right time to start the business.

What’s the best way to get people to invest in your venture?

The keys are: 1) the idea must be extraordinary; and 2) investors need to see you have done all your homework. Everything from the look of the presentation, the research, the business plan, the money raised to date, the people on your board, what the plan is, etc. You need to inspire investors to want to not miss out on your opportunity.

What are the biggest mistakes a startup business can make and how can you avoid them?

The biggest mistakes: not understanding the amount of money it will really take - not just to start a business, but to continue in a way that doesn’t devastate you. And then when the business is not working refusing to give it up. The other mistake women make: they pay everyone else but DO NOT PAY THEMSELVES. So they get further in debt in order to meet financial obligations to others. Women are especially challenged because their nature is to nurture. The problem with that is that when it comes to business women tend to nurture everyone around them even if they themselves aren’t being fed.

Is it prudent for women to start a business in this economy?

Yes, IF a woman has control and an understanding of what it will take on all levels to start it and keep it going in this economy. Question whether you are starting a business that focuses on people’s needs versus wants. A need-based business makes more sense in this economy.

What are the three most important things to do now as an entrepreneur to put yourself in a strong position once the economy turns around?

1) Do not create a lot of debt. 2) Make sure that of the money you make, put some aside towards your 8-month emergency fund. 3) Stay in touch with all of your customers and contacts, even if you don’t have anything to sell. Reach out – is there anything YOU can do to help THEM? At a time when people don’t have money and are afraid, can you – assuming you have enough money and time – do things out of the goodness of your heart to help people to do more and have more?

“People think I’m crazy to take the time on Twitter to respond individually. They say, ‘If they are already fans why help them one on one?’ And the answer is because they deserve it. Because they’re afraid. Because they need one on one contact. My business model is, ‘My job is to serve the needs, the places, and the time around us.’ If I can serve the needs of the people and time then I will continue to have a viable business model because I am serving. Put people first versus money; if you put people first you will be more successful in time - at the right time - then you have any idea.

What about the adage "you have to spend money to make money"?

You can always spend money that you have. Or you can take out a loan and spend it. But you cannot spend money – someone else’s money (e.g., loan, credit card) – that you can’t pay back. Of course you need to spend money to make money, of course you need to take out student loans to get the education, but you have to be responsible for the money you spent. How many students are there who used their student loan money not for education but to go skiing or to the movies? Now they owe all this money back to the student loan company and can’t make the payments. They would have been better off not taking out the money to begin with.

Question whether your plan is viable, your intentions pure, and do you have the right business model and plan so you can actually make the money back that you have spent?

Does the 8-month safety net also apply to small businesses? What about women who finally get to a point with their business that they can pay others? Should they pay themselves or put the money in business savings, or try to reinvest in the business?

It all depends on the type of business. Sometimes you can leave the money in your account if you’re a corporation. If you get in personal financial trouble, the corporation could always lend you the money and you could pay it back. Whether you are better off tax-wise leaving the money in the corporation vs. taking it and paying taxes on it – it’s really a more complicated answer, but in general the safety net for the corporation can also be a personal safety net. You can move the money back and forth.

How much risk should mompreneurs put into their businesses? How much is too much?

It’s too much risk if it goes under and everything else (your business, you, your spouse, your family, etc.) goes under too. Play risk. Pretend you put all the money you are thinking of putting into the business, then imagine that everything has gone belly up and you have lost everything. Then look at the ramifications. Think about Bernie Madoff and those who put everything that they had into this one business…and how it went under and now here they are, what are they going to do? You never, ever want to leave yourself in a situation where if the business goes under you have nothing. Play this game mentally with yourself and you will know how much is too much.

On the importance of incorporating.

It depends on your reasons and how fast the business is growing (e.g., if you have staff or need corporate protection). When you’re first starting out there’s nothing wrong with being a sole proprietor then stepping your way up as the needs arise.

Is business liability insurance necessary?

It depends on what business you are in. Are you running it from home? Are you running it where someone can get hurt? Are you selling things where if people don’t use it properly they can get hurt? What risk is out there if everything were to go wrong? If there is risk, protect yourself. We live in a litigious society.

What’s the difference between business liability insurance and a basic umbrella policy?

It depends on the structure of your business. Liability insurance would protect you if someone hurt themselves on your property. But it would not protect you if you were sued because you gave someone the wrong information in relation to your business. So you have to be very careful. Depending on your business, you may need to carry both.

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STUDENT LOANS

How smart is it to defer student loans? Is it “good debt”?

How do you pay off debt responsibility and in which order? The number one priority is the IRS – if you owe anything to the IRS you must be careful because they have the legal authority to take the money right out of your bank account. The second priority is student loan debt. Student loan debt is very, very dangerous debt, especially if you defer, forebear, or default on it. In most cases, student loan debt can never be discharged in bankruptcy. Today, in most cases, student loan debt is at 6.8% for Stafford loans and Plus loans are at 8.5% - that’s not like a few years ago where you could have consolidated student loans at a 2.77% interest rate. Deferring at a 2.77% rate made all the sense in the world. However, at a 6.8 or 8.5% interest rate - at a time when you’re lucky to get 1 or 2% of taxable interest in your savings account - you’re losing all of this money due to the interest spread if you defer but have the money to pay for the loans.

And the real danger is that the student loan companies DO NOT CONTACT YOU. The problem is this: you have $50,000 of student loan debt at a 6.8% interest rate and now you’re in deferment at an interest rate that continues to compound. So $50,000 grows to $75,000, then $100,000. You think you’ve gotten away with it because you’re not paying anything in deferral and they haven’t contacted you. And then reality hits when it’s time to start paying (for a $100,000 loan, for example, about $1000 a month!) and there’s no way to get out of it.

Should you defer student loan debt? No. If you’re in school and have taken out an unsubsidized Stafford loan – which means that the interest rate is accumulating – should you pay the interest portion while you’re in school so it doesn’t accumulate over those 4 years. Yes!

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SAVING FOR YOUR CHILD'S EDUCATION

Would you recommend using a universal life insurance plan to save for your child’s college education?

NO! NO! NO! If you want to save for your child’s education, don’t do it via a life insurance policy. Life insurance is life insurance. Savings are savings. Investments are investments. Do not mix the three. Here's the reality: if a life insurance agent sells you a universal life insurance policy and the premium is, say, $3000 a year; the commission on that will be approximately $2400 that first year. You are guaranteeing the lifestyle of your insurance agent, not protecting yourself. If you do life insurance, do term life insurance only. Do not make your children beneficiaries of an insurance policy because minors cannot inherit money.

If you want to save for your children’s college education – and you should only do so if you are out of credit card debt, have an 8-month emergency fund, and are putting money into retirement – then go with a 529 plan at Savingforcollege.com.

What are the pros and cons of 529 plans in this economy?

Once you put money into a 529 you now can make changes twice a year (prior to that you could only make changes once a year). That's still not very flexible - you should be able to make changes any time you want. The danger in a 529 plan comes at times like these - when you are too close to when your children are about to go to college and you need the money and are still invested in the stock market and now you’ve just seen your money go down significantly and you don’t have the money anymore. BUT, that’s not really the fault of the 529 plan, it’s your fault for not staying on top of the money.

A 529 plan has tremendous advantages over any other way to save for college education – it will not hurt you for financial aid, it is tax-free. So there are many more advantages than disadvantages to a 529.

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HOME & PERSONAL FINANCES

How can you get the right deal when you refinance?

You get the best refinancing deal when it’s not costing you an exorbitant amount in closing costs, and when interest rates are about 4.5% in the current economic climate. The key is: Are you going to stay in your home long enough to recoup the financing fees with the reduction of the mortgage payments? If it costs $4000 to refinance and you’ll save $100 a month on mortgage payments, it will now take 40 months (at $100 a month) to recoup the $4000 closing cost. If you’re not planning on staying in the house that long, you will have lost money. Also, it makes no sense if you have a 30-year mortgage and 20 years left to pay on it and then refinance for a 30-year mortgage just to save a few hundred dollars. If you have a 30-year mortgage and have 20 years left, refinance for a 15-year mortgage if you plan on staying the house for the long haul.

If you come into extra funds (e.g., raise, bonus) do you recommend saving or paying down debt?

In the past, when credit cards and limits were available in case of an emergency, they were there for you. The problem now is that the credit card companies – when you’re paying down credit cards – clump your credit cards together. If you pay down the balance, they also reduce your credit card limit. If you’re late on payment or have gone over your charge limit, they revoke your credit card and increase your interest rate to 32%. The key: Make sure you have at least an 8-month emergency fund to pay expenses. Credit cards may not be there for you. If you do not have an 8-month emergency fund and come into extra funds, rather than paying down your debt, SAVE the money. However, if you have an 8-month emergency fund, and come into extra funds, then go ahead and pay down credit debt. If the credit card company chooses to close your account and you're not carrying a balance, it will not hurt your FICA score (otherwise it will).

What if you’re living paycheck to paycheck?

Women don’t know how strong they are until they are put to the test. You may think you are living paycheck to paycheck and there’s no extra money, but if you really look at it and imagine what it would be like to not have that paycheck, you would find places to cut back: cable, internet, cell phone, eating out, gifts, etc. Come to grips with this concept while you have a paycheck coming in because it is easier to play financial unemployment than to experience it with no savings.

Also, consider a Save Yourself Account – simply put $100 in (no fees, no commissions) each month and at the end of 12 months, you will receive $100. If you start it and can’t finish it, you can take the money out whenever you want with no penalty. This program was created so people can see that if they get in the habit of putting $100 a month away it builds and before you know it you have $1300 to go towards your 8-month emergency fund.

What attitude changes must moms make to truly succeed in business and personal finance?

You will never be powerful in life if you aren’t power over your own money: how you think about it, how you feel about it, and how you invest it. There’s nothing wrong with saving yourself first. That’s why I created the Save Yourself Account. If you can understand that it is OK – it is your duty – to give to yourself as much as you give of yourself, it means you have true authentic power. And there’s a difference between perceived power and authentic power. It’s not because of what you do, it is WHO YOU ARE regardless of what you do.

How important is it for women to have their own bank account as opposed to a joint account?

It is probably the most important thing out there. You have to be independent, your partner has to be independent. You can have separate and joint accounts, but you need to have your own money, your own credit card, and your own stake in this game.

What is your sense of where the economy is going and your recommendation for investing with families with kids?

You have to think about the economy like a football field. There are all these players…some are getting hurt, some are getting back up, sometimes they’re winning, sometimes they’re losing…but another thing is happening on this playing field. A lot of the players very well may be taking steroids; their performance is enhanced by these steroids. They may look good and perform well but eventually the body of that player disintegrates.

This economy is on financial steroids. We have done everything possible to inject trillions of dollars into the so-called financial players (e.g., banks, cities, municipalities, corporations, etc.) to keep them strong. Eventually steroids wear off, players are hurt, and we have to start over again. The bottom line: the economy eventually will feel really great, then go all the way back and we’ll try to fix it again. Even President Obama said the economy is like a big cruise liner – it’s going to take a long time to turn it around. And the first class sits in the front of ship and at the end is the lower class. In my opinion, this economy will have totally turned around by 2015 when those in the lower class part of the ship - those who have lost jobs, those that don’t know what to do, those in severe credit card debt, those who are trying but can’t get hired, those who have lost their homes and jobs - have hope again and there are jobs and credit cards and money for them. Then the economy will have turned around for all. Not just those in first or middle class.

Moms, train your daughters and sons to be ethical, good with money, have values. It can all start right here. The hardest job in life is to be a mom. If you can be a mom, you can do anything and everything you want to do.

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A GIFT FOR YOU!

Suze concluded by advising that it is imperative to get your paperwork in place today to protect yourself and your family tomorrow, and she is kindly offering the gift of her Will & Trust Kit for FREE. To receive the kit, visit the Will & Trust Kit page, click the orange "Gift Code" button and enter Moms Rule into the gift code field. Click the green "Submit" button and follow the instructions to redeem your free copy of the Will & Trust Kit. This gift code will be valid until midnight EST on Saturday, April 25th. And Suze estimates this will save you about $2500 in legal fees!

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MANY THANKS!

I am grateful to the generous Maria Bailey of Blue Suit Mom for the opportunity to be in on this call. I also would like to thank Avon, who brought Suze Orman on board as a personal finance advisor to their representatives (many of whom are moms looking for supplemental or full-time income). And of course, tremendous thanks to Suze Orman for sharing her amazing wealth of knowledge.


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