For those of you eager to reduce your mortgage costs, today's record low mortgage rates offer an incredible deal. As of early 2011, the 30-year fixed-rate mortgage has an average interest rate below 5%; creditworthy borrowers may be able to grab a rate as low as 4.8%. And a 15-year mortgage has a 4.1% rate.

But to be able to refinance you will likely need to have at least 20% equity in your home. If you don't have that much equity, you will need to bring cash to the deal to reduce your loan amount to the magic 20% level. This is what is known as a cash-in refinance, and in 2010 it accounted for about one-quarter of all refinancings.

I think a cash-in that helps you lock in a lower rate can make tremendous sense if you have the savings to bring to the closing. I do not want you tapping your emergency savings fund for this, nor are you to touch your retirement savings. If you want to do a cash-in, you must have extra savings you can use to pay down your loan to the 80% level.

Whether you are doing a straight refinance or a cash-in refinance, please heed the following.

REFINANCING RULES.

Never Extend Your Loan Term If you have 20 years left on a 30-year mortgage, you are never to take out a new 30-year loan. That will extend your total loan term to 40 years. The goal should always be to maintain or reduce your total loan term when you add the time you have already paid on your current mortgage to the length of the new mortgage. So if you are 10 years into a 30-year mortgage, your refinanced mortgage should be for no more than 20 years. In fact, as I explained earlier, I would root you on if you could handle refinancing into a 15-year mortgage. The whole point is to get the mortgage paid off sooner rather than later.

Calculate the Cost of the Refinancing There are fees to pay when you refinance. Those can be 1% to 2% or more of the loan amount. Ideally you will pay the fees in cash up front. But if you can't swing that right now, then go ahead and roll the refinancing fees into the new mortgage; yes, your monthly costs will be slightly higher, but if this move does indeed ensure you can get the home paid off faster, and ahead of your retirement, then that's the big-picture goal we need to focus on here. However, you need to understand how long it will take for the lower cost of the new mortgage to offset the fees you paid for the refinance. At Bankrate.com you can use a calculator to compute how many months it will take you to recoup your costs. If you antic.i.p.ate you might move before then, think twice about the refinance. you can use a calculator to compute how many months it will take you to recoup your costs. If you antic.i.p.ate you might move before then, think twice about the refinance.

Consider a 15-Year Mortgage The interest rate on a 15-year fixed-rate loan is typically about 0.5% less than the rate on a 30-year. In early 2011 the spread was even greater, about 0.7%. If you are refinancing a mortgage with 20 or more years left, run the numbers to see if you can afford to go with a 15-year mortgage. The 15-year will always have a higher monthly payment than a longer-term loan, but you will spend thousands less in interest payments, and you also have the satisfaction and security of getting the loan paid off sooner rather than later. But don't overstretch to make a 15-year work. This only makes sense if you have the available cash each month to easily handle the payments. And you must still continue to contribute to your retirement savings. If you are in your 30s and 40s I don't think paying off your mortgage should be your highest priority just yet; focus on retirement savings, your emergency fund, and if you want, putting away some money for the kids' college education.

For those of you in your 50s, here's an example of how the 15-year can pay off: Let's say you took out a $300,000 30-year fixed-rate loan in 2003 at 6.5%. The monthly cost is about $1,900. Now you want to refinance to take advantage of lower interest rates. After eight years you would have a balance of about $265,000 to pay off. If you choose a 22-year loan term (to keep your total payment period at 30 years), your loan payment a.s.suming a 4.8% fixed rate would be about $1,625 a month. So you lower your monthly costs by $275 a month. Pretty good.

Now let's consider choosing the 15-year mortgage instead. At a 4.1% interest rate your monthly payment would actually rise, to about $1,965. That's just $75 more than you are currently paying on your existing mortgage, though of course it is $350 more than if you refinanced into a new 22-year mortgage. But remember, with the longer loan you would be paying that $1,600 a month-$19,200 a year-for seven years longer than your payments on the 15-year loan. If your goal is to get your debt paid off sooner, not later, it seems to me that paying $75 more a month than you currently owe is the smarter strategy than locking in a lower mortgage that will take a full seven years longer to pay off.

As we discussed in "The New American Dream," delayed gratification is often the route to realizing our dreams. And in fact the 15-year mortgage definitely pays off for those who are patient. You will not only have the loan paid off seven years faster, which can be a huge boost come retirement, but also your total interest payments with the 15-year loan will be about $90,000, compared to $165,000 for the 22-year loan. That's a savings of $75,000.

LOWER YOUR MORTGAGE COSTS WITHOUT A REFINANCE.

If you determine a refinance doesn't make sense for you-maybe you lack the equity, don't have the money for a cash-in refinance, or your credit score won't qualify for a great rate-you can still get ahead on your mortgage. Simply add extra money to your monthly payment. All you need to do is verify with your loan servicing company that the money is to be applied to paying down your princ.i.p.al. This is in fact my recommended strategy if you have any doubt about your job security, or if you do not want to lock in the responsibility of higher payments on a 15-year loan. By sticking with your existing mortgage and just making optional extra payments you have the flexibility to stop those extra payments if the need arises. A table on this page this page in the cla.s.s on retirement strategies in your 40s and 50s ill.u.s.trates the advantages of this very clearly. in the cla.s.s on retirement strategies in your 40s and 50s ill.u.s.trates the advantages of this very clearly.

TIP: Lenders usually have programs that offer to help you speed up your payment process. But there are often fees charged to enroll in such a program, and in my opinion they are a complete waste of your money. The fact is, you can pay off your mortgage ahead of schedule without incurring any monthly fees, by simply sending in a larger payment than is due each month. Ignore those bank come-ons and use common sense. Lenders usually have programs that offer to help you speed up your payment process. But there are often fees charged to enroll in such a program, and in my opinion they are a complete waste of your money. The fact is, you can pay off your mortgage ahead of schedule without incurring any monthly fees, by simply sending in a larger payment than is due each month. Ignore those bank come-ons and use common sense.

LESSON 6. THE DANGERS OF HOME EQUITY LINES OF CREDIT THE DANGERS OF HOME EQUITY LINES OF CREDIT.

Those of you who have been following my advice for years know that I have never liked borrowing against the equity in your home, especially for expenses that don't qualify as needs. Given that I have asked you to embrace the concept of living below your means but within your needs, I hope it is patently clear why I think it is frankly dishonest to borrow against your home equity. It is often an indication that you are in fact trying to live above your means.

In the immediate wake of the financial crisis, lenders were reducing or terminating outstanding home equity lines of credit (HELOCs). But I bet those of you with ample equity and good credit have recently started receiving new offers to open a HELOC. With the eye of the storm past, lenders are looking for ways to generate revenue, and homeowners with strong financials are a likely target.

And the timing could not be worse. While I have always advised against HELOCs, there is a looming risk tied to what is going on in our economy that makes HELOCs especially dangerous right now.

The vast majority of HELOCs are variable-rate loans. The rate is tied to a financial benchmark, such as the federal prime rate. The prime rate is typically 3 percentage points higher than the federal funds rate that you hear about so often in news reports. As I write this in early 2011, the federal funds rate is right about 0.25%, and thus the prime rate is 3.25%. When the prime rate moves up or down, so too does the interest rate charged on a HELOC. Lenders will charge a premium above the prime rate-called the margin-that can add 0.50 to 1.0 percentage point or more to the prime rate. For example, in the fall of 2010 some lenders were offering borrowers with good credit a HELOC at 3.75% (prime + 0.5%). That 3.75 sounds so enticing. In fact, lenders are quick to point out how smart it is to take out a low-rate HELOC and pay off your high-rate debt, such as credit card debt or a car loan. Or to finance a car purchase with a HELOC.

Here's what the lender might not be so quick to explain to you: Interest rates are going to rise, and when that happens your HELOC payments will go up. In the coming months and years we will see short-term interest rates controlled by the Federal Reserve rise. It may not happen this year, but sooner or later rates must rise off their historic lows. That makes HELOCs risky; with the future direction of the prime rate up, not down, you will likely encounter higher payments. Consider what happened just a few years ago: In May 2004 the prime rate was 4%; by the end of 2005 it was 5%. A year later it was at 7% and by December 2006 it had shot up to 8.25%. Homeowners who had HELOCs tied to the prime rate saw their rate more than double! Take out-and use-a large HELOC and in a few years you may well find yourself stuck paying the line back at a much higher interest rate.

If you fall behind on a HELOC the lender can foreclose on your house. A HELOC is what is known as a secured loan, meaning it has collateral. And that collateral is your home's equity. If you were to get in so much trouble you could not keep up with your HELOC repayments, the lender could foreclose on your home to use the equity to settle your balance due. That is why it never-and I mean absolutely never never-makes sense to use a HELOC to pay off credit card debt or to pay for a car. Credit card debt is unsecured; if you can't pay it off no one can come take your house from you. But if you transfer the credit card debt to a HELOC you have put your home at risk if you don't keep up with the payments. I also don't think it ever makes sense to use your home to pay for a car; I'd rather you use a regular car loan. In the event you fall behind on a car loan, you risk losing just the car, not your house.

HOME EQUITY LOANS.

I also have to say that I am not a fan of a home equity loan (HEL) either. A HEL typically has a fixed interest rate. That indeed will make it more appealing than a HELOC in a rising-rate environment. But the more pressing issue is why you are tapping into your home equity at all. It is a clear signal, in the majority of instances, that you are trying to live beyond your means. My bottom line is that if you are tempted to use a HELOC or a HEL, take that as a warning signal that perhaps you are not standing in the truth of living below your means but within your needs.

LESSON 7. REVERSE MORTGAGES REVERSE MORTGAGES.

In the coming years I expect reverse mortgages to become increasingly popular among retirees who are eager to find extra income. A reverse mortgage is available to anyone who is at least 62 years old and owns a home outright, or has a small mortgage balance remaining. If you are married and both spouses are on the home's t.i.tle, the youngest spouse must be 62 before you can consider a reverse.

With a reverse the borrower can opt to receive a lump payment, or an ongoing payment for a set period of time, or a line of credit in which the home equity is the collateral for the loan. It is literally a way for retirees to live off their homes.

While I think a reverse can make sense in certain circ.u.mstances, it is not nearly the win-win it is often made out to be. There are many costs and risks to doing a reverse that you must fully understand.

REVERSE MORTGAGE BASICS.

The vast majority of reverse mortgages are loans that are insured by the Federal Housing Administration. The formal name for these FHA-insured loans is Home Equity Conversion Mortgage (HECM). The maximum home value that can be tapped for an HECM is based on home values in your area. The upper limit in 2011 for people living in high-cost areas is $625,500. But that is just a limit used to calculate the benefit you can receive; in fact, no one can receive a payment anywhere near the full value of their home; typically your original loan amount might be 60% or so of your equity.

The percentage of your equity that you can tap is based on a calculation that factors in your age and current interest rates. Your credit score is not a factor.

The younger you are the less you can borrow. For example, in early 2011 a 62-year-old with a fully paid-off mortgage and a home value of $625,500 in a high-cost area might qualify for a maximum reverse mortgage of about $365,000. A 72-year-old might qualify for a $392,000 payment. All reverse mortgage payments you receive are tax-free.

I realize that sounds like a lot of money-it is a lot of money-but what you must realize is that once you borrow the money your account begins to ring up interest charges. You never have to repay a penny while you live in the home. But when you move, or you die, the loan must be repaid. (If you move into an a.s.sisted living facility or nursing home for more than twelve months you are deemed to no longer live in your home, and the reverse loan must be repaid.) And you, or your heirs, will owe the princ.i.p.al and the interest. Now one great aspect of a reverse mortgage is that you will never owe more than the value of your home when you leave, but every penny of the sale could well indeed go to the reverse mortgage lender to settle your loan-meaning you or your heirs may not have any equity left when all is said and done.

Another consideration is the cost. Traditionally, reverse mortgages have been quite expensive. The up-front fees to open a standard HECM reverse mortgage can add up to 10% of the loan amount. In late 2010 a new type of reverse, called the HECM Saver, was introduced. It eliminates many of the up-front fees, though the amount you can borrow through the program is about 15% or so lower than what is available with a standard reverse mortgage. In both versions you will pay an ongoing annual "insurance" premium of 1.25% of your loan amount.

I have to say that I think reverse mortgages are a potentially dangerous step for many retirees. It is far too easy to get blinded by the prospect of receiving much-needed income today and overlook some important considerations.

Please understand that after you take out a reverse mortgage you are still responsible for all costs a.s.sociated with running your home-the property tax bill, the insurance bill, the utilities, and all maintenance costs. If you can't afford the upkeep of your home it makes no sense to do a reverse mortgage. You will just end up having to sell eventually when you realize you can't afford the home, and whether you have any equity left after the sale depends on the size of the reverse loan that must be settled.

And as I mentioned, a reverse will also impact the estate you leave for your heirs. When you die, the loan comes due. The lender cannot charge more than the value of the home, but every penny of the sale could in fact go to the lender, leaving your heirs without an inheritance. I also want you to know that if your heirs decide they want to keep the home after you pa.s.s, they would in fact owe the lender the full value of the loan, even if it exceeds the sale value of the home. For example, if your reverse mortgage balance is $300,000 when you move or die, and the home sells for $260,000, the lender will receive just the $260,000. You or your heirs would not need to come up with another $40,000 to settle the loan. But if your heirs decided they in fact wanted to keep the house, then they would owe the full $300,000.

My recommendation is that you think of a reverse mortgage as a last-resort emergency fund in retirement, not a primary piece of your retirement plan from day one. If money is so tight at age 62 that you think you need a reverse mortgage, my concern is what happens at age 72 or 82? If you tap all your home equity through a reverse at 62 and then at 72 you realize you can't really afford the home, you will have to sell the home, and you may end up giving most or all of the sale price back to the lender to settle up. What will you live on then? I would much rather you base your retirement on other income sources-your savings, Social Security, and a pension. If later on in retirement you need extra income, then you can consider a reverse mortgage, but go in with your eyes open.

You can learn more about reverse mortgages online at www.hud.gov/offices/hsg/sfh/hecm/hecmabou.cfm. You can calculate an estimate of what you might be able to receive from a reverse mortgage at www.revmort.com/nrmla.

LESSON 8. INVESTING IN REAL ESTATE INVESTING IN REAL ESTATE.

Whether you are considering buying investment property today or are wondering what to do with an investment that is now underwater, it is important to understand how very different the rules and regulations are for income property compared to a home you live in as your primary residence.

WHAT YOU NEED TO KNOW BEFORE YOU BUY INVESTMENT PROPERTY.

With home values down 30 to 50%-or more-I know that many of you think now is a great time to invest in real estate. I have to say, my experience is that the people who are so quick to see the upside often don't properly prepare for the potential downside. Owning investment property is a risky investment. There is no guarantee the property will rise in value-or rise in time for you to flip or refinance as you had hoped-nor is there any guarantee you will always have responsible tenants. Please do not consider buying unless you have carefully prepared for all the what-ifs: You must have an eight-month personal emergency fund plus plus a one-year fund to cover the carrying costs on your rental property a one-year fund to cover the carrying costs on your rental property. If you are going to invest in a rental property your personal emergency fund is not to be a part of your plan. You must have a separate fund that can cover up to one year's worth of mortgage, tax, insurance, and maintenance costs for your property. The biggest mistake I see people make is that they wrongly a.s.sume they will always be able to rent out the property, that rental rates will always rise, and that their tenants will treat the property with great care. That is what I would call wishful thinking-and it could lead you down the road of ruin. You must have an ample investment property emergency fund to fall back on.

Real estate must be part of a diversified investment portfolio. I have had too many conversations with people who told me they lost everything in real estate when the bubble burst. They insist they were well diversified because they owned several properties in different neighborhoods. That is not my idea of diversification. That is owning a lot of the same type of a.s.set. Investing in real estate must be done after you have taken care of your other investment goals. If you are not contributing to your retirement funds you have no business investing in real estate. And if you do own investment property, that is never a reason to stop or slow down your retirement savings. have had too many conversations with people who told me they lost everything in real estate when the bubble burst. They insist they were well diversified because they owned several properties in different neighborhoods. That is not my idea of diversification. That is owning a lot of the same type of a.s.set. Investing in real estate must be done after you have taken care of your other investment goals. If you are not contributing to your retirement funds you have no business investing in real estate. And if you do own investment property, that is never a reason to stop or slow down your retirement savings.

Understand that you will pay more for financing. If you want to take out a mortgage to invest in real estate, be prepared for an entirely different set of lending rules compared to buying a home for your personal use. Lenders will often insist that your down payment for a real estate income property be at least 30% of the purchase price, and the mortgage rate will also be higher than the rates charged for a home you live in.

There's little help if you fall into financial trouble. All the various federal programs we have in place today to help are only for mortgages used for a primary residence. Investment properties are not eligible for any a.s.sistance. That makes perfect sense. Aid should be to help families stay in their homes, not to come to the rescue of investors and speculators.

WHAT TO DO WITH AN INVESTMENT PROPERTY THAT IS UNDERWATER.

For those of you who already own an investment property that is currently worth less than your outstanding balance, I want you to carefully consider your options.

If you are just 10% or so underwater and the rental income is still enough to cover your carrying costs, then I would not advise you to sell right now even if your lender agrees to forgive any unpaid mortgage balance. It is important to understand that the IRS will not forgive that shortfall. The valuable tax break that is in place through 2012 that exempts homeowners from owing income tax on the difference between their mortgage balance and their sale price does not apply to income properties. If you sell an income property at a loss you will still be handed a 1099 tax form that reports the difference between the mortgage balance and the sale price as "income" that was paid to you. So let's say you have a $250,000 mortgage and your property sells for $175,000. Even if the lender agrees to not come after you for the $75,000, that $75,000 will be reported as taxable income to the IRS.

And let's not forget that as a seller you will have to pay the agents' fee-typically 6% of the sale price-and other closing costs. That just adds to your loss at this point.

If you are more deeply underwater, or the gap between the current rent the property can generate and your mortgage is too big a monthly cost, then I ask you to read my advice from earlier in the chapter on how to navigate your way through a short sale or foreclosure.

LESSON RECAP.

- Recognize that a home is not a liquid investment.

- Base your housing decisions on the expectation that long-term price appreciation will likely match-or slightly exceed-the inflation rate.

- Consider a rental if you are not sure of your long-term plans.

- If you are considering a mortgage modification, understand the many risks.

- If you are 10% to 20% underwater and can afford your mortgage, stay put or agree to cover the entire mortgage if you want to sell.

- If you want to sell, stand in the truth that you should pay the difference between the mortgage cost and your sale price.

- If you are 40% to 50% underwater, walking away may indeed be the best move-but understand the liabilities if you go this route.

CLa.s.s.

CAREER.

THE TRUTH OF THE MATTER.

The American workplace has been undergoing some dramatic changes-general trends that have been playing out over decades and painful contractions brought on by the recession that took hold in 2008. If you are among the nearly 15 million Americans out of work or the 9 million getting by with a part-time job as of late 2010, you are feeling the pain of these changes most acutely. But even those of you lucky to have work-and work you love, I hope-must recognize that changes in our economy will present new challenges over the course of your career as well.

The American Dream of the last century seemed to promise jobs for everyone willing to work, a paycheck every Friday. That particular American snapshot, from where we stand today, indeed seems like it comes from a bygone era. In the simplest of terms, we have a far greater supply of workers than we have jobs, and this will not change for a long time. While I believe we have turned the corner in terms of job losses, it could be years before the ma.s.sive backlog of people looking for work will find employment. As I write, the most recent jobs report cited a net monthly gain of barely 100,000 jobs. That is far less than we typically have during an economic recovery. But here's what you need to understand: If new job growth were to stay at that monthly pace it would take more than a decade for everyone looking for work to find work. Even if we saw the pace of job growth rise to 250,000 a month the backlog would still take five years to work down.

Here is the harsh reality: I do not believe we will see a dramatic acceleration in new job creation. In the private sector, employers are focused on getting more out of their current workforce-through technology and longer hours-to meet any pickup in their business. This is what is known as productivity. You better believe companies are more interested in boosting productivity before they begin to hire aggressively, and I expect this trend to continue in the coming years. And when employers do decide to hire, the reality is that many will be looking to fill holes with "temporary" contract workers who work full-time jobs, but without benefits.

The situation in the public sector is even more dire. Given the political climate in Washington, it's hard to envision any substantial expansion in the federal payroll in the coming years. And the severe budget deficits and reduced revenues that state and local governments are experiencing makes it unlikely they will be able to go on a hiring binge anytime soon.

Adding to this job shortage is the fact that the workforce is growing older and people are staying in their jobs longer, so there is less turnover. The Bureau of Labor Statistics reports that the percentage of Americans age 55 and older still working increased from 29% in 1993 to a record 40% in 2010. And the BLS forecasts that trend will continue; it estimates 43.5% of the 55-plus contingent in 2018 will still be working. Many older workers are deciding they want-or need-to stay in their jobs past traditional retirement age-a move I endorse-in order to save more for retirement. That has the potential for creating a traffic jam on the career ladder; it's harder to move up-and make more money-if the rung above you is still occupied.

Will we see new jobs created in the coming months and years? Of course. Though we will no doubt face ongoing bouts of volatility in the markets, I do believe the worst of the economic slide is behind us. But all that means is that the patient-our economy-is out of the ICU but still has a long slow road of recovery ahead. When it comes to finding work and reaping the rewards of gainful employment in this current economy, I don't think anyone would a.s.sert that the American Dream is alive and well. However, I am a firm believer that ingenuity and invention often spring from adversity. And I can tell, even from the calls and letters that come in to my CNBC show, that many of you are figuring out ways to bring about change for yourself. Small businesses are springing up; locally produced food and goods are in demand; people are heading back to school to acquire new skills or to bring more to the job they're in. The American entrepreneurial impulse is strong-stronger now than it's been in years.

I felt it was important to account for work as we try to define the various aspects of the New American Dream because it was built into the American promise of opportunity: Hard work and dedication bring rewards. But there is, of course, no one-size-fits-all advice to be had in this category. You may be rising in your career but find that your job promotion came with more work and no increase in salary; or maybe you are frustrated that despite your strong performance, you haven't gotten a raise in four years and instead are told you should feel lucky just to have a job in this economy; or maybe you are just plain exhausted from having to work two jobs to make ends meet. All of these various states of employment are affected in one way or another by our sluggish economy. It's hard to think of an industry that has been untouched by the recession. And so no matter what your status, this is an opportune time to take stock of your working life.

I've organized the Career Cla.s.s into three lessons that cover the gamut, in broad strokes: - Advice for the Employed - Advice for the Unemployed - Starting (and Running) Your Own Business LESSON 1. ADVICE FOR THE EMPLOYED ADVICE FOR THE EMPLOYED.

"Hope for the best; plan for the worst." I put my faith in that credo. You might have heard me repeat it in the context of discussing the need for life insurance, but it is also an excellent guide for how to manage your career in this era of slow economic growth. If you are being honest with yourself you would look at the continuing fallout from the financial crisis-nearly one in five Americans is either unemployed or underemployed as of late 2010-and consider for a moment what if it were you. In fact, that may be the best career strategy for these times: Behave as if a layoff or furlough will happen to you. Hope that it never happens, but if you plan as if it will, you and your family will be well prepared to weather any setback and get back to work as fast as possible.

BUILD YOUR PLAN-FOR-THE-WORST FUND.

Yes, I am talking about having an emergency savings fund that can cover up to eight months of your living expenses. Back in 2008, when I began to insist that everyone increase their savings fund to an eight-month cushion, I took a lot of heat. Why do I have to save so much when everyone else says three months is enough? Why do I have to save so much when everyone else says three months is enough? you asked me. When I appeared on you asked me. When I appeared on The Oprah Winfrey Show The Oprah Winfrey Show in January 2009 I suggested that families in which both adults were working should experiment and see if they could handle their expenses if they lived off just one income; for individuals my recommendation was to pretend you had a 50% pay cut and see if you could still cover your bills. I knew it would be a stretch, but I wanted everyone to understand what could happen if they faced a layoff. Besides, by making do with just 50% of your current pay you would be able to shovel more-faster-into an emergency fund. Oh, the pushback I got from so many of you! You told me I was being too pessimistic and dramatic. You told me that it was impossible, that you could never live on less than you are living on now. You told me that you had worked for 20 years for your company and there was no way you would lose your job. And then the unthinkable happened. I'm sorry to say, I was right. As of fall 2010, more than 40% of unemployed Americans have been out of work for more than six months, and nearly one-third have been unemployed for more than a year. in January 2009 I suggested that families in which both adults were working should experiment and see if they could handle their expenses if they lived off just one income; for individuals my recommendation was to pretend you had a 50% pay cut and see if you could still cover your bills. I knew it would be a stretch, but I wanted everyone to understand what could happen if they faced a layoff. Besides, by making do with just 50% of your current pay you would be able to shovel more-faster-into an emergency fund. Oh, the pushback I got from so many of you! You told me I was being too pessimistic and dramatic. You told me that it was impossible, that you could never live on less than you are living on now. You told me that you had worked for 20 years for your company and there was no way you would lose your job. And then the unthinkable happened. I'm sorry to say, I was right. As of fall 2010, more than 40% of unemployed Americans have been out of work for more than six months, and nearly one-third have been unemployed for more than a year.

That is why I asked you then and I am asking you now to build an emergency fund that could pay your family's bills for at least eight months. Yes, I realize you may collect unemployment benefits, but typically these payouts cover just a fraction of your prior salary. Do not skimp on your savings because you think unemployment insurance will be all you need.

I understand it will take time for you to build up eight months' worth of expenses in your savings account. But don't get overwhelmed and give up before you start: The immediate goal before you is to focus on how you can trim your spending so there is more left over each month to dedicate to your "plan for the worst" fund.

LIVE BELOW TODAY'S MEANS I hope each and every one of you has uninterrupted career success that brings you a steady stream of raises and promotions. But I never want you to base your current lifestyle on the notion of what you think you might be making years from now. There is no guarantee your salary five years from now will be appreciably higher than it is today. Maybe yes, maybe no. I want you to make financial choices today that are affordable based on what your household income is today, not what you hope it will be in the future.

As an example, let's all remember what was happening with real estate in 2005 and 2006. Buyers were guided into negative-amortization loans or option ARM loans that offered super-low initial rates that wouldn't move higher for three or more years. The standard advice back then-advice I warned people not to heed, by the way-was that it was smart to get one of these loans because you would surely just refinance into a different mortgage before it came time for your mortgage to adjust to a higher rate, or you would be able to sell the house at a nice profit and walk away with money in your pocket. Except it never was a sure thing. And much of the housing crisis we are still dealing with-and will likely be dealing with for years-is a result of the fact that so many people who took out those mortgages and bet they would be able to flip or refinance before the adjustment lost the bet, big-time.

Don't make the same financial bets with your career by living beyond your means today based on the risky a.s.sumption that you will be making a lot more in the future. I hope you will be making more. A lot more! And if that is what occurs, then you can revisit your spending when you in fact have that money. But please do not borrow more today than you can honestly afford today. I'd much rather you rent or buy a smaller, less expensive home, or purchase a less expensive car today, than stretch to buy something that you know deep down is an act of living beyond your means.

VACATION STRATEGY.

I also want you to think through your vacation strategy. In these very challenging times, when you are being asked to do more than ever before at your job, there is no question that you need a break. My advice is to take every vacation day you are ent.i.tled to! Particularly if your employer is unable to give meaningful raises, then time off becomes a valuable currency. Time away from the job is important for your health and important for your family. But I am not giving you permission to spend whatever you want. Your vacation must be an affordable vacation. The cost is not "just" $1,000 or $2,000 or $3,000. That is $1,000 or $2,000 or $3,000 that isn't going into your Roth IRA, your child's 529 college plan, or your emergency fund. And don't you dare take any vacation that you cannot at least pay for up front in cash. There is absolutely no excuse for planning an expensive vacation that you "pay" for by putting it on a credit card because you're not able to pay for it immediately. I don't care if that card charges you just 5% or 10% interest-though let's stand in the truth and admit it, more likely you're paying 15% or higher. Taking on debt for a vacation is an act of financial dishonesty: no ifs, ands, or buts. You are denied! Do you hear me?

I am asking you to balance your vacation dreams against your other financial dreams. How about a less expensive vacation so you still have more to put toward your longer-term goals? I also want to recommend you think about a stay-at-home vacation. Pry yourself free of the BlackBerry or iPhone and make it clear to everyone you work with that you are indeed on vacation and are to be contacted only if there is a true emergency. Then plan every day just as you would a getaway. Yes, you are absolutely allowed to go to the movies and enjoy some meals out; it's okay to spend some money. The goal is simply to spend a whole lot less than you would on a vacation that includes airfare, a hotel, and three meals out every day. If you happen to live in a big city, why not plan a few days doing all the things tourists do but you never seem to have the time for? Some of my most memorable time off is playing tourist when I am at home.

GRAB YOUR FULL RETIREMENT BONUS.

Look, you and I both know, big bonuses have become rare in recent years. So tell me this: Why are so many of you turning down a guaranteed guaranteed bonus every year because you aren't being smart with your 401(k)? As I explain on bonus every year because you aren't being smart with your 401(k)? As I explain on this page this page, if your employer offers a 401(k) matching contribution, be sure you are contributing enough to get the maximum match. Do you see my point? That match is a bonus. Many plans offer a 50-cent match for every dollar you contribute, up to a set maximum. For example, if you make $50,000 and your employer offers a 50-cent match on every dollar you contribute up to the first 6% of your salary, that's $1,500 a year in a matching bonus you could be collecting ($50,000 6% = $3,000; 50% of $3,000 is $1,500). Yet about 20% of workers eligible for a match do not contribute enough to earn the maximum match. It never makes sense to turn down free money; and in a world where raises and bonuses may be meager, making sure you grab the full matching contribution is crucial. Who knows, at your next job you might not have a 401(k) or maybe your employer will not offer a match. Take advantage of this great deal while you can.

MAKE YOUR CASE FOR A RAISE AND PROMOTION THROUGH YOUR WORK.

I ask that you take a clear-eyed look at your att.i.tude toward work and pay. Are you expecting to be paid more because of a sense of ent.i.tlement, because you've hung in there year after year, or because you are doing spectacular work?

When I was a financial advisor I often had clients who came to me upset when they didn't receive the raise or promotion they expected. When I asked them why they thought they deserved the raise they often said to me, "Because it's been a year and I am working so hard." Mind you, this was in the early 1980s when we were coming out of a recession. Though the situation was different back then-we were grappling with high inflation-there are some striking similarities between that moment in time and where we are, economically, today. One such similarity: Employers were cautious and conservative in how they spent money, just as they are today.

It wasn't always an easy conversation with my clients, but what I told them back then is the truth I ask you to stand in today: No private-sector employer has to give you a raise. No one is obligated to dole out a bonus. As valued as you are by your employer, the reality is that there are a lot of very talented people who could replace you among the unemployed and underemployed. Please do not think the reason they are out of work is that they aren't as good at their job as you. There are literally millions of extremely talented people who are out of work. The financial crisis and recession didn't merely clean out the deadwood; it took a lot of hardworking, competent, professional workers with it too.

I hope this doesn't cause you to become paranoid and make you afraid of ever asking for a raise or bonus. Here's what I used to tell my clients: Make those you depend on for a paycheck dependent on you. What you want to do is make yourself so valuable, so close to irreplaceable that your employer is doubly motivated to make sure you are happy in your work, and your pay. When you overdeliver on every part of your job and exceed expectations, you are making your case loud and clear to be compensated for your work. When I wrote The Money Book for the Young, Fabulous and Broke The Money Book for the Young, Fabulous and Broke in 2005 my advice for 20-somethings was to just put their heads down, work super hard, and not sweat the pay. Build a reputation, make your mark, put in the effort, and you will be on solid ground. That advice applies to all ages today. You must double down on making yourself an absolutely essential piece of your firm's success. That should be your goal at any time, but in these times of economic stress it is imperative. It is how you keep moving forward in a very compet.i.tive job market. in 2005 my advice for 20-somethings was to just put their heads down, work super hard, and not sweat the pay. Build a reputation, make your mark, put in the effort, and you will be on solid ground. That advice applies to all ages today. You must double down on making yourself an absolutely essential piece of your firm's success. That should be your goal at any time, but in these times of economic stress it is imperative. It is how you keep moving forward in a very compet.i.tive job market.

I am not suggesting it will protect you from ever being laid off. But I can guarantee you that if you are laid off because your firm is struggling, your reputation will precede you and your manager will likely help your efforts to find a new job by providing a glowing reference. It will also likely put you at the top of the list for being rehired when the company rebounds.

Now that said, I realize at a certain point you may in fact feel your nose has been to the grindstone plenty long enough and you know you have put in the work to merit a raise. Okay, be smart here. Do not request a meeting with your boss, stomp in, and simply state, "I deserve a raise" or "Can I have a raise?"

I want you to be more tactical and frame the conversation by making your expectations clear.

HOW TO ASK FOR A RAISE.

Start by preparing a one-page presentation that doc.u.ments all your accomplishments-exactly how you contributed and continue to contribute to moving your employer's business forward, and how you have delivered specifically for your manager. Make sure your manager has that doc.u.ment at least forty-eight hours before the meeting. Next you need to decide how much of a raise you want. Let's say you want a 5% raise. When you are sitting with your boss, start the conversation by saying, "Given my accomplishments and ongoing contribution to our business model, I would like you to consider a raise of 5 or 10 percent." You make the amount you want the lower of the two choices. In any case, make them no more than five percentage points apart. Now, why do I want you to do this?

This goes back to a lesson I learned when I started out as a commission-based stockbroker in the early 1980s. I was trained to be a professional salesperson to call up clients, and after sharing an investing idea with them, I would ask, "Would you like me to buy five hundred shares or one thousand shares?" The rule was never ask a yes-or-no question, because if they said no there was nothing else I could say. I want you to do the same when discussing your salary with your boss. When you walk in and say you want a raise of 5 or 10%, you have just shifted the conversation about whether you deserve a raise to how big a raise you deserve.

Save Your RaiseIf you are living below your means but within your needs, you will not need to use any part of a raise to cover your existing expenses. But you and I both know that if you aren't careful you will soon find your expenses rising to meet your new, higher paycheck. Please don't squander your raise. If you have yet to ama.s.s an eight-month emergency fund, I want you to aim to save 100% of your raise. If you already have the eight-month emergency fund taken care of, I want you to aim to still put at least 75% of your raise toward any of your other saving and investing goals or paying off your credit card debt. The balance you can use as needed. So let's say you get a 4% raise. That means that at least 3% must be earmarked for your savings goals. The other 1% is yours to spend. Remember: You are standing in your truth when the pleasure of saving is equal to the pleasure of spending. My suggestion that you save the majority of a raise is not to be taken as a punishment. I am showing you how to realize your dreams.

CHANGE YOUR ATt.i.tUDE BEFORE YOU CHANGE YOUR JOB.

In the first cla.s.s of this book, I explained that there is rarely a bad situation that can't be improved by a change of perspective. It's not that you can't afford a house; you can afford a less expensive house. The problem isn't that you were turned down for a car loan, but that you were shopping for a car that was too expensive. Change your perspective-and budget-and you can reach your goal. I think that idea is especially timely in how you manage your career.

As we all know, finding a new job is not exactly a snap these days. As I write, there are five job seekers for every job opening. If you are unhappy in your current job, my advice is to take a step back and see how you might be able to make it work for you, so to speak. The truth you must stand in is that in this lousy job market, the job you have is a great job, for it is a job. And I want to be very clear: You cannot afford to walk away from any job today without having another job lined up. I don't care how talented and well connected you are, that is just crazy in this environment. It is infinitely easier to get a new job if you still have an old one. Ignore this advice and down the line you are going to end up saying, "I wish I hadn't." Please don't make that mistake.

That puts it on you to figure out how to turn around a frustrating job situation. If you can't stand your boss, get strategic about transferring to another division. Wish you had more responsibility? Well, come up with ideas for how you can expand your work. Right now your manager is probably overloaded and worried about her career. Ideally she'd be looking out for you, but this isn't exactly an ideal time. So be proactive. Don't just complain that you're unhappy; offer up ideas on new challenges you could take on that would make you happy. And don't tie it to a pay raise. Do the work first, and the pay will follow. That's just the way it has to be in these economic times.