Last week, Babble had the opportunity to participate in an Oprah-sponsored blogger q&a with financial guru Suze Orman, on whom our editors have an unrepentant crush, leopard-print blazers and all. Below, highlights from our conversation about college savings, credit card debt and how to change your financial situation in an hour or less. -- Gwynne Watkins
Babble:
One thing that comes up in discussions on our message boards is that cash-strapped parents are torn between saving money to their retirement funds and saving money for their children’s college funds. Which would you say should be a priority?
Suze Orman:
Now, without a shadow of a doubt, the parents’ retirement account. Forever I have been saying you cannot get a loan for retirement, that’s number one. Number two: There are today, because of the economic situation in the United States, you’re going to see over time Stafford loans, which are loans for kids going to school, whether they’re subsidized, which you need financial aid for essentially, or unsubsidized. You’re going to see interest rates be relatively low on those loans.
Plus loans, which are loans for parents to help their children, at approximately an 8.5% interest rate: Those loans have been changed now where you do not have to pay those loans back until after the student has graduated school. So that is a new change for how plus loans work. So there are loans that one can get for a relatively good interest rate to see your kids through school. However, there is nothing that will help you retire unless you have money in an account to do so. So first, you have to save yourself before you can save your children.
In today’s day and age, especially with the markets being as low as they are, especially the fact that maybe you’ve already put some money in a retirement account and you’ve seen that money go down, you have got to continue to dollar-cost-average into good diversified investments as long as you have at least ten years or longer until you need this money, so that you can decrease the price of the investments that you have so that when these markets do finally recover, you can make money on it. So especially right now, given this economy, you have got to save yourself first and put money away for your own retirement before you put money away for your child’s college education.
Babble:
We all know we should be budgeting more carefully, but keeping to a budget can seem so intimidating for people who aren’t used to tracking their finances. So what would you say is the best way for them to start?
Suze Orman:
I have a really, really hard time with budgets, and the reason I have a hard time with budgets is that budgets are just like diets. Neither of them work. Neither of them work. You go on a diet, you restrict, you lose – I mean, it happens to me all the time. You lose five pounds, ten pounds, and then you get so frustrated because you didn’t get to do what you want; you now eat everything you want and now you gain 20.
The same is true with a budget. When you restrict and you restrict, all of a sudden you get so – you’re just so out there that you go and that’s when you all of a sudden start buying Manolo Blahniks and Jimmy Choo shoes and all these purses that you don’t need to spend that kind of money on. You just give up all hope. So I don’t like diets and I don’t like budgets. What do I like?
I like consciousness. I like people being able to decide what they should be spending money on and what they shouldn’t; what they want to eat and what they should be eating that’s good for them, versus what they know is bad. And when you stay in touch with who you are and what makes you healthy, so that you can live your best life – whether it’s with food, whether it’s with money, whether it’s with exercise, whether it’s with spirituality – all the topics that that Best Life Week is going to deal with – when you are in touch with who you are, and you make conscious decisions or decisions from a place of consciousness, knowing that it’s an intelligent decision, it’s a wise decision, it’s not an emotional decision, it’s not an irrational decision – then what happens is you automatically choose the right choices for you. You eat what’s good for you, you spend money on things that are wise for you and that you need, and everything falls in place.
So it’s not about budgets and being restricted. It’s not about diets and choosing the right – and limiting what you can and cannot eat. It’s getting in touch with your own power, so that you make the right choices for you, and when you make the right choices for you, then you live your best life. And when you live your best life, you feel even more powerful; that allows you to make even better choices for you.
Wise Bread:
What are some of the easiest things that someone can improve their financial situation right now? Something they can do within maybe under an hour or two that will totally change your financial position?
Suze Orman:
Truthfully, within an hour, in even less than an hour, what changes your financial position is knowing your financial position – getting honest with the position that you’re in financially speaking. The reason that most people get into trouble when it comes to money is they don’t know how much money they owe in totality. They don’t know the interest rates that they’re paying. They don’t know anything about what it really takes them to live month in and month out, on average, to live the lifestyle that they’re living.
What you can do to improve your financial situation in less than an hour is to get your checkbooks out, get your ATM statements out, get every possible thing over the past year that you have spent money on, and sit down and divide them in 12 different categories. In fact, on oprah.com, when we do the Webinar on January 15th, we will have done this for you, where there will be an electronic expense sheet that everybody will be able to have, so they can see what it really costs them to live month in and month out.
But basically what I’m asking people to do is go back and categorize everything that you have spent money on over the past year. Add them up and add it all together and divide by 12. That is how much money you need month in and month out to be coming in, so that you don’t get into credit card debt. You compare that to the amount of money you actually have coming in. Now we’re getting honest. If you don’t have enough money coming in, you have either one or two things to do: You have to cut down on your expenses and/or you have to make more money. So you can turn your entire financial life around in less than one hour by simply getting honest with what you have and what you don’t have.
Baby Center:
What about parents who have saved perhaps not as much as you advise, three months of living expenses, but yet are threatened with not being able to pay mortgages, daycare and whatnot after that three months runs out, and their husband or whomever still hasn’t found the job -- what do you advise doing now?
Suze Orman:
If I’m getting your question right, they’ve saved for three months, they don’t have income coming in. They’ve used up their three months, correct? Is the wife a stay-at-home mother or is the wife working as well?
Baby Center:
Full-time working.
Suze Orman:
Full-time working. See, here’s the thing, is that when you find yourself in a situation where the bills are still coming in, you have to pay them, and there isn’t enough money to do so, the normal thing that people do is they start charging things on credit cards that normally they would pay cash for. They go to the grocery store and they charge their groceries on a credit card and when the credit card bill comes in, they just pay the minimum.
Normally I would have to say, please don’t do that. You have to find another way. But let’s say in a time – and let’s be realistic about this – unemployment is skyrocketing here. We’re in recession. What if, no matter what, you can’t find another job, you’re already working five jobs, you’re doing everything you can possibly do? It’s at that point in time that if you’re just being realistic, then you might have to put things on credit cards so that you can feed yourself, so that you can possibly just get by day to day.
Is that something that I want to see you do? No. But that’s a reality, which is why you should always, if you can, if you can only have three months of an emergency fund, it would be great for you to also have credit cards that aren’t charged to the max, that have available credit limits on them, that in a dire case – the last-ditch effort after all your money is gone—that at least for a while, you can do ethical things with it.
Now, an ethical thing is not you use this credit card to go to Disneyland.; you use this credit card to go out to eat at a restaurant; you use this credit card to buy one item of clothing. Ethical things, truthfully, are you are going to the grocery store and you are buying beans and rice so that you can feed your kids. Do you see? So those are things that you just have to have as a backup if you don’t have anything else in place, because when you don’t have a backup, what do you do? Do you know how many people – mothers – are now calling in to my own Suze Orman Show to tell me that they are living in their cars with their children?
To avoid that, you have got to plan for the worst and hope for the best. So all I’m asking everybody to do while things are still relatively okay, when you go into a store and you want to buy something, is it a need or is it a want? Are you going through your life saying, I’m going to buy this because I deserve it? What every single mother, especially, deserves is a life that she doesn’t have to worry about where the money’s going to come so she could feed herself and her children.
We deserve a good quality of life and a peaceful life. These things that we think we deserve, which are vacations, eating out, being able to go to the movies – those aren’t things that we deserve; those are things, if you do not have the money to pay for it, will eventually come back and bite you. And as you’re lying in your car at night, you’ll think of, oh, my God, I can’t believe what I did, and look at me now.
Get Rich Slowly:
Having once been over $35,000 in debt myself, I know that it’s one thing to say you’re ready to get out of debt and to stop using credit cards, but it’s another thing to actually maintain the dedication for the days and the years that are needed to pay that debt off. I’m wondering if you have any favorite behavioral tips or tools for maintaining motivation with new goals for a New Year’s resolution.
Suze Orman:
Yes. You know, what’s very fascinating is that the desire to want to use the drug known as credit cards is a very, very strong pull on people. It’s almost as strong – I’m very serious about this when I say this – as a narcotic, as tobacco, as well as alcohol. And in the same way that if you happen to be a drug addict or you happen to be an alcoholic, that normally what keeps you on the road of the straight and narrow is that you don’t hang out with people who drink. You don’t go into bars. You don’t keep alcohol around your house. You make it so that it’s easy for you to not get yourself in trouble because it’s right there.
The same, I have to say, is true when it comes to credit cards. You have to, even though you don’t want to close down your credit cards because that will hurt your FICO score, that doesn’t mean that you can’t rip them up. Doesn’t mean that you can’t cut them up as soon as you’re out of credit card debt where you just don’t see them.
So my advice to people who were once in credit card debt and now they’ve gotten themselves out of credit card debt is I would literally cut up all of my credit cards. I would not be carrying them, I would not even have them in the refrigerator. Some people say they put them in the freezer; oh, give me a break. Anything can come out of a freezer. I would cut them up 100%.
And if in fact I knew that I might seriously be tempted to call the credit card company and say, you know what, send it to me again – I would not care about my FICO score and I would literally call up the credit card company, close down the account and not give me any temptation whatsoever to get myself into credit card trouble. As soon as I got offers in the mail, they would immediately go into the trash.
The key is keeping good company, and when it comes to your money, you usually are keeping good company with other people who aren’t in credit card debt, other people who don’t entice you to spend money, other people who don’t say, let’s go on this vacation, oh, just put it on your credit card debt; other people that say, oh, please, let’s just go out to dinner. Good company are people that, I understand that you have credit card debt and you don’t have the money. Let’s go to your house and I’ll bring food. We don’t need to go on a vacation, let’s just go for a walk on the beach.
Again, when you leave your house, leave your house without any credit cards. You can go to the mall, you can go window-shop, you can enjoy the mall just like everybody else, but do not take your credit cards with you whenever you go out. If you see something that you want and you don’t have the credit cards, fine, you can’t buy it. If you’re still thinking about it one month later, maybe you really wanted it; who knew. But that keeps people in check. So don’t leave your house with credit cards. Cut up your credit cards once they’re paid off. If you need to go further than that, close them down and who cares about your FICO score. And keep good company. That would be my advice.
Suze
will present her 2009 financial plan as part of Oprah’s Best Life Week on
Thursday, January 8th.
