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Suze Orman Money Matters

Suze Orman, Money Matters

Dusting Off the Rules of Financial Responsibility

by Suze Orman

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Posted on Thursday, September 18, 2008, 12:00AM

This is my final Money Matters column for Yahoo! Finance, and that has me thinking about what's transpired since the column debuted in February 2004. Let's just say these have been very interesting times.

It just so happens that February 2004 was when the then-venerated -- yes, venerated -- Federal Reserve Chairman Alan Greenspan uttered this famous analysis: "American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage."

At the time, I strongly disagreed with Greenspan. Encouraging lenders and borrowers to take on more risk than they could really afford just didn't make sense. But as is the case with bubbles, especially those where the chairman of the Federal Reserve is doing some of the inflating, they often expand for a while before finally popping.

Return to Reality

That's exactly what happened. Between 2004 and the middle of 2006, the S&P/Case-Shiller home value index of 20 large metro areas rose nearly 35 percent. Then reality set in -- the teaser rates from those unconventional mortgages reset at unaffordable levels, and home prices didn't continue to rise fast enough to allow refinancing out of the loans.

Now we find ourselves in the current mess: Foreclosures at record highs; many more borrowers dangerously late on payments and headed toward foreclosure unless banks agree to more workout deals; and home values in a steep slide. The same Case-Shiller index is down about 20 percent from the July 2006 peak. Plenty of people bought at that peak -- in 2005 and 2006, the National Association of Realtors reported more than 13 million home sales -- and are thus looking at some serious negative equity.

So here we are, four and half years later, and the federal government is rescuing Fannie Mae and Freddie Mac. Clearly, all those untraditional mortgages that got the Greenspan green light in 2004 didn't end up providing much long-term benefit to anyone. In fact, it's going to cost us all billions of dollars in a taxpayer-financed bailout.

Ups and Downs

The credit meltdown hasn't exactly been a boon for the rest of the financial markets. Bear Stearns was trading at about $75 a share in February 2004, and the S&P 500 stock index was at 1,145. As I write this, the S&P is at 1,217 and Bear Stearns is no more.

Even with dividends reinvested, the S&P 500's gain for that four-and-a-half year stretch is well behind the 16 percent official inflation rate. And speaking of inflation, back in February 2004 the Energy Information Administration reported the average cost of a gallon of gas at $1.73. Today, it's $3.73 a gallon. For a 20-gallon tank you fill weekly, then, it costs an extra $160 a month.

A barrel of crude oil? Just $55 a barrel in February 2004; as I write this, the current cost is $104 a barrel. At the same time, income growth has barely nudged forward, and the official unemployment rate recently jumped past 6 percent.

The Basics All Over Again

Tough times indeed, but not insurmountable. As I've emphasized throughout my Money Matters columns, financial security comes from acting responsibly, even when everyone around you -- friends, family, mortgage lenders -- are behaving irresponsibly.

As a final send-off, I want to mention, just one more time, the basic rules of financial security that will keep you out of trouble:

• Don't take anyone else's word

What you do with your money affects you, not the folks handing out the advice. I'm not saying you shouldn't listen to outside advice, but you need to put it in context.

First, who's giving the advice? Someone who wants to sell you something, like a mortgage lender hungry to reap his fees? That should make you circumspect. And even when you have the best financial adviser, you should still be learning and asking questions. There's simply no excuse, or way around, the need to understand every investment and financial decision you make. Because at the end of the day, what you don't understand can end up costing you a ton.

• Wishful thinking leads to financial ruin

Making a financial decision based on what you "hope" will happen is where the trouble begins. Everyone who took out a mortgage with a big initial rate discount -- or even worse, an interest-only option loan -- was hoping that the crazy times would continue. They needed huge home value gains to be able to eventually refinance their loan before the rate reset.

But it was purely wishful thinking to assume that the 35 percent rise in home values in just 2 years was sustainable. If they took the time to ask "is this normal?" they would've seen that the long-term average rise in home values is more in the vicinity of 3 percent or so a year.

The same wishful thinking can get you in plenty of trouble with investing; chasing hot performers just because they're hot is how people end up losing lots of money. Base your financial decisions on what's rational and reasonable, not some beyond-the-norm hope (or prayer.)

• Bad things happen

Plan on it. From higher energy costs to an increase in your health plan's out-of-pocket costs, it seems like everything is a lot more expensive these days -- and your paycheck isn't much bigger at all.

Those rising bills are pushing a lot of families into financial ruin as they fall behind in payments or resort to running up expensive credit card bills. That's where an emergency cash fund would have saved the day. By having six to eight months of living expenses tucked away, you can deal with life's curveballs a lot easier.

• If you can't afford it today, it's just going to be worse tomorrow

When you use your credit card knowing you'll be unable to pay off the bill at the end of the month, you're making a decision that you can afford to pay the bill later. You can't. If you're lucky, the interest rate will be 7 percent; if you're just an average credit risk, you'll pay north of 10 percent. But if you're a financial mess, the rate is going to be more than 20 percent.

None of those make financial sense. If you won't be able to pay for the purchase when the credit card bill arrives, that's a sign you shouldn't be making the purchase. It really is that simple -- buy what you can afford today and your tomorrows will be that much more financially secure.

Parting Shots

If you need some reminders from time to time on how to act with financial responsibility, just tune into my CNBC show every Saturday night on CNBC. I'll still be dishing out advice on how to make sure you always do what's right instead of just doing what's easy.

Finally, always keep in mind: People first. Then money. Then things.

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323 Comments

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  • Cecelia - Thursday, February 26, 2009, 12:44PM ET  Report Abuse

    • Overall: 5/5

    Thanks , We have paied off our cards and only pay Cash. as a result I have more money in my pocket. Thanks again

  • Adrian - Thursday, January 22, 2009, 5:25PM ET  Report Abuse

    • Overall: 5/5

    Suze Orman is always provides a wealth of information about our finances. I wish she could be my personal finanace consultant. I know that she would tell me whats good for me even if its not what I want to hear.

  • peaceful - Wednesday, January 21, 2009, 11:29PM ET  Report Abuse

    • Overall: 5/5

    I am so thankful that there is someone out there that the public will listen to who seem to want to help women and their finances. She has helped me greatly. Those who gave Suzie Orman a bad rating is because they have no clue how money works, and/or don't want to know. Yes, I agree, cutting up the credit cards has been the best thing we ever did. If the money isn't there now, don't expect it to be there when the bill comes in. Something always comes up, need tires for your car, new washer since the old one quit, or someone gets sick, no paycheck to cover that credit card debt. And, why pay double for a vehicle, if you don't have money saved up for a car, don't buy it, fix the old one. Why make the banks richer? We should be putting that money in the savings account, at least make 1-4% interest, then when the car really dies, you have a back up, money saved for another used car. We personally got tired of worrying about that car payment every month, then we both got laid off from our jobs this year. Wow, the bank comes and gets the vehicle and you still have to pay for a dead horse. So, Suzie Orman is right, save your money, live within your means, eat more meals at home, saving your hard earned money makes a person feel like he/she is in control of their own financial stability while the rest of the world are still spending frivelously. Instead of eating steaks every night, eat cheaper meals and eat more fruits and vegetables, that means a person will be more healthy. Instead of paying for service, do it yourself, or ask a friend or family to help you and then in turn help them. This is so much more rewarding. And, if people would really understand the real meaning of life, love God and live for God, we are much more satisfied, don't need a bunch of junk. I would rather give my stuff to a needy person than keep it. Furthermore, I am totally mad that the Government wants to give out millions of dollars to those who already have millions, while the rest of us go hungry and have to pay MORE taxes so the rich can get richer. Just not right in my book. AND, those who are always on welfare expect to take my tax dollars and play around with it, instead of trying to support themselves and their families. I should NOT have to pay for deadbeats to have fun while I am busting my butt to pay my way in life. These tough times helps us get our lives back into perspective and see what is really important. Good luck with finding your own way of financial security. NOT in the stock market but in a savings account at 4% interest. Yes, there are companies out there, Primerica is one of them. There are others who also offer 4%, good luck. Save $25 per paycheck, you will be amazed. Try it, you'll be glad you did.

  • Yahoo! Finance User - Friday, January 16, 2009, 11:32PM ET  Report Abuse

    • Overall: 1/5

    Suze is another financial charlatan who made $6 million dollars last year. But, not in the financial markets, rather selling books etc. explaining how to do things she has never been able to do herself. As she is unable to make money in the markets, when she says don't take anyone's word, understand to not take her word. A great confidence person fooling others to fork their money over to her, she is a lightweight in knowledge, but not a lightweight in marketing herself. She has managed to fool many into buying her. But once put to the light of day one wonders how so many can still be fooled. She may be a good salesperson evidenced by her income, but this cow should be put out to pasture.

  • Yahoo! Finance User - Friday, January 9, 2009, 6:55PM ET  Report Abuse

    • Overall: 5/5

    I admit it - I'm one of the Suzi Fanantics. When you boil Suzi down to basics, its simple logic. It's good to have some out there who has preached the basics: Eliminate credit card debt; have an emergancy fund of 8-12 months; live within your current means; and be honest about your money. I was surprised myself when I started using a computer package to track my finances, how I was spending my money. I won't say I was being dishonest, but I was using a blind fold. I saw lots of ways I was spending without thinking and how my money wasn't going to my priority. I'm glad that Suzi's re-enforced the basics I was taught. I don't see how anyone can blame Suzi on losing money. On the stock market she has always been clear that money you need in 5-10 years does not belong in the market - it is too risky. She also warned about having credit card debt and buying houses outside you income. Thanks to Suzi for the reminder!

  • Rob J - Friday, January 9, 2009, 11:02AM ET  Report Abuse

    • Overall: 5/5

    I am shocked and sickened by the revelations in the investment community in 2008 and likely more to come in 2009. I will continue to remove my money from this venue and find legitimate ways to grow what’s left. This entire financial and monetary system is corrupt and must be blown up and reconfigured. Who is best equipped and qualified to oversee this process? Certainly not the government. How will the system ever recover? I can’t imagine how it can repair itself.

  • Taurus454 - Thursday, January 8, 2009, 1:11PM ET  Report Abuse

    • Overall: 1/5

    At least Suze and I have the same barber;~)

  • MattW - Tuesday, December 16, 2008, 5:35PM ET  Report Abuse

    • Overall: 5/5

    To Rick Cain: Hey, smartass, if living within your means is such an obvious concept, why are so many people in dire financial straits? Why does the average American family have more than 11K in credit card debt? Why is the country as a hole drowning in debt and running a record deficit? Get off your high horse and face the facts: MOST Americans are clueless about personal finances and need to completely re-think the way they handle their money. If Suze can help even one person change their financial futures with her insight, she's done well. Keep the articles coming, Suze!

  • alex - Monday, December 15, 2008, 6:07PM ET  Report Abuse

    • Overall: 1/5

    Ormon and her Sheeple do not really know tht the best investment for now and probably anotehr 2 decades will be pennies..they are already paying 10,000% returns at the Bank of Pen: tee hee hahhahahaha!: http://www.associatedcontent.com/article/656625/global_bond_market_collapses_amidst.html?cat=3

  • __A_YAHOO_USER__ - Wednesday, December 10, 2008, 7:39AM ET  Report Abuse

    • Overall: 1/5

    Ms. orman, and her rabid fanbase, is a wag and a scold who seem to desire only to lecture the most of us who do not make tens(or hundreds) of thousands a month on networking trickery about how we are somehow inferior or inheiretly less moral. About how easy it is to save massive amounts or pay off something twice as fast, when you're first concern is keeping a roof and where your next meal is coming from. I would say she is a con woman and a swindler but that could get me sued; so since I can't be vulgar in this forum, I'll settle for saying she's a pogue and a useless jerkette in an empty suit.

  • Stephen M - Tuesday, December 9, 2008, 7:05PM ET  Report Abuse

    • Overall: 5/5

    Good one, Suze. Too many people listened to Greenspan when they should have been listening to you.

  • frank s - Monday, December 8, 2008, 9:13AM ET  Report Abuse

    • Overall: 1/5

    Ms. orman, and her rabid fanbase, is a wag and a scold who seem to desire only to lecture the most of us who do not make tens(or hundreds) of thousands a month on networking trickery about how we are somehow inferior or inheiretly less moral. About how easy it is to save massive amounts or pay off something twice as fast, when you're first concern is keeping a roof and where your next meal is coming from. I would say she is a con woman and a swindler but that could get me sued; so since I can't be vulgar in this forum, I'll settle for saying she's a pogue and a useless jerkette in an empty suit.

  • DAVID - Tuesday, November 18, 2008, 10:21PM ET  Report Abuse

    • Overall: 3/5

    okay, but mostly people smoke away their money.

  • jay - Sunday, November 16, 2008, 2:29PM ET  Report Abuse

    • Overall: 5/5

    I work in the financial industry dealing with subprime deadbeats. My thoughts are if you are not disciplined enough to pay your bills on time or you spend excessively, then you deserve high interest rates because you are a higher risk to the lender. If you save money, pay your bills on time, live within your means, and invest (like I do) then you shouldn't have to bailout these deadbeat dummies who don't know how to read or pay their bills. I agree people who have had rough life events such as death, sickness or jobloss deserve a break, but the other subprime deadbeats (you know who you are) DO NOT. Lets face it, if your credit score is not above 700, then you are subprime and deserve what you get. Just remember subprimers your days of easy credit are over- back to the pawnshops and rent to owns for you.

  • Jeff B - Friday, November 14, 2008, 2:25PM ET  Report Abuse

    • Overall: 3/5

    Cutting up your credit cards is the first sign of financial responsibility. Nobody "needs" a credit card. Who cares if closing a card dings your credit score. If you pay cash for everything, you won't need to borrow money. Pay cash for a car and the only thing you need a credit score is a house. And how many houses do you buy? Not many. Give up the card and see how much more money you have. Orman never says that using a credit card will cause a person to spend 18% more. Is that worth it to get 3% back? Go ahead and put up the credit card and see if you spend less money. It works.

  • Yahoo! Finance User - Friday, October 31, 2008, 4:39PM ET  Report Abuse

    • Overall: 5/5

    My parents came here with no money and never used welfare or food stamps. Instead, they did something it appears very few have the common sense and discipline to do: they worked hard, lived within their means and saved money. As a result, they are well off. Their story isn't new or original. But I it appears it is lost on many who were born in this country and believe that they shouldn't have to work as hard or save as much. It's shocking to me. I never grew up thinking the government or anyone owed me anything. I was taught it was my responsibility to take care of myself.

  • spinaltap58 - Friday, October 31, 2008, 9:17AM ET  Report Abuse

    • Overall: 1/5

    What we have recently seein in the Market runup is a suckers rally. Most of the major players are still sitting on the sidelines waiting for a further retreat. Of course the stock market is forward looking but we are in for a double dip recession that could very well last for several years.The Dow will suffer steep losses again and we have not seen bottom

  • Yahoo! Finance User - Thursday, October 30, 2008, 3:56PM ET  Report Abuse

    • Overall: 5/5

    If 50% of this country which should have, had taken her advice, 90% of our problems would not have occurred. I'm betting most of her naysayers are down the tubes and trying to take her with them. As someone said, many won't take advice unless they hear it from a paid expert. I'm an expert skier, but I'm not paid, and my wife won't take suggestion #1 from me.

  • Debbie - Thursday, October 30, 2008, 11:40AM ET  Report Abuse

    • Overall: 5/5

    I am a tax preparer and in that capacity it amazes me how little the bulk of my clients know about money dynamics! This article is money 101 for the average American!! You guys who are criticizing should prepare income taxes for one tax season. You will be amazed. Of course, the average American tax payer isn't reading articles on Yahoo finance.

  • Yahoo! Finance User - Monday, October 27, 2008, 2:59PM ET  Report Abuse

    • Overall: 1/5

    Give me a break !!!

  • GabrielQ - Saturday, October 25, 2008, 9:50AM ET  Report Abuse

    • Overall: 4/5

    to rick, it is obvious, but look where the people who dont see the obvious have put our country. i agree with you, she doesnt do that much more than tell us what we know, but sometimes people need to be told that. i have plenty of people in my own life that i can tell them the best way to solve their problem, but it takes them 3 more opinions or 100 bucks to be told the same thing before they believe it. some people just dont wanna listen. i myself am about a year and a half from being debt free aside from my mortgage. i know the bad decisions i made to get where i am, but i am doing what it takes to clear them out and still live comfortably within my means. you just have to hope everyone else can and will get on the bandwagon too.

  • Yahoo! Finance User - Wednesday, October 22, 2008, 11:55AM ET  Report Abuse

    • Overall: 1/5

    Only in America can a person like Suze Orman make millions off folks by telling them the obvious. A friend of mine was excited about one of her seminars and told me that living within your means was a great idea. File this under DUH. I've never been in debt and I don't need Orman to tell me the obvious.

  • seema - Monday, October 20, 2008, 5:30PM ET  Report Abuse

    • Overall: 4/5

    testing

  • RedHeadRN - Friday, October 17, 2008, 9:43PM ET  Report Abuse

    • Overall: 5/5

    I often view the subsequent disaster that occured in the housing market as a algabraic equation: what you do to one side you must do to the other side to balance out the equation. What I mean is that many people lost their homes as a result of extreme risk taking. Freddie Mac and Fannie Mae and other lending institutions did the same. Why are we bailing them out and allowing so many people to lose their homes? They are predatory lenders looking for the fast buck and now that the "stuff" is hitting the fan they are crying for help...at the taxpayers expense. CEOs running off with multi million dollar severance packages while other people are struggling to get by and make that monthly mortgage payment or perhaps lost their home. I wanted to buy a home in 2003 but had too much credit card debt...my own fault. I was told by a real estate broker to pay the minimums on the credit cards and he would getme into a condo. I didn't have to give that proposal much thought and did not buy. I'm glad I didn't. Instead, I worked hard, spend less, and paid off that debt. I can now say that I am a first time home buyer with an excellent credit rating as a result of the more conventional route.

  • Yahoo! Finance User - Thursday, October 16, 2008, 9:57AM ET  Report Abuse

    • Overall: 5/5

    Dare our Politicians, D's & R's, remind their constituency of the need for personal responsibility? All of Washington should be required to attend Suze Orman seminars once a week until they begin to demonstrate and preach responsibility; financial and moral responsibility. Enjoy your show. JPS

  • Single mom with big dreams - Sunday, October 12, 2008, 4:09AM ET  Report Abuse

    • Overall: 5/5

    Enjoy a dip in the waters of metaphors. . . Suze's article is a refreshing kick-in-the-pants coaching approach for personal accountability. This is a call to individual management which can provide the thrust needed to strengthen our nation collectively. Suze isn't afraid to get in your face with festering issues that could have long since been remedied if we didn't live in such denial of the blatant causes of our problems. Suze offers education with the long-term goals in view sans the used-car-dealer-instant gratification-sugar-coating! (A little F.Y.I. you plaid-jacket-wearing wanna-be's, Sweetening the pooh with artificial sweetener doesn't make it tastier or healthier! ) Hats off to Suze's ability to call the waddling, quacking, web-footed creature the duck that it is! If birds of a feather flock together, let's hope our nation chooses to fly like the Eagle instead of follow the lead Dodo bird over the cliff!

  • Yahoo! Finance User - Friday, October 10, 2008, 3:08PM ET  Report Abuse

    • Overall: 1/5

    Thanks for everything Miss Worshiper of the "I Love Debt" score. I meant FICO score, sorry. ;-)

  • Rod - Thursday, October 9, 2008, 11:43PM ET  Report Abuse

    • Overall: 1/5

    Hey Suze, Thanks for the after the fact grasp of the obvious. You've flourished giving bad advice to uninformed people, but have done a great job of marketing yourself and lining your pockets. Won't miss your disingenous personality one bit !!!

  • hocus - Wednesday, October 8, 2008, 4:34PM ET  Report Abuse

    • Overall: 1/5

    1 star for the article, but 5 stars because you're leaving.

  • Yahoo! Finance User - Monday, October 6, 2008, 1:13PM ET  Report Abuse

    • Overall: 5/5

    First of all Suze, I am going to miss your column terribly. Hopefully you will write a column from time to time that I can use to suppliment what I learn from The Suze Orman show. Before I found your show and column I was financially clueless and had been searching for information on budgeting and money management for a long time. Just three years after I started following your advise I have a couple of years' worth of savings, a 401K (market fluctuations aside) and a Roth IRA account where I max out my contributions - I now have a plan in place to work towards an early retirement! As an added bonus, I now watch other CNBC shows because I fianally understand what they're saying - they're not talking over my head any more thanks to you. Thank you for the information you give us, it is priceless and it empowers me (a woman) to understand my relationship to money better. I have now taken charge and responsibility over my money - and my life! I appreciate you. S.

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