Suze Orman Money Matters

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.