Suze Orman Money Matters

This is the perfect time of year for me to share my best investing advice.

I know that January is the month when you want to follow through on all sorts of resolutions. This year, you're determined to do a fabulous job of making more money and making more of the money you make. No excuses -- you're going to be on top of it all this year. Right?

Time Is of the Essence

Here, then, is my hottest investment tip to help you turn your resolutions into financial reality: Making more of your money is a matter of time. Focus on the time element and you'll come out ahead no matter what specific investment you make.

Let me explain.

In just about every facet of your financial life, time can either work for you or against you. But the time factor is often overlooked, and it costs you a ton. Here's how:

• Mortgaging your future

When it came to choosing your mortgage, you probably spent a fair amount of time deciding whether to go with a fixed rate, a hybrid, or an ARM. But I'll bet you didn't even think about the length of the mortgage.

It's pretty much a reflexive move that we always opt for a 30-year mortgage. For my money, if you know you're going to be staying in that home for at least the next 10 years, a 15-year mortgage is the smartest move if you can handle the higher payments.

First, the interest rate on a 15-year fixed rate mortgage is typically about a half a percentage point below a 30-year fixed. Right off the bat, then, you have a better deal. But the real payoff is that you'll pay so much less in interest payments over the life of the loan.

On a $200,000, 15-year fixed-rate mortgage at 5.5 percent, the total interest payments are about $94,000, compared to more than $231,000 on a 30-year fixed-rate at 6 percent. Clearly, the time you take to pay off your mortgage has a huge financial cost.

Obviously, the 15-year loan also requires a higher monthly payment ($1,634 versus $1,200 in the example above). If that's not doable, then at least try to send in an extra payment or two a year on your 30-year mortgage. Just one extra payment a year will shave 5 years off your mortgage, which is going to save you plenty of interest.

• Retirement procrastination

Wait until you are 45 or 50 to get serious about saving for retirement and you're going to have a tough time of it. Consider that someone who starts socking away $300 a month at age 45, and earns an average annual return of 8 percent, will have about $178,000 at the age of 65. But if you start saving at 25, you'll have $1,054,000.

Yes, it's true you invest more of your own money ($144,000 versus $72,000) when you start saving at the age of 25, but look at the payoff: you end up with about $875,000 more because you played the time card so well.

• The credit card trap

If you have an unpaid credit card balance, your credit card company is going to try to take financial advantage of you. The minimum payment due on your statement is a time trap: it's calculated as a percentage of your outstanding balance, and typically ranges between 1 and 3 percent.

Each month, your minimum payment is recalculated to meet the minimum percentage due. Let's say you pay 18 percent interest on a $5,000 balance, and your minimum payment due is 3 percent of your balance. The first month, your minimum payment is $150. But the next month it will be slightly less because it's recalculated at 3 percent of your new balance.

By constantly recalculating your minimum payment each month at 3 percent, the card issuer lulls you into a long payback period. In the example above, it'll take you more than 16 years to get the balance paid off; during that time, you'll end up paying nearly $4,800 in interest.

If, on the other hand, you choose to ignore the minimum payment listed on your statement each month and continue to pay a flat $150 each month, you‘ll have the debt paid off in less than four years.

Doing the Math

I often see investors unwilling to put the time into thinking through their investment options, and that's quite a costly mistake. To illustrate this, pick the offer below that seems better:

1. I'll give you $1,000 a day for 30 days.
   
   
2. I'll give you a penny on day one and then double your money every day for the rest of the 30-day month.

Many of you chose the second option because you believe this could be a trick question, and that seems like the less intuitive answer. But if you were honest, your initial reaction was that the first option is a lot better.

The first option plays on our impatience, because it takes no time at all to do the math on it: You'll have $30,000 at the end of the month. The second option doesn't seem so great at first glance, plus it takes time to do the math. But it'd be time well spent: Choose the second option and you'd have more than $5 million at the end of a 30-day month.

Timely Advice

The crucial lesson of this quiz is that instant gratification isn't the key to financial success. Easy isn't necessarily right. Investing on the basis of what you hear the gang talking about at work or at a dinner party is easy. Investing on the basis of doing your own research so that you know what you're doing with your money is right.

It's equally foolhardy to assume that small amounts don't matter. We find it so easy to throw away "small" amounts of money on things we don't need, because we don't value a few dollars here or there. But I bet if you add up all the small ways you spend money you'll see that you're throwing away $50 a month (and probably a whole lot more). If you managed to save that $50 a month for 20 years, you'd have nearly $30,000 saved up.

Acting impulsively with money ends up being doubly costly. It often means you don't give your money the time it needs to work for you, and there's no more important investing rule than using the power of compounding -- putting money away and letting it grow over many years -- to help you reach your financial goals. The impulsive urge to go for the quick solution -- jumping at $1,000 a day, for instance, rather than the doubling penny -- undercuts you in the long term.

Financial success requires taking the time to weigh your options. And whether it's your IRA or your mortgage, it pays to make sure that time is always working for you, not against you.