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Suze Orman Money Matters

Suze Orman, Money Matters

A December Spending Survival Guide

by Suze Orman

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Posted on Friday, November 30, 2007, 12:00AM

This is the month of living dangerously when it comes to spending. No matter how disciplined we may have been during the rest of the year, somehow when December rolls around it's hard to resist the temptation to spend at any cost.

But while doing so might make for a festive holiday season, the hangover is hellacious come January, when you realize the steep price you pay for your December forays into bad personal finance.

Blowing a Bonus Bounty

It amazes me how often I hear people gleefully report how they intend to spend their holiday bonus. It's rare when someone mentions how they intend to save and invest it instead.

A bonus should be approached as valuable compensation, not some funny-money lottery bonanza to blow on a spending whim. It's irrelevant what the size of your bonus is -- your first inclination whether you get $500, $5,000, or $50,000 should be how you can use the money to build a more secure financial future.

Don't tell me you deserve to treat yourself to a shopping or vacation spree with your windfall. What you and your family really deserve -- and need -- isn't a beach vacation in February that no one will remember by April, but the security of knowing that you've taken care of all of your important long-term financial needs.

Here are my top five uses for this year's bonus:

1. Pay off high-interest-rate credit card debt.

Sound obvious? Please. Anyone willing to carry an unpaid balance that charges 18 percent interest is the sort of in-the-moment indulger apt to spend a bonus.

If you use your bonus to pay off your balance instead, you get an immediate 18 percent return on your investment. Given how the markets are struggling right now, that could very well be your best investment opportunity for 2008.

2. Fund a Roth IRA.

If you get your bonus before the year ends, you can spend $4,000 funding a 2007 IRA and then wait for the calendar to flip to Jan. 1 and fund your 2008 IRA. (Note that the limit rises to $5,000 in 2008.) Tuck that $9,000 away for the next 20 years and you'll have more than $43,000 in tax-free money waiting for you in retirement, assuming your money compounds at an annualized 8 percent rate.

If you're over 50, take advantage of the catch-up provision that allows you to invest an extra $1,000 a year in a Roth. (That means a $5,000 max for 2007 and $6,000 in 2008.)

3. Create an emergency stash.

Bankrate.com reported last year that less than 40 percent of people surveyed had an emergency fund that could cover at least three months of living expenses. As far as I'm concerned, three months isn't nearly enough protection; ideally, you should eventually build up a cash cushion equal to at least six months or more of living expenses.

The what-ifs of life just keep getting more expensive, from job uncertainty to helping aging parents deal with their living costs to coping with the high out-of-pocket expenses if you become ill. And if your current savings account doesn't earn at least 4 percent, you need to shop for a better deal. Right now, EmigrantDirect offers an account yielding 4.75 percent and HSBC has a 4.5 percent payout.

4. Build a mortgage adjustment stash.

If your mortgage is scheduled to reset in the next year or two, and your current plan is to hope that you'll be able to refinance or sell when the adjustment time nears, you're flirting with disaster. Look how well that plan has worked out for all the homeowners caught in the foreclosure trap.

If I were you, I'd take my entire bonus and hide it in a separate savings account right now. That way, you'll have cash ready to pay the higher mortgage if in fact you aren't able to refinance or sell.

5. Buy more insurance coverage.

As I explained in my last column, many people unknowingly count on homeowner's insurance policies that are woefully inadequate. In the event that you suffer a major loss, you could find yourself needing tens of thousands of dollars to cover the difference between what your policy will cover and what it will take to repair or rebuild your home.

Think back to when you first bought your insurance policy. Did you opt for the least expensive options as a way to save some money? Did you want to shave a few hundred dollars a year off your premium, even if it meant not fully protecting an investment worth $200,000, $300,000, or more? That's financial Russian roulette. Get on the phone with your insurance agent right now and upgrade your policy. Details about the right coverage you need are in my previous article.

If you have all of the above under control, and you're on pace with retirement and college funding, then by all means treat yourself to some bonus spending.

Gift-Buying Gaffes

Holiday spending is expected to slow this year; according to the National Retail Federation, the increase in spending will be just 3.7 percent, or about half the increase of last year. Still, the bottom line is that consumers, on average, intend to spend more this year than last. The average holiday outlay is expected to be $925 per person -- no small sum no matter how much you earn.

Here are a few things to keep in mind before you get into gift-buying mode:

1. Make a list. Seem silly? Well, the surest way to stay on track is to stick to a plan; that way you won't be seduced by all the strategically placed come-ons at the mall, or the teases on the checkout page when shopping online.

2. Leave your credit cards at home and use cash at the mall. Go to the ATM once before you head to the stores; when you run through that money, you're done. No ifs, ands, or buts. I guarantee that when its time to pay the bills in January you'll be thrilled that you didn't go card-crazy in December.

3. Speaking of which, don't open a store credit account no matter how emphatic the cashier is at the checkout counter. Those tend to be the absolute worst credit card deals, with rates on unpaid balances typically at 20 percent or more.

4. Finally, if you're shopping for consumer electronics, it usually doesn't make economic sense to pay for an extended warranty. Even when a gadget needs repairs, you'll usually come out ahead paying out of pocket rather than spending the money for a hefty warranty.

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83 Comments

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  • Yahoo! Finance User - Friday, December 7, 2007, 1:28AM ET  Report Abuse

    • Overall: 1/5

    Are you still telling people to invest all of thier money in the S&P 500 index like you were in 1998 and 1999. By the way the index was down over 40% from 2000 to 2003. That was great advice.

  • Justin - Thursday, December 6, 2007, 11:19AM ET  Report Abuse

    • Overall: 5/5

    Yes, this is basic finance 101. Unfortunately, there are so many people who either don't understand these basic concepts or choose not to. It's nice to have someone like Suze drill into these knuckleheads to actually start saving rather than going into tremendous debt. Think about it: if people were smarter about personal finances, they wouldn't have purchased homes they can't afford with ridiculous adjustable rate mortgages. Listen to what Suze says! For example, if the only way you can afford a car is by purchasing with a lease, then you can't afford it. If everyone followed Suze's advice, we wouldn't be in the subprime mortgage mess.

  • Simo - Wednesday, December 5, 2007, 5:27PM ET  Report Abuse

    • Overall: 3/5

    Like others have said this is basic finance info. However, don't knock it either because if it were that easy we wouldn't be in this mess to begin with. Use the advice wisely. This isn't the quick method, but if you live by it you should have financial independence.

  • anita - Wednesday, December 5, 2007, 3:10PM ET  Report Abuse

    • Overall: 5/5

    I think this can be very useful for younger adults, such as myself, who are finding out on their own about budgeting and living completely on your own. Anyone else in their early 20's can probably appreciate this a little more, but I'd assume for people who are more settled with their homes and family that this is old news.

  • Daniel - Wednesday, December 5, 2007, 2:36PM ET  Report Abuse

    • Overall: 1/5

    This is basic finances 101 that all should be living by. Although this could be a useful reminder for those who cannot manage their own money or decisions.

  • Tamara - Wednesday, December 5, 2007, 2:29PM ET  Report Abuse

    • Overall: 4/5

    Great refresher for those of us who tend to revert back to old ways by over spending during the month of December.

  • Sweet Tomato - Wednesday, December 5, 2007, 10:19AM ET  Report Abuse

    • Overall: 5/5

    I'm glad Suze reminds us to leave the credit cards at home. If you are disciplined and stick to a budget and pay your card off every month, that's great. Most people are carrying a balance and figure that if their credit card can cover it, they can just go ahead and grab it. Suze reminds us to set limits and stay within our means.

  • DavidD - Wednesday, December 5, 2007, 9:58AM ET  Report Abuse

    • Overall: 1/5

    This is typical Suze advice that appeals only to people who are in over their heads in debt and not doing basic finance 101. Thanks for nothing Suze!

  • R. - Wednesday, December 5, 2007, 8:12AM ET  Report Abuse

    • Overall: 5/5

    I would like to see Ms Orman regularly on Yahoo.com finance. She is terrific.

  • Yahoo! Finance User - Wednesday, December 5, 2007, 7:09AM ET  Report Abuse

    • Overall: 1/5

    DH got his bonus yesterday, low five figures, so I thought, this would be a great article to read altho we'd roughly decided how to divvey it up already. This article was useless, beyond obvious. Pay off your bills. Wow. That's not exactly seminal. We have no debt other than a mortgage (we live well below our means), zero balances on cc's, cars paid for and we're 20-25 years from retirement. How annoying; if you're poor or indebted, pay your bills off first. Duh. There's no guidance for people who already have and who have gotten a windfall on top of it. Although, he does get one every year, we just don't know how much, exactly (always increases). In case anyone wonders, the whole bonus is going to charity. Habitat for Humanity, Nature Conservancy and Save the Children. I think we're also going to buy some goats, calves for that 'heifer project' don't remember the name.

  • Darci - Wednesday, December 5, 2007, 1:18AM ET  Report Abuse

    • Overall: 5/5

    This advice is very sound and is exactly what I have heard many financial advisors and companies say to do. It just doesn't make sense to blow it all at one sitting. Believe me, I KNOW!!!!! We have been some of those that did. I wish that we had put more back because when the financial crisis hits and you don't have backup. It is like being broadsided by a semi and it takes so long to dig back out. Especially, when a person was just about to pay off the last of the credit card debt and then some crisis happens. We don't ask for them, they just happen and they can be both good and bad. We had two babies in less than two years. I didn't take into account the added expenses of diapers. We are paying for my mistakes now. But we have already started paying things off again(high interest CC) and we are taking the above advice to pay off and put into savings. IT IS IMPORTANT!!!! Stick to these suggestions and other wise suggestions like this and you can come out better than blowing it all at one sitting or even a few stores. You will feel much better in the long run. Stick to and you can do it!

  • Yahoo! Finance User - Wednesday, December 5, 2007, 1:14AM ET  Report Abuse

    • Overall: 1/5

    I don't understand why the so called "experts" always ask people not to use credit card in the Mall. I always use credit card and I always pay off the credit card bill. The advantage of using a credit card is that: #1: safe: you don't need to risk being robbed when you carry a lot of cash. #2: you get a lot of incentives when you use a credit card, such as cash back bonus, incentive points, etc. Every year, I get thousands of dollars worth of gift cards coming from my credit card companies' cash back bonus. If I didn't use those cards, I wouldn't have been able to get so much free gift cards for the holiday shopping spree.

  • Yahoo! Finance User - Wednesday, December 5, 2007, 1:08AM ET  Report Abuse

    • Overall: 1/5

    How many times is this article going to be recycled? Is this any different from any of Suze's other advice? How uninspiring.

  • Yahoo! Finance User - Wednesday, December 5, 2007, 1:03AM ET  Report Abuse

    • Overall: 5/5

    Good advice no matter how much or little of a bonus you get. Pay yourself first.

  • Gloria - Wednesday, December 5, 2007, 12:53AM ET  Report Abuse

    • Overall: 2/5

    wanted to put five stars but it would not let me.. love this kine of stuff

  • Yahoo! Finance User - Wednesday, December 5, 2007, 12:44AM ET  Report Abuse

    • Overall: 5/5

    She is always right. I have used her advice for years now, and am financially sound and able to retire when I want. I just love her!!!

  • Yahoo! Finance User - Tuesday, December 4, 2007, 11:59PM ET  Report Abuse

    • Overall: 4/5

    Can't argue with these sound tips from Suzy O., who in my opinion often gives a lot of dumb ones (i.e. asked on some talk show what 5 biggest mistakes people make with their money, she listed not getting gap insurance for new cars... I suppose it's possible that you total your brand new car within 3 months of driving it off the lot, but c'mon Suzie... that ever really happen to anyone you know?)

  • TerriK - Tuesday, December 4, 2007, 11:52PM ET  Report Abuse

    • Overall: 2/5

    This is what gripes me: when they say things like, "you can spend $4,000 funding a 2007 IRA and then wait for the calendar to flip to Jan. 1 and fund your 2008 IRA. (Note that the limit rises to $5,000 in 2008.)" What about those of us living paycheck to paycheck and don't HAVE $4,000 now and $5,000 in 2008?!!! Be realistic, for crying out loud!

  • Yahoo! Finance User - Tuesday, December 4, 2007, 11:36PM ET  Report Abuse

    • Overall: 3/5

    For those of you reading this that think it is too basic, stupid, low-level, etc., instead of being critical, be thankful that you have been blessed with enough to have 6 months extra in the bank, etc. For those of us who don't, it doesn't mean we don't know this stuff, but sometimes bad things happen to good people and I know a LOT of them right now. We aren't getting any Christmas bonuses, can't afford to pay off the credit cards, can't re-finance that ARM because of credit scores and I know what some of you are thinking . . . dumb people that get themselves in those situations deserve what they get. After a year from hell, I can actually say, I really understand the other side of the coin now. I've been there with all you know it all's! I have an MBA too . . .so what.

  • B - Tuesday, December 4, 2007, 11:36PM ET  Report Abuse

    • Overall: 4/5

    Even if it is last year's article, who cares? We obviously didn't pay enough attention last year or she wouldn't be saying again this year. And yes, expect the same article next year.....We need the reminders.

  • Yahoo! Finance User - Tuesday, December 4, 2007, 11:34PM ET  Report Abuse

    • Overall: 2/5

    What about those of us who only make 30,000 with a $96. bonus. I never see advise for those of us who can barely pay our bills each month...

  • Yahoo! Finance User - Tuesday, December 4, 2007, 11:32PM ET  Report Abuse

    • Overall: 4/5

    This may be basic for some, but some people are basically lost financially out there. More than you money savvy people may think or know. Can I have an inner circle with some of you guys knowledge? It's a lot of things like the school system misinforming and never education a student to be a savvy consumer. I never heard anything regarding money and money management EVER in all my public schools from Kindergarten through High School. Never!

  • wiseacre - Tuesday, December 4, 2007, 11:30PM ET  Report Abuse

    • Overall: 4/5

    sounds good to me

  • Alexander - Tuesday, December 4, 2007, 11:28PM ET  Report Abuse

    • Overall: 5/5

    Best advice I've hear in a while. Leave the credit cards @ home, and only use cash . . . what a novel idea!

  • Jack - Tuesday, December 4, 2007, 11:17PM ET  Report Abuse

    • Overall: 5/5

    It maybe old news to those of who are already following this advice; but the average Consumer hasn't a clue or a care until it is too late.

  • Jeff F - Tuesday, December 4, 2007, 4:59PM ET  Report Abuse

    • Overall: 2/5

    Anything new here? No? Ok, didn't think so. Might as well copy/paste from last year.....

  • SidneyB - Monday, December 3, 2007, 10:55PM ET  Report Abuse

    • Overall: 5/5

    Excellent practical home truths. The global economic circumstance is clearly signalling for cautious personal spending. Tip: Pay off your credit card in full every month as people in many other countries do. (Required by banks in Japan as part of the deal when they 'allow' one to have a credit card; the 'tough love' approach to taming the consumer tiger)

  • Yahoo! Finance User - Monday, December 3, 2007, 9:43PM ET  Report Abuse

    • Overall: 3/5

    For those having trouble arriving at the $43,000 after 20 years, just take $9,000 (the IRA deduction for 2007 & 2008 which can be invested at one time but deducted over the two years) times 1.08 twenty times. Keep multiplying the result by 1.08...People who feel getting a store card gives them extra coupons need to determine if they are really saving. If they otherwise would not have spent the money if they didn't have the coupon, then they are not really saving money at all. Maybe this advice isn't so dumb after all.

  • Douglas - Monday, December 3, 2007, 8:10PM ET  Report Abuse

    • Overall: 4/5

    Sensible advice ... too bad the only people who will read it are the ones already concerned about their finances.

  • Khana - Monday, December 3, 2007, 5:30PM ET  Report Abuse

    • Overall: 5/5

    Excellent, insighful, and useful as usual!!!

Showing comments 6-35 of 83<< PreviousNext >>
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