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Suze Orman Money Matters

Suze Orman, Money Matters

Stash It, Don't Cash It

by Suze Orman

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Posted on Friday, February 8, 2008, 12:00AM

By now you've heard that the latest economic stimulus package has passed both houses of Congress, and was signed by President Bush this week. If you're in line to get a sizable rebate check in the mail this spring, think twice about doing what the government wants you to do with it.

Stimulating Savings

That's because if you're planning to use your Washington mini-windfall at the mall or a car dealership, you're playing into the government's theory that your spending will stimulate the economy and all will be well. Or at least all will be better.

I don't agree with that approach on any level. The economy isn't floundering because we aren't spending enough; it's floundering because we're spending too much, largely on credit. So do the opposite of what the government is hoping for -- it's far more important for people to boost their savings, not their spending.

Help Yourself First

You read that correctly. The rebate you're about to get should be saved, not spent. It should be used to pay down debt and build up an emergency savings account. What you need to focus on is not what your government wants you to do for the national economy, but what you can do for your personal financial security. Help yourself first.

Does that seem unpatriotic? Please. If you listen to Washington and spend the rebate, and we still slide into a recession and you get laid off, don't count on extended unemployment benefits to help you weather the storm -- that provision didn't make it into the stimulus package, despite Senate Democrats' efforts to include it in an extended bill. You get my point: What Washington wants you to do for the economy isn't necessarily the best thing for your personal security.

The better move is to use your rebate to build your finances. If you've got credit card debt, this is your chance to put a big dent into that unpaid balance. Right now, the stock market is taking us all on a roller coaster ride, but if you pay off a credit card balance that's charging you 18 percent interest you give yourself a guaranteed 18 percent return on your money. Even when stocks are on a bull run, it's hard to get that kind of a return.

Sock It Away

Next up is an emergency cash fund. Seriously, if you haven't paid attention to this advice in the past, pay attention now. A weak economy and a volatile stock market make it all the more important to have some money socked away in a risk-free account.

Of course, with the Fed's 75-basis-point haircut, interest rates on savings accounts are slipping. At the same time, however, banks are so starved for deposits that they're doing all they can to offer strong rates.

If you're convinced rates are going to be coming down even more, consider putting a portion of your savings in a 6- or 12-month CD. You can still find rates north of 4 percent if you act now. Shop for the best deals here.

Make It Work

If you already have an emergency cash fund in place and you don't have credit card debt, you still shouldn't spend the rebate. Invest it for the long term and you can easily increase the value of your rebate five-fold.

For instance, say you're married and have three children; if you meet the income cutoffs, you could be in line for a $2,100 rebate according to the stimulus plan. Invest that $2,100 in a Roth IRA and in 35 years it'll be worth about $34,000, assuming an annualized average 8 percent return.

Is blowing $2,100 today on a plasma-screen TV or a long weekend at Disney World worth the opportunity to add about $34,000 of tax-free money to your retirement stash? I don't think so.

A Jumbo Change

The big news in Washington's stimulus package is that it will sharply increase the dollar limits for what qualifies as a conventional mortgage and what gets tagged as a "jumbo" mortgage.

Right now, mortgages for more than $417,000 are considered to be jumbo loans. The major government agencies that "guarantee" mortgages aren't allowed to touch loans over this threshold. That's had a chilling affect on for mortgages amid the subprime fallout; banks are finding it hard if not impossible to find anyone willing to buy jumbo mortgages in the secondary market. To get investors willing to bite, lenders have raised the rates on jumbos about 1 percentage point above the going rate for a conforming (less-than $417,000) loan. Right now, the national average for a jumbo 30-year fixed-rate is about 6.5 percent, compared to 5.4 percent for a conforming loan.

But jumbos are about to get a lot cheaper: Washington's package includes raising the amounts that qualify as conforming, non-jumbo loans. Fannie Mae and Freddie Mac could see their loan limits for 2008 raised to a maximum of $729,750 in high-cost metro areas; FHA-backed loan limits up to that limit would be permanent. Once the stimulus bill is in effect, plenty of people paying an expensive jumbo will be able to refinance at a lower rate.

But just because you can get a lower rate doesn't mean it'll automatically save you money in the long term.

Refi Rumples

Let me explain. A $600,000, 30-year jumbo mortgage taken out a year ago at 6.4 percent costs $3,753 a month. Let's assume that once the new loan limits kicks in, it can be refinanced into a 5.4 percent mortgage. The monthly tab would be just $3,370, or a monthly difference of $383. That's an annual savings of more than $4,596.

What people never seem to focus on is what will it cost to refinance. First, there's the fact that you may be hit with fees that can easily add up to 2 percent or more of your mortgage amount; even if those costs are rolled into a new mortgage, you're still paying for it -- and paying interest on it, too.

So before you rush to refinance, slow down and think through your plans. If you intend to stay put in the house for a few years, the cost of the refi will eventually be offset by your monthly savings. Use this calculator to find out how long you need to stay in your house for the monthly savings of a refi to offset what you pay in fees. And carefully read the fine print in your existing mortgage to find out if you're going to be hit with a prepayment penalty -- these fees became all too popular during the housing mania. If you're stuck with a prepayment penalty, add the cost of it into your calculation.

Timing Is Everything

The other big refi mistake people make is refinancing into a new 30-year mortgage even though they're already 5, 10, or 20 years into paying off their existing mortgage. Even though you're paying a lower interest rate on the refi, there's a good chance your total interest payments from what you've already paid on the existing loan and what you'll pay on the refi loan will add up to a lot more than if you just stuck with the original mortgage.

Aim to refinance into a mortgage term that will keep your total payment period to 30 years or less. For example, if you've paid off 5 years of your existing mortgage, try to refinance into a 25-year mortgage, not a 30-year one. You can run the numbers using this calculator.

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245 Comments

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  • marco - Sunday, February 17, 2008, 9:11AM ET  Report Abuse

    • Overall: 5/5

    miss orman is truly the best when it comes to financial advice

  • Yahoo! Finance User - Sunday, February 17, 2008, 9:10AM ET  Report Abuse

    • Overall: 5/5

    Suze is a very smart lady. I wish I knew how to turn our financial mess around. I hope everyone listens to her. It would be so great if people could see what Washington is trying to do. The sad part is probably not enough people will hear about Suze's recommendation and things won't happen that way. But it would be so great if EVERY person took Suze's advice and stashed it away or at least paid a bill with it.

  • Mo - Sunday, February 17, 2008, 8:11AM ET  Report Abuse

    • Overall: 5/5

    I think the author's assumptions about people in general are valid: a large number of Americans are going to go out and spend their rebate on a big-ticket item or vacation. Why? Because that's the fun choice, and hey, it says on TV that we're helping the economy to boot. Young people are not always thinking ahead to retirement (it's too far away!) and lesser-educated individuals who are used to living paycheck to paycheck are not in the savings and investment mindset. I like Suze because she speaks to every person, not just those who already know what to do with their money.

  • Jacqueline L - Sunday, February 17, 2008, 7:20AM ET  Report Abuse

    • Overall: 4/5

    Suzy speaks in word we can all understand. She also speaks as one who is not making money off us while doing so. That makes HER a lot more believable~

  • Good Guy - Saturday, February 16, 2008, 9:53PM ET  Report Abuse

    • Overall: 5/5

    Suze's cute and she's SMART! Follow her advice and you'll be thanking her many times over in the long run. She speaks COMMON SENSE. (That's something I'm always seeking from anyone's advice.)

  • Debra - Saturday, February 16, 2008, 9:43PM ET  Report Abuse

    • Overall: 4/5

    Thought the article was good. Touched on the basic points. Plan to save by rebate. I am refinancing my house because I am going from a 30 year mortgage to a 15 year mortgage and from a 6.25 percent interest rate to a 5.125% interest rate. Think the saving will outweigh the costs. Could also pay my house off but then would have no deductions.

  • Yahoo! Finance User - Saturday, February 16, 2008, 7:07PM ET  Report Abuse

    • Overall: 5/5

    I WAS GOING TO REFINANCE BUT NOT NOW THINK YOU AND YES THE MONEY WILL BE A CASH FUND ACCOUNT

  • scott - Friday, February 15, 2008, 10:04AM ET  Report Abuse

    • Overall: 1/5

    Basically the advice is - if you can afford to save the money, save it. Does anybody need an "expert" to tell them this? Also, consider the author's assumptions about people, that if left to their own devices, they will just blow the money at Disneyland. In addition, everyone considering mortgage refinancing must be aware of what's going on, unless they are living on Pluto, so Orman's advice here ("be careful") is equally less than "expert." So don't blow your refund check. Put it in the bank. Isn't that what your mom would say? It's not BAD advice, but calling her an "expert" is a stretch, no? What's next on Orman's list for "expert" advice? Put your change in a big jar? And she gets richer by the minute...

  • Yahoo! Finance User - Friday, February 15, 2008, 10:00AM ET  Report Abuse

    • Overall: 5/5

    I always enjoy reading articles from Suze. I find myself taking her advice and my financial world and mind set has completely changed. I feel so much better about my future and my children's future.

  • John - Friday, February 15, 2008, 9:09AM ET  Report Abuse

    • Overall: 4/5

    If I don't pay off bills, I will buy Chinese stocks with it. CHDX or CHNR look good.

  • LeoR - Friday, February 15, 2008, 8:06AM ET  Report Abuse

    • Overall: 4/5

    The main point is still missed: ALL CURRENT ECONOMICAL PROBLEMS ARE NOT TEMPORARY OR ACCIDENTAL - THEY INDICATE THE SHORTCOMINGS OF GREEDY CAPITALISM GONE WILD. Depressions, recessions, etc. will repeat at increasing pace and frequency until the entire system collapses, and don't think that it's your grandchildren that are doomed to eat the bullet - it's us! Graceful way out? Too late.

  • Yahoo! Finance User - Thursday, February 14, 2008, 9:53PM ET  Report Abuse

    • Overall: 4/5

    Great advice and it really takes some guts for her to actually say it how it is.

  • Yahoo! Finance User - Thursday, February 14, 2008, 4:47PM ET  Report Abuse

    • Overall: 4/5

    Good article to point out to the problem to us material hungry Americans. People in this country are complaining about banks preditory lending or having to pay interest on mortgage loans and high credit card rates. Guess what, their is a cost for having the nice things we "need" to have. You want a nice house, you pay a higher monthly mortgage. Just because you can get that house, doesn't mean you should. Nobody pulled your arm and made you have an interest only loan that your shortsightedness did not allow you to see an increase in the payment in a few years (which was disclosed to you at the time of application). America needs to change and in order to be smarter with money and not rely on the goverment to bail us out of our own greed and stupidity. Yeah, the government that we complain about! Sock it away.

  • Yahoo! Finance User - Thursday, February 14, 2008, 4:20PM ET  Report Abuse

    • Overall: 1/5

    I'll use my check to short the market (GS SPY, ETFs) as DJ goes to 11500, then buy china stock, God, I love this country.

  • Art - Thursday, February 14, 2008, 3:06PM ET  Report Abuse

    • Overall: 4/5

    Suzi, and everyone else, is offering the re recipient of the rebate check three options: 1) spend it on consumer goods, 2) pay down debt, or 3) invest in an IRA or other savings vehicle. How about a fourth option? I will be using my federal tax rebate to pay my County tax bill. Ya gotta love this country - one branch of government gives a little hand-out, while another branch is waiting to grab it.

  • mic - Thursday, February 14, 2008, 2:17PM ET  Report Abuse

    • Overall: 4/5

    I agree 100%. I'm only expecting about 600-1000$$$ - I'm dropping it right into my Roth for 2008. If it isn't enuf to open a Roth, than I'll open an ing high yield savings, cont. to deposit til it is. I intend to gladly! sacrifice today for "my" tomorrow! My 32" cable ready still has a great picture.

  • Yahoo! Finance User - Thursday, February 14, 2008, 1:12PM ET  Report Abuse

    • Overall: 1/5

    You call this advice? This material might make it in a 9th grade finance course but that's it. Of course most of the people that read this crap are teens. lol. Suze, you are a self-proclaimed expert but you are a joke. I could easily make you look even more like the clown that you are. Suze, you should tell your readers that you employ a staff of writers to submit ideas and write for you. All you are is some cheesy marketing machine. Only fools do not realize this - people with no money anyway.

  • Jojo - Thursday, February 14, 2008, 12:01PM ET  Report Abuse

    • Overall: 5/5

    So true, so true. For decades, banks have been pulling in cash based on predatory interest rates, over sized fees, and loose lending. Americans have spent all of their extra money in interest, and now there is nothing left for the banks to take, and they're panicking. The best thing we can do as a nation is to inidividually get our financial houses in order.

  • Betty Big O little o - Thursday, February 14, 2008, 2:15AM ET  Report Abuse

    • Overall: 5/5

    So help me I cannot understand this at all,The goverment has talked about the Social Security running out by such and such year and thing are looking so bad ,I am no expert but it doesn't take one to figure out what we are facing here.So if we are going broke how in the world can they give out rebates and encourage people to spend I will save my rebate,wonder if we will get another one .Ha! Ha!

  • Yahoo! Finance User - Wednesday, February 13, 2008, 11:28PM ET  Report Abuse

    • Overall: 5/5

    Sounds to me like most of the people posting here have sure helped create this crisis. I think you need to READ Suzie's article AGAIN -- might be your last chance to save your homes, family, job, health and possibly your life! Take it from someone who's career was cut waaaay too short due to a health crisis. Better save for today so you WILL have a future!!

  • Sherwin Clarence - Wednesday, February 13, 2008, 9:32PM ET  Report Abuse

    • Overall: 5/5

    Very good advice! The government and some people will tell you to spend it to save the economy. We are not even sure if it will really save the economy but one thins is for sure. You better save yourself first than save the economy because no one will care for you more than yourself.

  • Yahoo! Finance User - Wednesday, February 13, 2008, 5:41PM ET  Report Abuse

    • Overall: 2/5

    Spending your rebate in family activities. That will be worth a million today and tomorrow. Understand that the rebate is not about stimulating the economy but to shot up our mouths and not to blame the goverment for this recession. They are just giving us a taste of milk with their fingers to keep us under control.

  • Randall - Wednesday, February 13, 2008, 5:35PM ET  Report Abuse

    • Overall: 4/5

    Not much to argue with here, besides the fact that as good Americans we should always do the very opposite of what government tells us to do just to show them at least who should be in charge. Spending versus saving is a tough question to answer logically. It is an area of compromise. I'm a saver, my wife's a spender, but what good is it to save, save, save when you are dead, laid up, or when your kids conistently have nothing to do. Its a tough one.

  • Chris - Wednesday, February 13, 2008, 4:11PM ET  Report Abuse

    • Overall: 1/5

    It is amazing the financial myths that Suze teaches. It's good that she teaches people how to gamble by using hypothetical calculations but will take 30-40 years to confirm. By that time, she probably will not be alive to account for the limiting advice she gives. If she even understand basic economic laws, she would know how the rebates could be used in productive ways for utilization, not just accumulation. Banks would love you to save money in their institutions so they can then lend out 6 - 10 times more than what you gave them. By the way, if bringing your family to DisneyWorld creates more than $2100 of value for you and your family (if you can even quantify the relationships you have), why not do it? One could wait 35 years for it to POSSIBLY be $34,000 and use that money to take your family but will it be worth it by then? What opportunities do you lose with your family right now waiting for "someday." With inflation, could you be paying $16,000 at that time instead of 2,100 now? Very possible, isn't it? Look at gas prices in 1973 until now. Is that hard to imagine? Could you not be alive in 35 years? Would you regret it because you wanted that possibility of $34,000 instead of time with your family? It does not matter that you even spend the $2,100 but stashing it away for "someday" may never come. Putting it into savings or paying down some liabilities could help in making you more productive. Do not take the advice of someone that works for financial institutions. You decide what is best for you. Suze does not care about you personally.

  • Yahoo! Finance User - Wednesday, February 13, 2008, 3:57PM ET  Report Abuse

    • Overall: 5/5

    I liked the article a lot. Great ideas! Those that have a problem with the article and want to spend, SPEND IT! Please come to my store and spend your money. I will then use the profit and follow some of the advice given in the article. Remember: as soon as you spend it you are NOT getting another one :) and you will still have your bills. My profit from YOUR money will be invested so it can grow. Thank you all!

  • BrianM - Wednesday, February 13, 2008, 3:42PM ET  Report Abuse

    • Overall: 4/5

    The one thing that bothers me about this whole "rebate" is that this is not free money. It is an advance on money that you would get next year. If it were just taxable income, you would have to pay a portion of it back, but this is a line item deduction from your refund next year (or if you owe money, you will end up owing MORE money). Big Bush did this in the early nineties, Lil Bush did it in 2001 and now they are doing it again. I got whalloped last time (shame on them) but if we fall for this again and spend it, shame on us.

  • Louis G - Wednesday, February 13, 2008, 1:56PM ET  Report Abuse

    • Overall: 3/5

    I think Suze is a little bit off the mark here. I do agree with her basic premise that you need to do what is best for you with that money. However her arguement that somehow it won't help stimulate the economy if you don't spend the money is essentially wrong. Go ahead, save that money and feel good about doing it. If you invest the money in stocks or mutual funds, you are adding capital to the markets. This gives more money to companies who will in turn spend that money and thus there still occurs some stimulation. Even if you just put the money in your bank account, the banks ability to lend money will increase, making it easier to give out loans, thus, again, providing stimulus. The ONLY thing that you could do which does not help the economy would be to cash the check and put the money under your mattress... and THAT helps no one. In short, Yes I agree, do with the money what is best for YOU. Feel good that no matter what you do, the stimulus will still have an effect... So long as you don't hide it under your mattress. :)

  • Yahoo! Finance User - Wednesday, February 13, 2008, 12:42PM ET  Report Abuse

    • Overall: 5/5

    Why can't you be part of the next administration. Hocus pocus bush has us so far indebt, we nay never recover. I asked about 15 people here where I work about saving, paying of debt or going out and buying something with their money 14-1 people want to pay off debt or save. Thanks for letting the word out.

  • Sh0rty - Wednesday, February 13, 2008, 12:24PM ET  Report Abuse

    • Overall: 5/5

    This rebate check is coming out of our pockets anyway. CNN put a liner up on one of their articles about this rebate check saying, "The checks are an advance on next year's refunds, and most, if not all the money, will be deducted from taxpayers' refunds in 12 months' time."

  • Yahoo! Finance User - Wednesday, February 13, 2008, 12:05PM ET  Report Abuse

    • Overall: 5/5

    WOW! Thanks for saying what I've been thinking about this whole economic stimulus crap! It's just another excuse for the government to give money to big business! And it's not going to solve anything! Can't we just send the checks back and tell them to use it to pay off our enormous deficit? Anyway, I'd rather have affordable health coverage and a guarantee that I'll be getting social security in forty years... ah, it's nice to dream...

Showing comments 6-35 of 245<< PreviousNext >>
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