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Suze Orman Money Matters

Suze Orman, Money Matters

New Rules for the Age of High Energy Prices

by Suze Orman

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Posted on Friday, June 27, 2008, 12:00AM

I know there's plenty of talk that oil and other energy commodities are caught in a speculative bubble. The implication of that line of thinking is that if we all just hold our breath (and wallets) a little bit longer the bubble will burst, prices will fall, and we'll no longer face $4.50 a gallon gas (yes, it's already that high in California), home heating bills that rise 20 percent or more a year, and grocery bills that require getting a second job.

Don't Hold Your Breath

I wish that were the case, but I just don't see it happening. It's interesting to me that a lot of the oil chatter is about the oil bubble bursting and the price of crude dropping all the way to $100 a barrel, or maybe even $80. Even if we do get "down" to those levels, it's still a long, long way from where we were less than two years ago.

The optimist will say that if oil falls from its current $134 a barrel (as I write this) to $100, that's a dramatic 25 percent decline. You can't argue with that math, but the realist will point out that even at $100 a barrel, oil will still be double its most recent low: $50.48 a barrel in mid-January 2007.

Checking the Math

And I'm not even sure we'll get any noticeable relief going forward; a lack of long-term energy policy for our country, coupled with rising worldwide commodity demand, just doesn't lend itself to a situation in which the United States will be able to buy energy on the cheap anytime soon. The Energy Information Administration (EIA), the official data keeper of U.S. energy prices, expects regular-grade gasoline to average $3.78 this year, up from $2.81 in 2007. And the EIA forecast is for an average $3.92 per gallon in 2009. Heating oil is forecast to cost an average of $3.95 this year, and $4.25 in 2009. The cost of natural gas is expected to rise 15 percent in 2009.

As you already know all too well, the spike in energy prices ripples throughout the economy and your personal budget. I have little patience for the official inflation figures that show consumer prices have risen just 4.2 percent over the past 12 months. As many have pointed out, the math used for calculating the official consumer price index (CPI) number excludes certain items such as food and energy.

Please -- as if Americans have the luxury of bypassing food and energy in their daily lives. Far from 4.2 percent, plenty of your everyday expenses have risen double or triple that amount in the past year.

Re-energize Your Finances

Life in a time of persistent inflation requires tinkering with your approach to personal finances. When you're contemplating a major purchase, it's no longer sufficient planning to calculate whether you can afford it today. You need to figure out if you'll be able to afford it in the future given higher operating costs. And inflation is also a big factor in both your job stability and the value of your retirement investments.

Here are some rules to help you adjust to the new realities of high energy costs:

• Your home: When the already expensive cost of heating your home in the winter and keeping it cool in summer could keep getting higher and higher, McMansion mania just doesn't make sense. Why would you want to heat and cool a 4,000-plus-square-foot house when any family of four can live more than comfortably in a house half that size? A smaller home means smaller utility bills. Keep that in mind when you're ready to make a move.

I'd also caution anyone with an adjustable rate mortgage to anticipate that they could face a higher rate in the near future. With inflation sticking around as a problem for Ben Bernanke and the Federal Reserve, there's a growing likelihood that sometime in the near future the Fed will have to begin to raise its Fed Funds rate to try and rein in inflation pressures. When that happens, ARM rates will rise, too. The best way to deal with that prospect is to lock in a fixed rate mortgage; the current 6 percent national average is a really good deal.

• Your car: Even if you can cope with $4 and more for a gallon of gas today, don't foolishly think that's the worst case scenario. How about $5 or higher? You won't find anyone suggesting that's out of the question.

So ask yourself: What happens to your family budget if gas rises another 25 percent? Not a pretty picture to contemplate. I realize it's hard to unload a gas guzzler these days, and it makes no sense if you're currently upside down on a car loan. If your work commute is a mileage hog, it's time to get serious about finding some coworkers to carpool with -- or better yet, use public transportation if it's available.

Not only will you save on gas costs, you might also be able to lower your auto insurance premium. If your annual mileage drops below a certain threshold (typically 10,000 miles or so), you could be eligible for a 10 percent or so premium reduction. Check with your insurer.

• Your job: Rising energy costs aren't just a personal consumer issue; businesses face the same budgetary crunch, too. One study estimates that every time the price of oil rises 10 percent, about 150,000 Americans lose their jobs in the subsequent year.

You have two routes for coping. Commit to bulking up your emergency savings account; given the weakened economy, six months of living expenses is the bare bones minimum, and an eight-month stash is the ideal goal. You also need to make sure your job skills stay cutting-edge; the employee with the better skills is often spared in early rounds of layoffs -- or, if the worst should happen, makes you a far better candidate for your next job.

• Your investments: A $250,000 retirement account might look really good today, but if inflation averages 4.5 percent a year, the purchasing power of that $250,000 will be just $161,000 in 10 years. Over 20 years, inflation erodes the value to about $104,000.

Accounting for inflation has always been a key component of retirement planning, but its importance becomes even more acute when the expectation is for higher rates of inflation. For those of you with 10 or more years until you retire, making stocks the core of your retirement investments is one of the best ways to get a shot at solid inflation-beating gains.

Loading up on supposedly low-risk bonds because you have market jitters is actually the riskiest move you can make right now. There's no chance that the 4 percent or so interest on a bond is going to generate inflation-beating gains. To retire comfortably tomorrow requires living with the volatility of stocks in your portfolio today.

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91 Comments

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  • mke - Saturday, July 5, 2008, 2:55AM ET  Report Abuse

    • Overall: 4/5

    think back to the 1970's then look at today. it could be a similar story.

  • thomasg - Friday, July 4, 2008, 4:49AM ET  Report Abuse

    • Overall: 2/5

    Sound advise mostly-car pooling,fixed mortgages,smaller homes.I disagree about stocks-the right advise would be sell stocks on rallies,buy commodities on dips.Earlier one had to buy futures and worry about margin calls.Now one can buy index funds like DBA,USO,UNG or short funds like SKF,SH or QID.None of these has been mentioned.Against gold,the S&P has been declining in value since 2000.Stocks don't always go up.She is right about bonds,they are the worst investment for the next 10 years.

  • Gee - Thursday, July 3, 2008, 11:12PM ET  Report Abuse

    • Overall: 5/5

    Good, sound coverage of various aspects of how rising fuel prices can impact individual finances. She provides a good summary and rationale for why she thinks fuel prices will remain high, and supports it with facts and figures. Presentation is clean and clear, and geared to the "average guy/gal" that is her target market. I agree with her argument that you need a diversified retirement portfolio that includes stock in order to provide returns that will stay up with or beat inflation. Especially since bonds are currently paying BELOW inflation rates. The "average" yield for stocks over the past 40 years is in excess of 12% annually. However, you have to have a long-term investment horizon to reap those returns, since in a shorter time frame of just a few years the stock market can fluctuate significantly up and down on its way to producing that "average" return over the decades. As you get close to retirement and into retirement, you should gradually cut back exposure to stocks -- but should still keep a certain percentage in stocks to provide inflation protection. You could still live another 10 to 30 years in retirement, which would give you a long enough horizon to get the "average" return of stocks -- and provide a combined yield on stocks, bonds, and cash that compensates for inflation.

  • christian - Thursday, July 3, 2008, 4:25PM ET  Report Abuse

    • Overall: 3/5

    Just a brief comment to those who think Saudia Arabia is our largest oil supplier becasue Bush was over there vs others who commented that Mexico and Canada are our largest suppliers. Up until recently, Mexico and Canada were our largest suppliers; although I believe Mexico has dropped below Saudia Arabia now. But this is not the issue: the issue is who has available capacity to pump right now? Saudia Arabia is apparenlty the only major with the extra 1.5 to 2 million barrels a day availalbe. Everyone else is going at maximum. And as you all know, drilling offshore or in ANWR will likely not add anything to new production for another 5 years. It takes time to bring on new energy sources. What we really need are electric cars and more nuclear power plants!!

  • Yahoo! Finance User - Thursday, July 3, 2008, 12:42PM ET  Report Abuse

    • Overall: 4/5

    I'm not about the vitriol being thrown around by some of the previous posters. Let's say for the sake of argument that Ormand IS wrong about her statistics or even that she IS (gasp!) a liberal, every single piece of advice she's giving makes sense. Consume less? Yes, why not, it SAVES YOU MONEY! Save more? Of course, you morons, it provides you more security. Live within your means/needs? Positively! Can anyone convince me these are not worthwhile goals to strive for??

  • Michael M - Thursday, July 3, 2008, 12:39PM ET  Report Abuse

    • Overall: 4/5

    Of course the Federal Reserve is going to have to raise rates, but just you watch, they will wait until after the November elections. Despite what they say, that place is so freaking political.

  • BJ9736 - Thursday, July 3, 2008, 10:24AM ET  Report Abuse

    • Overall: 1/5

    It's really simple -- all things move in a cycle. We're currently the victim of liberal policies, such as the prevention of drilling in ANWR, etc. People are starting to realize that liberal policies actually have effects on them, and they will swing the other way in a big way. When that happens, the dollar will increase in value and the pressures will dissapate...for awhile. When we can all afford SUVs and steaks again, the do-gooder hypocrits (who love that their lights turn on when they flip the switch...that thing called electricity comes from somewhere) will revert to their efforts, having forgot that liberal policies actually have effects, and the cycle continues...

  • michaelo - Wednesday, July 2, 2008, 10:10PM ET  Report Abuse

    • Overall: 1/5

    Suze Orman is just one of a long string of financial advice snake-oil hucksters who regurgitate the same crap over and over again. Why does Yahoo give this woman a sounding board?

  • Wisdom - Wednesday, July 2, 2008, 10:50AM ET  Report Abuse

    • Overall: 1/5

    WRONG!!! Fact-Check: Core CPI (excluding Food and Energy) is NOT "officially" running at 4.2 percent. It's running at 2.0 percent. The overall CPI is 4.2 percent INCLUDING FOOD AND ENERGY. http://www.bls.gov/news.release/cpi.nr0.htm The government numbers are still wrong - even 4.2 percent is clearly too low! - but too-busy Suze can't even be bothered to understand the numbers that the government does publish. Why believe anything else she writes if she won't bother to check simple facts? What else does she believe that's just plain wrong?

  • Yahoo! Finance User - Tuesday, July 1, 2008, 5:18PM ET  Report Abuse

    • Overall: 4/5

    Thanks for these reminder points. I didn't finish the article before I called my auto insurer to determine my eligibility for the under 7500 miles a year premium reduction (my insurer has a lower threshold). (Then, of course, I came back to finish the piece.) Although some may say your points are often too trite and inconsequential, they are probably the same people who suffered tremendous losses during the dot com debacle. I'd rather take the common sensible, steady approach any day.

  • Yahoo! Finance User - Tuesday, July 1, 2008, 2:05PM ET  Report Abuse

    • Overall: 1/5

    The sky if falling! The sky is falling!

  • Yahoo! Finance User - Tuesday, July 1, 2008, 11:32AM ET  Report Abuse

    • Overall: 3/5

    This is a great story. Based on all this information though, it's easy to digest and understand that our country is fudged. We're screwed beyond epoch proportions. It's time to buckle down. The stock market is just teetering on falling through the floor. Shoot, you might as well just walk away from the mortgage and start putting your monthly mortgage payment into purchasing OIL.

  • Yahoo! Finance User - Tuesday, July 1, 2008, 11:07AM ET  Report Abuse

    • Overall: 1/5

    The Monday, June 30, 2008, 3:29PM ET commenter referred to the I-bond comments…………………….THE I-BOND COMMENT HAD ZERO TO DO WITH ONE WHO RETIRES…………THE COMMENT strictly DELT WITH THE FACT THAT BONDS CAN HOLD PURCHASING POWER………in contrast with what suzie’s ghost writer stated………….BTW $5,025 IS BETER THAN ONE WOULD HAVE DONE OVER THE LAST 12 MONTHS IN THE MARKET…..so the word for today is DUHHHH

  • Out of Focus - Tuesday, July 1, 2008, 10:32AM ET  Report Abuse

    • Overall: 5/5

    To Mikotian: "um... I'm pretty sure that the 4.2% number is the headline inflation, which includes food and energy. The core inflation is more like 2%. But yeah, there are lot of reasons that the CPI is understated." Food and energy prices have been left out of the core inflation figure since the mid 90's. Counting food and energy, inflation is closer to 10% and grossly understated by the fed. As a result out GDP growth figure is grossly overstated. If the inflation figure was correctly included in the GDP growth %, it would show that we are already in a recession (2 quarters of negative growth).

  • brian - Monday, June 30, 2008, 11:31PM ET  Report Abuse

    • Overall: 3/5

    It's always good advice to play defense with your finances when times are tough. It's better advice to play the offense in an economic slowdown... but of course... whether you play defense or offense depends on your job demand. That's the way capitalism works. If you are an accountant, IT guru, or health care worker... you can continue to play risky... but if you are an auto worker, or banker... stash the cash. Either way... nobody knows when the oil train ride will end... but I have one big derailment idea. That is the fed reserve needs to raise rates. Not quickly though because of the housing crisis... but slowly... inch it up a quarter point in September... then again in the new year... and so on. Only a stronger dollar can begin to save us from this crisis... it doesn't take a genius to figure that out.

  • MZZZZ - Monday, June 30, 2008, 11:25PM ET  Report Abuse

    • Overall: 1/5

    um... I'm pretty sure that the 4.2% number is the headline inflation, which includes food and energy. The core inflation is more like 2%. But yeah, there are lot of reasons that the CPI is understated.

  • Yahoo! Finance User - Monday, June 30, 2008, 10:53PM ET  Report Abuse

    • Overall: 3/5

    The sad thing is that we NEED high oil prices to motivate us to use alternatives. It has to stay high long enough for the technology, polliticians and public to find ways around it.

  • CoreyK - Monday, June 30, 2008, 10:41PM ET  Report Abuse

    • Overall: 4/5

    Suze's advice is usually awful but this article is pretty good. This sounds like its coming from a legitimate financial planner. I wonder if she pays someone to write these articles for her????

  • KM - Monday, June 30, 2008, 9:58PM ET  Report Abuse

    • Overall: 1/5

    Suze......nice try but worthless advice....The job markets are shrinking, the value of real estate is coming back to reality, the dollar is worthless and the good news is that all of these factors are FOREVER linked to the price of oil. Until we address our LACK of a LONG TERM energy policy/strategy, we are on the Highway to Hell without an off ramp. We should be marching in the streets rebelling against this. Instead of nitpicking over Obama vs. McCain... Wake up!!!! Ethanol is best produced from sugar cane, yet we talk about wheat!!!!!...Why are we letting this bloated dinosaur of a sector dictate our destruction????? Wake Up people before its too late!!!!

  • Yahoo! Finance User - Monday, June 30, 2008, 8:57PM ET  Report Abuse

    • Overall: 5/5

    Suze always makes good sense. Thanks!

  • Yahoo! Finance User - Monday, June 30, 2008, 8:34PM ET  Report Abuse

    • Overall: 1/5

    Same redundant crap. please try to say something that I dont know yet.

  • Alameda Al - Monday, June 30, 2008, 7:53PM ET  Report Abuse

    • Overall: 3/5

    The following scurrilous, anti-Obama screed was posted as a completely inappropriate non-response to Suze Orman's column: "Yahoo! Finance User - Monday, June 30, 2008, 6:36PM ET ". Yahoo can cooperate to squelch free speech in China but in seem incapable of appropriate monitoring of its U.S. website.

  • Worker72a - Monday, June 30, 2008, 6:13PM ET  Report Abuse

    • Overall: 3/5

    Okay as far as logical strategy for dealing with the symptoms of the problem goes. But, at some point we are going to need to address the cause of relentlessly rising prices and reduced living standards. The Federal Reserve is the single entity responsible for monetary inflation in this country. In 1964, gasoline cost about 30 cents a gallon. 1964 was also the last year our coins were minted with a 90% silver content. Today, the silver in three 1964 dimes is worth about $4.00, or, amazingly enough, the price of a gallon of gas. Energy prices measured in real money have not changed in over 40 years. The value of your dollar has been reduced by 93 per cent. Abolish the Fed.

  • L.C. - Monday, June 30, 2008, 5:50PM ET  Report Abuse

    • Overall: 5/5

    The writer of this article shows good commonsense reasoning. Some people have trouble accepting what their good senses tell them. Even if there is a global depression the price of oil will never drop to prices we have grown to accept in the United States. The free ride is over. This country should immediately start to develop nuclear energy programs. We have construction know-how and the infrastructure in place to accommodate the transmission of electrical power. This is the most logical approach for there are no miracles solutions in sight that will produce the quantity of energy we need to serve our nation.

  • JOel - Monday, June 30, 2008, 5:33PM ET  Report Abuse

    • Overall: 3/5

    Let me get this right. The head of the Saudi oil company can predict oil at 150 to 170. And immediately it jumps. How about if he predicted 25 to fifty it should go down. If the year over demand for oil has increased by two percent per year over ten years can anyone explain 140 per barrel. The market appears to be reacting to demand that does not exist. Or try this . In July 2007 the national hurricane center predicted twelve hurricanes would hit the continental US. In October it changed the prediction to one. In fact One hit. The price of oil went from 45 to 75 dollars per barrel. If the prediction was incorrect the market should of immediately corrected. It did not.

  • Ken - Monday, June 30, 2008, 5:16PM ET  Report Abuse

    • Overall: 1/5

    Inflation is not the problem, merely a symptom. The (privately owned) Federal Reserve is the problem.

  • Yahoo! Finance User - Monday, June 30, 2008, 5:08PM ET  Report Abuse

    • Overall: 1/5

    This person has such a negative outlook coupled with self-limiting ideas. Yes they do work for the unsophisticated crowd she targets, but all of you pursuing the American dream ignore everything she says. She knows nothing and has nothing tangeble to offer.

  • Yahoo! Finance User - Monday, June 30, 2008, 4:57PM ET  Report Abuse

    • Overall: 1/5

    RE: POST @ 3:11 June 30: After reading your post, and Openminds post, I have come to the conclusion, that Open mind makes more sense than you by far. Why is that? Well, first if Saudi Arabia is NOT this countries oil supplier, then why was George Bush in Saudi Arabia at the beginning of the month begging for more oil output. If Canada and Mexico was our largest supplier, then especially with NAFTA, we wouldn't have the problems we are having now with oil being over $135/barrel. As for the flood estimates, it was made clear that the floods in the MidWest were above that of a 100 year flood (as per estimates from emergency management officials). Even if we drilled in ANWAR, with the American Dollar at it's current levels, it would be HIGHLY unlikely that any oil company would have sold that oil here in the U.S. Especially with China and India, and their markets, where their money is more sought than that here in America. From where I stand, you are basically of that congregation of lemmings who think that things are good "I've got mine/it's all about me" crowd. Apparently the post after yours said it best, "We are a consumer nation, we only make war and the rest of the world isn't buying anymore." "What we see today is the result of 40 years of the me generation. horay for me and ---- you." From your rant against Openmind's opinion, you are another of the "ME generation." If that wasn't enough, the DOW had it's worst month since the great depression. Just wait for the Auto Sales numbers on Wednesday, and the Job Numbers that come up on Thursday (due to the holiday..), and find out how Openmind's views are pretty close to being right (a clue...the Wednesday/Thursday reports are viewed by most analysts...being below estimates..) So keep dreaming in your Me World of fantasy. Just don't let reality hit you on the way out. Another public service message of a 1-star that knows better than to listen to fantasy drivel of Suze Orman, and her ilk.

  • Christoph - Monday, June 30, 2008, 4:35PM ET  Report Abuse

    • Overall: 1/5

    'As many have pointed out, the math used for calculating the official consumer price index (CPI) number excludes certain items such as food and energy.' I stopped reading after this sentence. The CPI DOES include food and energy prices. How can one write a column and NOT do such basic research.

  • Yahoo! Finance User - Monday, June 30, 2008, 4:16PM ET  Report Abuse

    • Overall: 5/5

    I wish someone would post a true inflation number. I am thinking about 9 to 10%.

Showing comments 6-35 of 91<< PreviousNext >>
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