E-mail a friendSuze Orman
airdate March 1, 2004
Suze Orman wants to change the way America thinks about money. Her books are best sellers, and she's a contributing editor to Oprah's O magazine. Called a "one-woman financial-advice powerhouse" by USA Today, she's written, co-produced and hosted several PBS specials based on her books and won two Daytime Emmys. Orman is a certified financial planner, who directed her own financial group and was previously VP of investments for Prudential Bache Securities and a Merrill Lynch account executive.
Suze Orman
Tavis: As we continue our series on personal finance--we call this series 'The Road to Wealth'--I'm pleased to welcome financial wizard Suze Orman to the show. Her most recent book coincidentally is titled 'The Road to Wealth.' It's been updated, and it's now out in paperback. In addition to her very popular show on CNBC that I watch every weekend, she's now also dispensing financial advice in a new Internet series for Yahoo! Guess I better check that out.
Check out Suze Orman, who joins us now from New York City. Suze, nice to see you.
Suze Orman: Thank you, Tavis. I love being here with you.
Tavis: I'm glad to have you on. Let me start with bombshell of a news headline from last week, and there are 2 or 3 things that I want to get to regarding comments made by the Fed chairman, Mr. Greenspan. We talked a little bit about this last week, but not with Suze Orman. So at last, your thoughts on Mr. Greenspan's announcement last week that something had to be done to Social Security, that the system as we know it is insolvent.
Suze: Well, what surprises me is that it has taken so long for some public official to actually say that something has to be done about Social Security. What have we all been thinking?
There is no way, given, if you think about it, that the life span when Social Security was originally created back in the thirties was until 62 years of age. Tavis, we weren't even expected back then to live long enough to collect social security at 65. Now that we're living until 85, 90 years of age, there is no way that Social Security could have ever lasted.
But we shouldn't just be addressing this problem now. This should have been a problem that was addressed a long time ago. But every administration keeps pushing it off, pushing it off, and it is a serious, serious problem. But what was interesting to me about it, Tavis, is that he is bringing up by saying that we have to do something about Social Security rather than increasing tax brackets.
The truth of the matter is, what Alan Greenspan was really saying is these tax cuts are catching up to us, and we have to do something about it or we're all going to pay the price. So what do we do? 'Cut Social Security.' I don't think so, Tavis. It's not right. Even though it needs to be done, we've got to figure out a different way to do it, if you ask me.
Tavis: All right, so politics is not your thing. Economics surely is, but there seems to be an intersection, clearly, between these two things. So from your vantage point, from your perspective, what ought be done about this problem that we now know, thanks to Mr. Greenspan, actually exists?
Suze: Well, you know what's interesting is that we might want to think about some really creative solutions. Maybe the government needs to buy all of us out of our Social Security. Hey, if you don't have the money to be able to pay for us in the future, just like when corporations don't, what do corporations do? They downsize, and they actually offer you a severance package. So maybe the government needs to offer that to all of us. But something.
And again, I'm not the one who really has the intelligence to be able to tell the government, truthfully, what to do, but the one thing I know is it's really easy to increase a budget. It is never easy to decrease it. We're gonna have to figure out a way that we stop spending more money than we have coming in. I know nobody wants to raise taxes, but I personally would rather see taxes be raised across the board than to see people lose Social Security benefits.
Tavis: Before he made the comment, the bombshell of a comment, about the fact that something had to be done about the SSI system, what got my attention, and I suspect your attention as well, is the statement that he made that American family finances were 'generally sound.' With all due respect to Mr. Greenspan, who was he talking about?
Suze: Now you know, just last week, I was in Grand Rapids, Michigan, speaking to the people there. They have lost so many jobs in Michigan they don't know what to do.
I don't know what he's talking about, but the money that I see going out there is in the form of having to pay for credit card bills that people are living off of. Who has money to invest anymore, Tavis?
I don't care what the numbers say. I don't care that the economy seems to be chugging along. I travel through Middle America, and I really talk to the people. Not people behind desks in Washington, but real-live human beings. They don't have any money. They have nothing in savings. They don't know how they're going to retire. They're counting on Social Security. They're up to their neck in equity loans from their homes. They've all borrowed money from their 401-K plans. They're all leasing cars. Otherwise, they couldn't afford to drive a car. They are such financial nightmares. They're financial time bombs walking around, and yet Greenspan is saying, 'Oh, don't worry about it. The level of debt isn't increasing. Everything's OK.' I don't see it that way, not when you talk to real-live human beings.
Tavis: All right, so the third thing, before I move on, that Mr. Greenspan said that got my attention, and again, I suspect yours as well, is this notion that he offered that--promulgated, quite frankly--that adjusted home mortgages can save homeowners money. So explain the math on that one for me.
Suze: Did you listen very closely to what he said last week? He said, 'Over the past decade,' meaning 10 years ago, 'if you had had an adjustable rate, you would have saved thousands of dollars.'
Well, that's true. 10 years ago, a fixed mortgage was at about 7% to 8%. Adjustables were way under that--10 years ago. Interest rates have come significantly down. Where are we today? Today we're in a situation where there's only one way for interest rates to go, and that's back up.
So here's the bottom line: If you are in a home that you are never going to sell, it's the last home you're going to buy, if you don't have a fixed rate mortgage, in my opinion, you are asking for serious trouble.
If, however, on the other hand, you've just bought a home, you know you're gonna sell it in 3 to 5 years 'cause you're gonna have a family and therefore you hope to buy a larger home, a hybrid, an adjustable rate mortgage that fixes it for 3 to 5 or 7 years and then goes to adjustable is fine.
However, he made a comment that we're paying too much for insurance to get a fixed mortgage. We always pay too much for insurance. Insurance is never worth its cost unless something happens. So you don't hope when you have car insurance you're gonna be in an accident, or fire insurance, your home's gonna burn down, or life insurance, you're gonna die. But if you do, it's worth it. Fixed rate mortgages--the insurance of knowing that your payments are never going to increase over the life of your loan, which gives you peace of mind, I think is absolutely worth it.
Most people do not understand how adjustables really work. I beg all of you to understand what's going on there 'cause if you keep an adjustable... Right now, adjustables are about 4¾%, right in there, depending, 4½. They have lifetime caps on it that if you keep it for the life of a loan, you're gonna be paying 10% for that money.
And one last thing--they always say how, 'Oh, you'll just refinance and you'll be able to get another loan, and you can monitor it.' What happens if you've gotten ill and you don't have a job? Or you were downsized and you don't have income? Or something happens and you were in a relationship and now you're divorced and your credit's no good? Can you get another loan? Will you for sure be able to refinance? The mortgage companies want you to. That's how they make their money. So I could go on and on about this. We need an entire hour just on this one topic, but I think it's one of the more ridiculous things I've ever heard anybody say.
Tavis: I don't have an entire hour, but I do have another question before we move off the home ownership issue. Now, I stay with this right quickly because it seems to me, as we talk about this 'Road to Wealth' series that we're doing here, that home ownership for most Americans is the most certain way to get on that road to wealth, if you're gonna get on the road to wealth at all. It starts with owning a home, I think, for most Americans. I've been reading a lot lately, Suze, about this notion of biweekly mortgages. What do you know about this?
Suze: Well, I can tell you a biweekly mortgage is simply when you take a mortgage payment that you'd normally pay just once a month, and you pay it every 2 weeks. What you have to understand is when you pay a mortgage every 2 weeks rather than once a month, you are in essence paying one extra mortgage payment a year. So if your mortgage payment is 1,000 a month--and that's 12,000 a year--if you pay it biweekly, you're gonna be paying $13,000 a year, and that is why it reduces a 30-year mortgage to 25 years and a 15-year mortgage to 30.
Banks charge you $350 to set up biweekly mortgage payment programs and $5 for every check. You can do it on your own by simply taking your mortgage payment, dividing it by 12, taking that extra amount and adding it to your mortgage payment every single month. And that way, rather than paying a bank to do something for you that you can do on your own, you can put that extra money in your own pocket.
Tavis: All right. So, one of the things I love about you, and there are many things I love about you, Suze Orman, as you well know, but one of the things is, you make things really simple and easy to understand. So for those who are watching right now who want to get on the road to wealth, who are having financial issues, money issues, as so many of us are, what's the thing you tell people as you travel around the country to start with? The first thing to do. Let's simplify it here.
Suze: You know, the very first thing one needs to do--and it's not rocket science here--is most people today in America, Tavis, are carrying $8,000 to $13,000 of credit card debt at an average interest rate of about 18%. There is no investment that you can make today that will guarantee you an 18% return to you. Therefore, how do you do that? Pay off your credit card debt.
Once your credit card debt is paid off, then what you can start doing is determining if it makes sense for you to save for a down payment for a home, which I think it does, or should you be investing in your retirement plan?
For those of you who have 401-K plans and your 401-K matches--let's say you put in a dollar, they match 50 cents. That's a 50% return. You cannot afford to pass that up. However, after the point of the match, or if your 401-K or retirement plan does not match, you are better off, in my opinion, putting money for your future in a Roth IRA, if you qualify for it income-wise, rather than a 401-K, because right now tax brackets are the lowest they have ever been in your lifetime, so your tax write-off is not that high.
You have heard Alan Greenspan say, as we talked about at the beginning of this interview, 'We're in trouble. We have to do something.' He suggested Social Security. What if they cut Social Security and raise tax brackets? That means when you go to take money out of a 401-K plan, you might not be getting to keep as much as you think. In a Roth IRA, when you take money out, it is tax-free. I'd rather see you know what you have is what you get to keep, so I'd rather see you investing in a Roth than a 401-K plan, after the point of the match.
As you get older and you know you're gonna keep your home, pay down the mortgage on this home. It makes no sense to have a mortgage. I don't care what the tax write-offs are. Especially at low tax brackets right now, they're not making as much sense.
Stay away from leasing. And those are just a few things, my dear Tavis.
Tavis: So many questions, so little time. In the 30 seconds I have left, tell me about this Yahoo! deal--another place for you to dispense financial advice.
Suze: Well, it's true. I want people to really 'yahoo!' about their money. So every 2 weeks on Yahoo! Finance, on personal finance, I'm gonna be writing for you articles that really, really help you with your money, 'cause I think everybody needs a place to go for free to get the information they need.
Everybody wants to make money off of everybody today, Tavis, and 'The Suze Orman Show' on CNBC, the columns on Yahoo! are places that all of you can go to find the information that I personally think that you need.
Tavis: Well, I love the information that you share, Suze, whether it's on Yahoo! or CNBC or on this program tonight. So thank you for coming on and helping us get on the road to wealth. Always a delight to talk to you. We gotta do it again sometime.
Suze: Any time, my dear Tavis.
Tavis: Thank you, Suze.
Back to March 1, 2004