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Suze Orman Financial Advice (A must read!)

Posted on: May 26, 2005

May 2005
Fidelity Investments

Suze Orman:

What to Do If

You’re Young,

Fabulous, &

Broke

By Len Abram

Are you young, fabulous, and broke? According

to personal finance expert Suze Orman, if you’re

in your 20s or 30s with a student loans and

credit-card debt, you just might be. And she understands.

She was a college-educated $5,000-a-year

waitress before becoming an Emmy-winning

TV commentator and author of four bestsellers.

Here are tips from her latest title, The Money

Book for the Young, Fabulous & Broke.

Q: When you graduated college, you had your

own problems with debt and finances. Is the young,

fabulous, and broke, or as you say, YF&B,

generation, similar to Suze Orman of an earlier time?

Orman: Today’s young people have it tougher.

I get e-mails everyday from their parents, saying,

‘Suze, my kids watch your show. They will not

listen to us. Tell them how we had to plan and

sacrifice to get ahead at their age, just like you.

They can do it, too.’ Yes, they can. However,

times have changed, and what worked for

their parents may not work for them. That’s

why I wrote The Money Book for the Young,

Fabulous & Broke.

I graduated with credit-card debt, a low-paying

job, and a modest place to live. But, unlike

many YF&Bers, I never had crushing student

loan debt, sometimes $80,000 or more.

(I bought my first home for less.) Health care

and energy costs are several hundred percent

higher than when I graduated, and very few

jobs were being outsourced overseas.

Entry-level jobs don’t pay much more

than when I finished school.

Add to these, the threat of terrorism,

problems with Social Security and pension funding,

and you realize that this generation is

facing challenges unlike those of their parents.   

Q: Your main message is about

managing debt. What is FICO? How does it

determine our financial plans and dreams?

Orman: Your FICO score — and every one of

us has one — is the most important three-

digit number in your life. It’s a numeric score —

between 300 and 850, with 850 being the best —

that summarizes the information on your

credit report. Lenders look at the rating

to get a quick sense of how creditworthy

you are. It determines the interest rates you

will pay on car loans, credit cards, and

mortgages. FICO, named after the Fair Isaac

Company, also has a derivative known as an

insurance score, which establishes what you pay for premiums.

Do you know that many landlords check your

FICO score before renting an apartment?

And that employers are starting to check

your FICO score before they hire you?

By the way, when you get married,

your mortgage interest rate will be

based on the person with the lower FICO score.

If you don’t have a FICO score in the highest

range of 760 to 850 you are committing financial

suicide — especially in today’s real estate market.

Your monthly payment on a 30-year mortgage

for $300,000 will cost $700 more per month

if you have a FICO score in the low 500 range,

versus 760 or above. 

Q: How can a young person in debt get

control over his or her financial life and

improve their FICO score? How frugally

do YF&Bers have to live?

Orman: I don’t like the term the ‘latte factor,’

a concept that I actually introduced about

ten years ago. Rather than buying one latte

a day for $4 a day, you invest that money

instead and over 40 years could have a

million dollars. What is realistic is to offer the

tools to make more out of less, to make

money go further. If YF&Bers are late one day

in paying a credit card, that impacts their

FICO score meaning they may end up

paying 18%-23% interest, with no reduction

because their FICO score is so low. They can’t

even qualify for a 0% interest rate on a

credit-card promotion so they can

transfer their 18% balance.

Q: You suggest easier ways of saving money.

You call it ‘digging for dollars.’ 

Orman: Digging for dollars means how you

make more out of less money. Thousands

of interviews with YF&Bers taught me

that they are wasting money that would

be better put into reducing debt.

For instance, most of these kids are

getting a tax refund. Because they feel

incompetent about saving money, they’d much

rather have their employers save it for

them. The majority get a yearly tax refund of

around $3,000. At the same time, they have

$3,000 to $8,000 of credit card debt,

a low FICO score, and, therefore, an interest rate of 18%.

How much interest are they making

on their tax refund? None. If they increase

their exemptions to get more money

back every month — if they could get an

extra $250 — they might pay off their credit

cards and be out of debt in a year.

Q: You make a point that in marriage

‘I do’ often means ‘we pay.’ Does a

young couple require financial,

along with emotional, compatibility,

for a marriage to last? 

Orman: Absolutely. Closer to 40% of

marriages end up in divorce. The number-one

reason for divorce is arguments over money.

So while it’s wonderful to have romance and

intimacy with your potential lifelong partner,

the truth is that marriage is a financial and

legal obligation you take on, whether the

marriage works or not.

Will you split the house expenses 50/50,

even if one partner makes more? How much

debt does your partner have? How will you

handle supporting children from previous

marriages — or children from this marriage?

These are important questions that need

answers before the couple says ‘I do.’

It’s the difference between ‘Til death do you

part’ and ‘Til debt do you part.’ 

Q: What kind of mutual fund or asset

allocation do you suggest for a young person,

perhaps in his or her mid-twenties,

for a comfortable retirement? 

Orman: I advocate exchange-traded funds (ETFs).

In my book, I actually give an asset

allocation model — but only after debt is

reduced or paid off — and foreign markets

should be as much as 20% of your portfolio.

Q: You also favor Roth IRAs for young investors.

Orman: After matching whatever an employer

contributes to a 401(k), the YF&Ber (assuming

they have no high interest debt) should

start a Roth IRA. Once they’ve reached

the company’s maximum match,

usually 6% of base pay, then anything after

that should go into a Roth IRA. The money is

after tax, but withdrawals are tax free,

unlike those of a 401(k), which are taxed at

your income tax rate when the money is

withdrawn. Of course, you must meet the

eligibility requirements of a Roth IRA. Also,

early withdrawals of earnings may be subject

to taxes and penalties.

Q: You imply problems with money

are not always about money, but about

self-esteem. You tell your readers and

viewers that they should feel good about

themselves. How can this help them out of debt?

Orman: Why do you get into debt to begin

with? You usually spend more when you feel

bad or want to impress others, which is another

way of feeling good about yourself. People

spend money that they don’t have to

impress people that they don’t even

know or like. They think that the things

around them will define who they are.

Buying things you don’t need or cannot

afford puts you into debt. Eventually

that makes you feel even worse.

Q: So what moral compass does a YF&Ber use?

Orman: You can’t define yourself by your

things any more than by your job title and

money. I always say, ‘People first, then

money, then things. People first means you —

when you understand who you are —

you then understand what you really need,

not think that you need. When you only spend

money on needs, you tend not to get into debt. 

Q: You differentiate between good and bad debt:

How does a young person know one from the other?

Orman: Frankly, one of my other books

popularized the idea of good and bad debt,

that good debt is student loan debt or

mortgage debt, while bad debt is nearly

all credit card debt. Those terms are now

obsolete. Mortgage debt, especially when

it’s an interest-only loan, can be very bad debt.

Credit card debt at a 0% interest rate can be

very good debt. It’s the use that counts,

its purpose. Borrowing to lease a car is

bad debt; financing a used car — and keeping

it five years after paying it off — is very good debt.

Q: What’s the number-one positive reason

for going into debt?

Orman: Number one, even before a retirement

plan, is to save for a down payment and finance

a home. A home will provide not only a place

to live, but also great tax write-offs. Mortgage

interest is tax deductible, as well as property

tax. Live in the home two years and the first

$250,000 from the sale of a primary residency

is tax-free; $500,000 if you own it with someone else.

Q: From modest beginnings, you overcame

debt and adversity and reached great success.

What kind of a future does the YF&Ber face?

Orman: With effort and grace, I think anything

and everything is possible. I understand that

what’s happened to my life is quite extraordinary.

You may not go from waitress to best-selling

author. You can, however, have a home of

your own. You can have a comfortable

retirement. You won’t wake up at three

in the morning, wondering how to pay

your bills. You’ll always be fabulous, but

you do not have to be broke.


© Copyright 2005 FMR Corp.
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