The Money Class

by Suze Orman

  Over the years you may have heard me say that money has no power of its own. It might have given you a moment’s pause when you first heard it, but maybe the truth behind it didn’t stick with you. So let’s dwell on it a moment here, because it’s truly an important concept.

  When you are staring at the numbers on your worksheets, I want you to recognize that you have been the catalyst that made the decisions to spend, save, and invest those dollars. Money has no power on its own. It is the car; you are the gas, ignition key, and driver. Without you nothing happens. That should actually make you optimistic. You have the power to make the right and honest decisions about how you handle your money. And finding your power will set off a wonderful chain reaction: When you take the necessary measures to regain security—or build it for the very first time—you bring happiness into your life. You are better able to be present and connect with your family; you are less preoccupied by financial anxiety.

  I am asking you to recognize and embrace this concept with your head and your heart: Your money has no power of its own; you are what gives it power. That you are here with me in The Money Class tells me you are ready to own that power, fix what isn’t working, and build lasting security.

  LIVE BELOW YOUR MEANS BUT WITHIN YOUR NEEDS

  The reality is that in order to reach your goals, and maintain those goals once they are achieved, you must live below your means. If you do not have money left over each month you will have nothing to put toward fulfilling your dreams. So “below your means” means making a commitment not to spend every last dollar you take home. “Within your needs” requires that you make a clear-eyed assessment of what exactly you are putting in that category. Yes, it is the act of separating needs from wants, something that I’ve discussed in previous books; but now, in fact, I am asking you to take a more penetrating look.

  You need a house, but do you need a house that eats up 35% or more of your monthly income? Could your family be just as content in a less expensive house where the rent or mortgage is just 20% of your monthly income?

  I find it so interesting that over the past thirty years the average square footage of a new home grew 42%, even though the number of people living in that house actually decreased. That’s a lot more house to pay for, to heat and cool, to furnish and repair. We all need a place to live, but perhaps a smaller, less expensive place would help us achieve our new dreams. You are meeting your needs with the less expensive house but given the lower cost it will allow you to live below your means, and that can free up significant money to put toward other goals.

  You need a car to get to work and shuttle the kids around. But can you honestly tell me you bought a car that met your needs but was as inexpensive as possible? The new dream car is one that is less expensive and that you drive for as long as possible.

  I understand the desire to have the things that you want. You feel you work hard, so you deserve those things. But the truth of the matter is that they are just things and those things will never make you happy. Peace of mind will make you happy. Being able to sleep at night will make you happy. Not worrying about being able to retire one day will make you happy.

  I want you to appreciate where I am coming from: My call to live below your means is the path to having more. Living below your means—but within your needs; this is not about punishing deprivation—will allow you to create more to put toward your goals. I need you to recognize, right here, right now, that your dreams for tomorrow reside in the choices you make today.

  THE PLEASURE OF SAVING IS EQUAL TO THE PLEASURE OF SPENDING

  I want to share a dream of mine: Someday, hopefully not too far in the future, I will have people call in to my television show or stop me on the street and excitedly share with me their latest savings triumph. I mean, let’s just say no one has ever asked me if they can afford to save another $500 a month, if you catch my drift. But a girl has gotta dream …

  I am not suggesting you never allow yourself to spend money today. But what is painfully absent from so many of your lives is an appreciation that what you manage to save today is in fact what gives your family security, hope, and opportunity. When you see it from that vantage point, you begin to understand what I mean by the pleasure of saving. It is what makes your dreams possible.

  To be sure, some of you do understand the pleasure that comes from saving. But those families seem to be the exception, not the norm. So my dream is that each and every one of you can embrace the power, security, and control that comes from saving:

  When I see a family that has an eight-month emergency fund, contributes to their workplace retirement funds, and also makes annual contributions into their own IRAs, I know they understand the pleasure of saving and that their family is not beset with financial stress.

  When I see a family that drives a six-year-old car they own outright that runs perfectly fine, and even though they can afford to buy a new one they do not, I know they are standing in the truth.

  When I meet families, as I have so often these past few years, that tell me with well-earned pride that they have cut back on their household spending and have reduced their credit card debt by 30%, I know they get it. When you stop me in the street to tell me you have managed to cut your food expenses dramatically by cooking dinner at home and reserving fancy restaurant meals for special occasions, I see that you’ve got a handle on your priorities.

  When you tell me you stopped yourself cold in the mall and put down an impulse purchase because you recognized it really wasn’t something you needed, I am happy for you, for you have experienced the pleasure that comes from saving.

  One of the goals of this book is to make savings part of our national conversation. It’s my dream that someday soon we will share and measure ourselves by our saving exploits, rather than judging ourselves and others by what we spend. I’ve heard newscasters and pundits refer to this shift as the “New Frugality,” but I have to tell you, the negativity of that phrase turns me off. Finding equal pleasure in savings as you do in spending strikes me as something far more hopeful and exciting. It carries with it the promise of freedom, of liberation, for when you make it a priority to save, to fund your current expenses and future goals, you are in fact buying yourself freedom from crushing debt, from having to cross your fingers that the markets—real estate and stock—will generate the money you want and need. With savings comes control. And I think we can all agree that on many levels what went so wrong in the recent past and came to a head during the financial crisis is that we lost all control over our future. We borrowed it from the banks, or based it on unrealistic expectations.

  YOU DEFINE YOURSELF BY WHO YOU ARE, NOT WHAT YOU HAVE

  With all the spending of the past few decades came a not-too-surprising by-product. Money became our identity; we became defined by what we owned, or what we dreamed of owning. The New American Dream is rooted in a definition of self that has everything to do with character and intention and nothing to do with material things. When you are motivated by your own beliefs, aims, and principles, you possess the clarity and single-mindedness to achieve that which is truly valuable: security and peace of mind.

  YOU CAN SAY, “I’M GLAD I DID,” RATHER THAN “I WISH I HADN’T”

  Making tomorrow’s dreams a reality requires being able to make the right choices today. As you consider the options before you, I ask that you take a few moments to consider how that particular decision might play out over the next year, the next decade, the next generation, and imagine how you might grade your decision with hindsight. You will know you are standing in your truth today if during this exercise you can imagine your future self saying, “I’m glad I did make that decision,” rather than “I wish I hadn’t.” For a decision to be powerful it must not only provide you immediate gratification or relief, it must in fact be a choice that brings long-lasting satisfaction.

  YOU ARE AN ELEPHANT

  Don’t be offended—I mean that as a compliment!

  I have a favorite saying th
at I recall whenever I need help to stand in my truth: The elephant keeps walking while the dog keeps barking.

  The elephant stays on course, moving toward its goal, regardless of all the barking and noise that swirls around him. I do what is true and right for me. I listen to advice. I seek advice. But ultimately I know when I am standing in the truth because my mind and my gut are in agreement. The goal is to achieve an internal calmness that comes when your intellect and your instincts are operating in harmony.

  Why is this saying so important for you? If you are going to stand in your truth then you will have to be strong and tenacious. You will have to be committed to your goal and determined to stay the course. You may feel pressured at every turn to spend money; there are many enticements all around us trying very hard to get you to part with your hard-earned cash—the sounds of excitement coming out of restaurants and clubs, the heady scents that waft out the doors of department stores, persuasive ads, the pages of glossy magazines telling you about the “must haves” of the season. Let me tell you, it’s not easy to ignore all that barking. A lot of time and money and invention is spent on coming up with ways to seduce you to spend. But if you are steady and true and you are able to just keep walking when your friends say let’s go skiing this weekend, let’s go out to eat, come on, live a little—if you can just keep walking then you will end up where you want to be, regardless of the obstacles thrown in your path. An elephant walks where it wants—surely and steadily it arrives at its destination, and that is the truth that I want you to stand in.

  In the New American Dream we must all aspire to be elephants. We must decide what is true and right for ourselves and our family and then stay devoted to actions and behavior that are in service to our greatest goals. We must not let the barking dogs distract us.

  LESSON 3. THE FOUNDATION OF ALL TRUTHFUL LIVING: THE POWER OF CASH

  In the following chapters I dive into detailed advice on how to maneuver through the big financial decisions in your life. But before you venture into those lessons you must first make sure you and your family have a solid foundation to build upon. And that brings me to the last element of what it takes to stand in your truth: embracing the power of cash.

  While you will always need to borrow to purchase a home, and many families will need to borrow for college as well, one of the fundamental principles of the New American Dream is to pay for as much as possible with cash. Spend what you have today, not what you hope to have tomorrow.

  Paying with cash—be it good old dollar bills or a debit card—cuts down on the temptation to charge more on a credit card than you can truly afford. And studies show that when we use cold, hard cash to pay for things, we tend to spend less; it’s a more tangible experience to part with actual money than to hand over a credit card with a too-generous limit that won’t require us to pay in full.

  DEBIT CARD RULES

  Using a debit card tied to your bank or credit union checking account is the next best thing to paying with cash and it’s undeniably convenient. I think this is a fine way to shift your reliance on credit cards, but please make sure you adhere to these two rules:

  Decline overdraft protection. Thanks to a new federal regulation that went into effect in 2010, you should have been asked whether you wanted this service; if you said yes or if you can’t remember what you chose, please check right away. I never want you to be enrolled in the overdraft program. An overdraft is a sign of dishonesty. You are spending money you don’t have. And it makes me nuts when you end up being stuck with expensive overdraft fees. When you are standing in your truth and living below your means, you don’t need overdraft protection.

  Monitor your account every other day. If someone has managed to hack into your account and withdraw money using your debit card info, your liability is limited to $50 if you notify your bank or credit union within two business days. Otherwise you could be held liable for up to $500 in fraudulent charges.

  LIFE HAPPENS

  I’ve said it before and I’ll say it again: You need an eight-month emergency savings fund. Why so long? Well, it’s not just because 4 in 10 people who are unemployed today have been out of work for more than six months. Being laid off indeed creates a dire emergency, but there are less dramatic and more frequent emergencies that happen throughout the course of any given year. Your car may need new brakes. Your water heater goes on the fritz. Your kid tears a ligament playing soccer and suddenly you have $1,000 in copays for the doctor bills.

  I have to admit, I regret casting these events as emergencies. They really aren’t; they are just life. So if it helps you embrace the necessity of this account to be well funded, we can call it a “life happens” fund.

  Every New American Dream must rest on the foundation of a robust savings account that can absorb life’s emergencies, big and small.

  CREDIT UNIONS: A GREAT PLACE TO SAVE

  Credit unions are nonprofits and that makes them a whole lot nicer to do business with because they aren’t motivated to squeeze every dollar out of you with penalties and exorbitant fees. They are also less likely to shut down your credit card for no reason, and the fees they do charge are typically lower than bank-issued credit cards. Best of all, especially for those of you who are still not out of credit card debt, the maximum interest rate on all federally charted credit union credit cards is capped by law at 18%, whereas some bank cards are charging 28% or more these days.

  Credit unions are also a smart place for your checking and savings accounts. You often can qualify for absolutely free checking at many credit unions, and the interest rates paid on your bank deposits are typically better than at many banks that are in the business of making money for themselves, not you.

  You must be a member of a credit union, and some credit unions limit membership to people with a specific affiliation; it can be through an employer, or a community group. But many credit unions are in fact more than happy to invite “outsiders” to become members, often for a small fee of $5–$20 or so. You can search for federally insured credit unions that you may be eligible for at the website of the National Credit Union Administration. Go to cuonline.ncua.gov or CreditCardConnection.org.

  There is just one trick to joining a credit union: Please make sure it is a member of the National Credit Union Association (NCUA). That means your deposits are federally insured in the same way bank accounts are backed by the FDIC. The base level of protection in an NCUA-member credit union is $250,000. That is, if anything were to happen to that credit union, the federal government would step in and pay you back every penny up to $250,000. You can learn more at www.ncua.gov.

  Go to The Classroom at www.suzeorman.com:

  Depending on how you set up your accounts you can in fact have more than $250,000 protected by federal insurance at either a bank or credit union. At my website I have a detailed explanation of how you can use different accounts to increase your total coverage at one individual credit union.

  SAFETY FIRST WITH YOUR SAVINGS

  In early 2011, most basic checking accounts are not paying more than 1% or 2% interest. We may see those rates persist at least through 2012 as the Federal Reserve is determined to keep short-term rates low to help spur economic growth.

  As low as the yields are on super-safe bank and credit union deposit accounts, they are indeed the best place for your emergency fund. You must keep this savings account safe and sound. You need to know that money is available to you whenever you need it—and you need to know exactly how much is there.

  Don’t use a money market mutual fund for your emergency savings. It’s not just that money market mutual funds are not federally insured. The problem is that they charge an annual fee. It can be quite small, maybe one-tenth or two-tenths of a percentage point, but right now that small sum is actually huge given how low general interest rates are. You want to earn as much interest income as possible.

  I also want you to stay away from putting this money into a certificate of deposit account that matures in more than
12 months. These accounts, especially ones that have longer terms (five years or more), are not where you want to be when interest rates start to rise.

  SAVING FOR BIG-TICKET ITEMS

  The New American Dream also requires that you have ample savings beyond your “life happens” fund in order to borrow less for major purchases. Be it the cost of a new car, a 20% down payment on a home, or the full cost of a kitchen renovation, I want you to do your very best to have that money saved up—completely—before you embark on this expenditure. That is how our grandparents did it and it is the way of the future.

  I have news for you: This isn’t just about my wanting you to borrow less. As I write this in early 2011, you probably will not qualify to borrow money from banks and credit unions unless you have a sizable amount of your own savings to bring to the deal. You need a down payment to make a deal. It is that simple. (Yes, I am well aware homebuyers can make just a 3.5% down payment and qualify for an FHA-insured loan. But as I explain in the Home Class, I do not think a 3.5% down payment is in any way standing in your financial truth.)

  Here are a few tips on how to save for a capital expense.

  Open a separate savings account for each goal. Your emergency fund should be its own separate account. And every additional savings goal should have its own dedicated savings account.

  Set up an automatic monthly transfer from your checking account into your savings account(s). All banks and credit unions offer this service for free and I would encourage you to take advantage of it. It’s hard to have the discipline on your own to make sure you are setting aside money every month. By committing to an automatic transfer each month that the bank handles for you, you are making sure the money will in fact make it into your savings account every month. You can set up this service online, or by dropping into a local branch.