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Be sure to read the interview that The Home Story did with Suze Orman about gaining control of your finances as a first-time home buyer or recent college graduate.
Gain ‘Confidence, Control, and Command’ Over Your Finances: An Interview With Suze Orman
By Laura Lang Haverty
New graduates focused on landing that first “real” job should also be making choices to help them gain control over their financial futures — for good. Suze Orman, an expert on personal finance, shares her thoughts with The Home Story to get you thinking in the right direction.
Suze Orman knows what it’s like to work your way up.
Long before she became a personal finance guru, the author of multiple New York Times bestsellers, and an Emmy Award-winning television host, Orman was a 30-year-old with a college degree who was earning $400 a month working as a waitress. In other words, Orman knows what it’s like being a recent college graduate just learning how to handle personal finances.
The Home Story spoke with Orman to get her advice on how to tackle student debt, how to save for both emergencies and retirement, and what young people need to know about wills and trusts.
The Home Story: Student loan debt is at the top of your “must pay” items, even before paying mortgage or rent. Can you talk about why it’s so important to prioritize student loan debt?
Suze: Even if you were to declare bankruptcy, you would still have to pay off your student loans. They are not “dischargeable” (forgiven) in bankruptcy. Credit card debt, mortgage debt, car loan debt can all be discharged, but not student loan debt.
THS: Often young adults are attracted by certain credit card “rewards,” yet only make minimum payments. Can you summarize what credit card debt really costs and steps they can take to break free?
Suze: If you are paying just the minimum that means you have a running balance on a card. And that balance is charged interest. A lot of interest. The average rate these days is around 14 percent per year. So let’s say you have a $1,000 balance, you pay 14 percent interest and you are paying the minimum every month (I am assuming the minimum due each month is equal to 2 percent of the balance.) It will take you more than nine years to pay off the balance and your total payments-including all that expensive interest-will be more than $1,700. There is not a reward program in the world that is worth paying all that interest.
I recommend everyone have a credit card that they use a few times a month on purchases they can afford to pay off in full. That’s responsible. And it will help build a great credit score. But all other spending should be with cash, or with a debit card that does not have overdraft coverage. With cash or a debit card your spending is limited to what you actually have!
In terms of a reward, don’t you think not being in expensive credit card debt is a pretty smart payoff?
THS: According to Interest.com, the median household savings nationwide is zero. How much of your household income should you be saving and why is this important?
Suze: Let’s just focus on emergency savings. This is the money you set aside so you won’t be screwed when something unexpected pops up. A big car repair. A health insurance co-pay. I want everyone to have eight months of living costs set aside in their emergency fund. That’s how you know you can weather anything – including a layoff. Don’t panic. I am not suggesting you have eight months saved up pronto. The goal is to start today. Set up a direct deposit to a federally-insured savings account at a bank or credit union. Push yourself to deposit as much as possible, at least once a month.
THS: What about retirement savings? When should that start? And how about people who are self-employed? What are their options?
Suze: The sooner the better. The best investment strategy is to give your money as much time as possible to grow. This is called compounding. If you start saving at 25 or 30, your money has a lot more time to compound then if you wait until age 40 to start.
At a minimum everyone who has a workplace retirement plan where there is a matching employer contribution, must – and I do mean must! – contribute enough to qualify for the maximum match. That is free money your employer is going to give you – a bonus – for contributing to your own retirement account.
If you don’t have a workplace plan with a match – or at the point you max out on the match – your next retirement savings move is to contribute to a Roth IRA.
I think at a minimum everyone should make it a goal to set aside 10 percent of their income for retirement savings.
THS: If a homeowner has student debt, credit debt, and a mortgage, what would be a good plan of attack for that person to tackle this debt?
Suze: You always stay current on all your debts. Then add extra payments to the debt that carries the highest interest rate. Chances are that’s the credit card debt.
THS: A lot of young adults, especially in pricy urban markets, may think they won’t be able to qualify for a mortgage. What help is available to them? How much should they plan to put down on a house?
Suze: Honestly, I think it is smart to work on saving up so you can make at least a 10 percent down payment. If that seems crazy to someone, chances are what they really need to do is consider buying elsewhere. You may love the city, but if you want to own a home, you may belong in the suburbs. Life is full of tradeoffs. If you don’t think you can qualify for a home where you want to live, maybe you need to rethink where you want to live. Or keep renting.
THS: What should every household know about wills and trusts?
Suze: They aren’t for just the old folks, or the wealthy. At a minimum you need a will. But a will only kicks into action once you die. A revocable living trust gives you all sorts of protection – and peace of mind! – while you are alive. (Editor’s Note: Read more from Suze on wills and trusts.)
THS: What about non-traditional households—you’re living together but not married, have been married more than once, have children from a previous relationship, or have beneficiaries who cannot manage funds for one reason or another? Are there ways to have the same legal protections?
Suze: Of course! No matter your situation, there is a way to create the legal documents to make sure that the people you want to protect are protected and that your assets are passed to the heirs you want them to pass to.
THS: President Obama recently announced a plan to fund community college tuition 100 percent. What are the big-picture benefits of this idea?
Suze: We all know that a high school degree doesn’t leave someone fully equipped to compete and thrive in our competitive global economy. But a traditional college degree can be way too expensive for many to consider, even with financial aid.
If the President’s proposal were to ever see the light of day, one interesting benefit is that it would effectively reduce the cost of a four-year college degree. Part of the proposal is that a community college would have to offer credits that are transferable to a four-year degree school. So you could have a deeply subsidized first two years at a community college, and then transfer to a four-year program that you would be able to complete in less than four years. You still have to pay for books etc. at the community level, but having the tuition taken care of would be a big relief for many households.
THS: There’s a slogan on your website “People First, Then Money, Then Things.” What does that mean to you?
Suze: It’s the big picture of how to set your life priorities.
THS: Any other advice that would be helpful to The Home Story reader?
Suze: I always urge interested readers and viewers to follow-up with my free video series to help them gain confidence, control, and command over their finances.