Personal-finance guru Suze Orman is famous for her no-holds-barred advice. And in her latest book, The Money Class (Spiegel & Grau), she urges recession-battered Americans to be just as honest with themselves. Says Orman, whose past eight books have all been New York Times best sellers: "The whole purpose of this book is to learn how to create a new American dream, a dream that is based in reality, not fantasy." TIME spoke with Orman about credit cards, student loans and the death of the American dream.
In the book you write, "The American dream as we knew it is dead." What did you mean by that?
The American dream transformed over the past few years. It
became a dream of bigger, better, newer. How do you buy stuff without any
money? It was leverage. It was this American financial fantasyland. We were
all trying to keep up with the Joneses. We were all trying to do things that
we never should have done. And that American dream turned into the greatest
financial nightmare of all time. You can't get a loan. You can't get a job.
You can't get credit. So the old American dream really is dead.
You advise people to live below their means. Why?
Even if you have a pension, there's a very good chance that that pension
will be taken away from you, because corporations don't have the money to
keep the pensions up. So the only thing that is going to keep you going when
you get older is the actual money that you yourself have saved to generate
the income that you need in order to pay your bills. The only way that you
are going to be able to save money for retirement is to not spend every
single penny that you make. When you live within your means, you think just
because you're bringing home a paycheck, you are entitled to spend it all,
because those are your means. The money is there, so I get to spend it. If
you lived, however, below your means, that would give you extra money to
save. Extra money to save means more money in retirement.
How would you answer people who say, "I'm strapped. How can I
save? I barely make my expenses."
If you don't have enough money to save today, while you have a paycheck
coming in to pay your expenses, how are you going to pay those exact same
expenses when you no longer have a paycheck coming in? You cannot live in
financial la-la land anymore.
You advise people to have an eight-month emergency savings fund. Why
that much?
When you lose a job, it will take you a good year to two years to get
another one, so you have got to have an eight-month emergency fund of what
your current monthly expenses are. But eight months isn't enough if it's
going to take you at least 12 months or 24 months in order to get another
job. Therefore, when you lose your job, you cannot continue to live the same
lifestyle you were living when you had a paycheck coming in. So you have got
to cut your expenses in half. If you've cut your expenses in half, that
eight-month emergency fund now becomes a 16-month emergency fund with your
new expenses.
Do you think younger kids should be told what's going on if a parent
loses his or her job?
Yes, absolutely. I think the kids should understand reality. I think it
should not be presented to the kids that, "Oh my God, everything is lost.
We're miserable. We're destitute. We're going to be in soup lines." No. The
reality of life is, "Daddy, Mommy, [whoever] just lost their jobs.
Therefore, we have to make changes."
Is it still wise to borrow a lot of money to send your child to the
best college possible?
It's no longer, "I'm just going to go to school. I'm going to get a degree.
Then I'll figure out a way to pay for it." No. You have to work backward.
The new American dream is one of responsibility. What is the bottom-line
number that you're going to be able to pay back toward a student loan
responsibly if you're doing it yourself after you have a job? That dictates
the amount of money you can borrow. That dictates the school you can go to,
if you can even go to a four-year college at all.
What about loans to family members, if somebody loses a job or ends up
in financial trouble?
There's no such thing as a loan. It's either a gift, or it's not. Because if
you think that you're going to loan money to a family member and a family
member is going to consider that loan as a No. 1 priority to be paid
back when they have their car loan, their rent or their mortgage, their
student-loan payments, their credit-card payments, their 401(k) payment, I'm
here to tell you that you will be last on the totem pole. You either can
afford to make a gift or you can afford to not.
What if somebody finds themselves with enormous credit-card debt and
just feels swamped? How are people supposed to catch up?
The rule of thumb is this: If you owe as much as you make, you are
technically bankrupt. So to stand in your truth, you are going to have to
open up the envelopes of your credit-card payments that you have not opened
up in the past six months and see how much you really owe. If you owe as
much as you make, you need to claim bankruptcy, and that is your truth. If,
however, you can afford the minimums or the monthly payments, then you need
to figure out, How do you get out of credit-card debt? What can you do? Do
you do balance transfers to credit-union credit cards, which are far better
than bank credit cards? By law, they can't charge you more than 18% interest,
when a bank credit card can go all the way up to 30%. So there are things
that you can do, but the very first thing that you have to do is stand in
your truth.