The 5 Best Pieces of Financial Wisdom From Suze Orman

By Damian Davila on 29 June 2015 0 comments

Personal finance expert and television personality Suze Orman has been called a "force in the world of personal finance" and a "one-woman financial advice powerhouse" by USA Today.

This is an amazing achievement for an individual that at the age of 30 was still a waitress making $400 a month. That demonstrates the amazing drive of the woman who later became an investment executive, obtained a Certified Financial Planner certification, and wrote seven consecutive New York Times best sellers.

To help you jumpstart your financial strategy, here are the five best pieces of financial wisdom from Suze Orman.

1. Insure People First

In Oprah's O Magazine, Orman established a set of 12 steps to wealth. In step number eight, she lays out a useful rule of thumb to tackle insurance decisions, "People first, then money, then things."

"If a child, a spouse, a life partner, or a parent depends on you and your income, you need life insurance," says Orman. You wouldn't want to create an overwhelming financial burden on people who count on you for living expenses.

Let's imagine that you are the sole breadwinner and provide for your spouse and two toddlers. If you were to take out a $300,000 mortgage and pass away a year from the date of the purchase, could your spouse handle all of the monthly living expenses, including mortgage payments? If your answer is no, you need life insurance to secure the income of your family in case of your absence. (See also: 5 Reasons Why Life Insurance Isn't Just for Old People)

2. Check Fees of Investment Funds

"Some of the most important things to look for when checking underneath a fund's hood are its fees," writes Orman in The Money Book for the Young, Fabulous & Broke.

There are two studies that support her argument.

First, a study from Morningstar (an investment research and investment management firm) showed that using low fees as a guide would give investors better results than even Morningstar's own star-rating system.

Second, a study of more than 1,800 mutual funds found that "investment expenses almost completely explain persistence in equity mutual funds' mean and risk-adjusted returns."

So, the next time that you have to choose mutual funds for either your 401(k) or investment account, head straight to the section detailing fees on the prospectus. The lower the fees, the better the returns.

3. Cut Back on Small Expenses

A nickel here and a dime there — it all adds up by the end of the month.

Orman is well known for pushing people to look for ways to save, even if it's just a little bit. "Look everywhere you can to cut a little bit from your expenses. It will all add up to a meaningful sum."

Take Millennials, for example. We may complain that we don't have enough money after paying bills and student loans, yet we make up 29% of the U.S. adults drinking wine several times a week. Even worse, Millennials are the group most likely willing to spend more than $20 per wine bottle. Assuming that you drink a $20 bottle a week, you're spending about $80 a month in wine. If you were to take that $80 every month and put in a mutual fund with an 8% return compounded annually, you would end up with $45,812.80 after 20 years. (See also: 5 Facts Millennials Should Know About Retirement Planning)

Can't live without wine? Then just cut your monthly consumption in half. Saving $40 every month and depositing in the same investment accounts would yield $22,906.40 after 20 years.

4. Don't Put Yourself on Sale

In her million-copy bestseller, Women & Money: Owning the Power to Control Your Destiny, Orman advises women not to treat themselves like they're on sale. "When you devalue what you do, it becomes inevitable that you — and those around you — devalue who you are," she warns.

This advice is not only applicable to women but also to several others:

  • Individuals that decide to become full-time freelancers have a hard time figuring out what's a fair rate. While taking on a $20 assignment that takes you about one hour may not seem that bad, you should only take the assignment if that rate covers your living and business expenses, taxes, and retirement savings per hour. Here's a useful calculator that breaks down all necessary criteria to determine your hourly rate.
     
  • More than 60% of Millennials don't negotiate the salary offer from their first employers. While first-time employees often think that negotiating their first salary makes them less desirable to employers, the reality is that 75% of employers could raise a starting salary by 5% to 10%. Given that our first salaries have the greatest opportunity to benefit from the power of compounding, Millennials may be leaving up to 10% of potential contributions to their nest eggs on the table.

Take Orman's advice and don't settle for less than you rightfully deserve; remember that self worth equals net worth.

5. Consolidate Debt the Right Way

Getting rid of credit card debt is so important to Orman that she suggests getting out of debt before even investing for retirement. In the past, transferring a balance from a high-interest card to one with a lower interest rate was a no-brainer. The balance transfer fee was often capped at $75. However, things have changed over the years.

"As you'll learn by inspecting the promo terms, the fee is often 3% of the amount being transferred," Orman warns about what she calls the "balance transfer blunder." Assuming that 3% transfer fee, transferring $10,000 from your old card to a new one would cost you $300 right away.

Consolidating your debt into a single card may be beneficial as long you do your homework:

  • Find out the details of the balance transfer fee. Some cards may offer a 0% APR but then hit you with an up to 5% balance transfer fee. Determine whether the transaction cost cancels out potential savings.
     
  • Don't close your old credit card. The length of your credit history makes up 15% of your FICO credit score. Closing a credit card, especially if it's your oldest card, will lower the average age of your credit accounts and undermine your credit score. Just hide that old card from yourself and don't use it at all.
     
  • Find out the duration of the promotional balance transfer. That lower APR is often a teaser rate that lasts only only a few months.
     
  • Figure out if APR after the end of promotional one would be lower, equal, or higher than your current one. The APR at the end of the promotional period should be lower than your current one, otherwise that APR may cancel out what you saved.
     
  • Maximize your payments during the lower-rate period. If your interest rate is now 0%, then a $100 payment pays off $100 of your principal. Take advantage of this period and, ideally, plan to pay off your balance during this time.

What are other great pieces of financial wisdom have you learned from Suze Orman?

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