Saturday, March 13, 2010

Suze Orman Goes Too Far!

I've been a fan of Suze Orman for years. When I first started working after graduating college and then I started to make some money, my experience with other members of my family, mostly my grandparents, showed me that I needed to figure this money thing out.

So, I set out to understand how money works and I found Suze. Many financial gurus are out there and for the most part, much of the advice overlaps, but Suze really seemed to be right along my line of thinking. I bought the books, watched the show, and despite the fact that I feel like I've largely outgrown it so long as I follow the lessons, I really wanted to check up on how things were going.

I went to the CNBC website and found an interview where she said this:
"I do really live within my means. I have absolutely no debt. If I don't have the money to write a check, then I can't afford it. I never, ever, ever spend old money, so I'm only allowed by my own standards to buy something new with new money that comes in. So, if I sell a home, I can't take that money to buy a new home. That money I already had, that goes into the investment account. If I want to buy a new home, it has to be with new money that comes in."

Now here, in my opinion, Suze goes way too far, for some people. Many people are very comfortable now with the idea that you're supposed to be spending less than you make and that it is not important to impress people. The great recession that we're in has been a tremendous shift in mindset for the average American consumer. But the idea that you have to only spend new money is something that will fly in the face of most people's thoughts on money.

I agree with this concept. The idea is simple, you need to make sure you're doing everything to live within the means based on what you're making today, not what you made 3, 6, or 12 months ago. This is one of the fundamental problems with many people's personal financial situation.

In the face of a salary cut or a layoff, people continue to live the lifestyle that they had at 100% income levels. What Suze is saying here is a bitter pill to swallow, but it reflects a new economic reality that we'd all be better off accepting now and living by: a loss in any kind of income needs to be balanced more than 100% by reductions in expenses.

Most people have discretionary expenses: cable, internet, cell phone, dinners out and entertainment, the list goes on. However, it makes no sense to spend on these things when you've just lost hundreds or thousands of dollars monthly in income. Where will that loss of income come from? And what if things get worse and you lose your other income or have an emergency?

What Suze says here is advanced, but it is critical. A good credit score and a nice healthy emergency fund makes no difference if it is not managed judiciously in the face of a real emergency like a loss of income.

Personally, I've taken the same principal and applied it the other way. If my income increases, I typically wait until I've gotten 3-5x as much additional monthly income before I commit to a discretionary expense. Then I know that the expense is sustainable and that I'm continuing to save and invest enough extra that I should be able to reward myself.

For example, if I wanted to go out to eat one additional time for 45$ each month, I'd usually wait until I made about 150-200 dollars additional (and that I was saving/investing it), net each month before committing to spending that money.

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