The Best Life Week with Suze Orman's 2009 Action Plan - Show Recap

Thursday, January 8, 2009

Live Your Best Financial Life:

Oprah welcomed back financial advisor Suze Orman for the fourth day of Best Life Week to help viewers with a 2009 Action Plan. To open the show, Suze and Oprah pointed out the first step to financial freedom is the same as with most other areas of life - get honest! A new financial plan will not succeed if based on lies. A common lie people tell themselves is the amount of credit card debt they actually have. 225 people in the audience admitted to having CC debt of 2.3 million dollars - but are they being honest about the number?

Donna admitted to Suze and Oprah that she is drowning in CC debt. Juggling 3 jobs, a husband and kids, Donna is paying more than the minimum payment, but is watching her debt go up instead of down. After admitting to Suze that her debt is 2 times what her husband thinks it is, Suze explained that because Donna's finances are based on a lie, she is spending more out of guilt. If Donna comes clean to her husband about the debt, according to Suze, the number will start to fall.

Pamela, an accountant and mother of 2, shared that she is also in denial about her CC debt.

Pamela shared that before coming to the show, she thought her debt was around $60,000, but after working with production, realized that it is closer to $79,000. Listening to Pamela tell Suze of how she and her husband landed so deeply in debt, Pamela sounded much like many other American's in the same situation. Pamela described a lifestyle that didn't change once she and her husband had their children; living beyond their means meant going deep into debt.

Suze responded by explaining that 2009 with either make you or break you, and that the "days of unconscious spending are over."

Suze used Pamela's credit story to explain to viewers the steps to start paying off CC debt. Suze's steps include:

1. Line up your credit cards starting with the one with the highest interest rate to the lowest
2. Continue to pay the minimum on each card
3. Put any extra money you can find each month (whether $10 or $100) towards the card with the highest interest rate
4. Once the first card is paid off, roll the minimum payment plus the extra money from the first card to the minimum payment on the second card
5. Continue this process until all of your credit cards are paid off

According to Suze, your goal should be to get out of CC debt before having a savings account.

To show why it is not a good idea to borrow from your 401K to pay off CC debt, Suze used Pamela's debt as an example of why doing this could equal financial disaster:

CC Debt = $79,588
Borrowed from 401K = $33,000
Total Monthly Payments = $1,829

Suze explained that if Pamela's husband were to lose his job, the 401K loan would be due almost immediately. Also, borrowing from a 401K means being taxed double - paying the loan with income that has been taxed, and paying additional taxes when you take the same money out later.

To start, Suze explained that FICO scores range from 300 to 850; and in today's economy, anything below 700 is considered low. A low FICO score equals a higher interest rate. However, Suze also explained that a low FICO score can affect whether a landlord will rent to you, or an employer will hire you.

Suze Steps to Improve Your Credit Rating:

1. Pay more than the monthly minimum
2. Pay your bills on time
3. Never go over your credit limit

Suze also recommended not to close a credit card because it will cause your FICO score to go down - losing the credit limit affects your debt/credit ratio, lowering your score.

Oprah introduced Carol, a stay-at-home mom who is frustrated by her husband Scott's spending. Carol explained that the couple has no 401K, IRA, savings, will or college fund for their 14 month-old daughter, yet they spend money on eating out and hobbies - $35,000 in the last 10 months, according to Carol, on things they didn't need.

When Suze sat down with the couple, Scott stated that he thought it cost $2500 per month to operate the home and that the couple had $200 in savings with 3 months of an emergency plan.

Suze revealed the couple's actual monthly expenses to be $8000 with $95,000 worth of debt - not including their house. Suze ended Scott's fantasy of having 3 months of an emergency plan by showing him that they wouldn't even have 1 day worth of savings if he were to lose his job.

Suze's 2009 Action Plan for Spending & Saving:

So what are Carol and Scott, and everyone else in their position, to do? Suze's Spending Plan includes:

1. Go through your list of expenses noting "wants" and "needs"
2. Circle the items on your list that are "wants"
3. If you have debt or not savings, eliminate the "wants"

Once your spending is under control, Suze's Savings Plan includes:

1. Save an emergency fund to cover 8 months of expenses
2. Decide how much you can save each month, and try to stretch it by 20%
3. Find a savings account with a higher interest rate

Kathleen and Tony had done almost everything right - planning for their's and their children's financial future early. Their one mistake? Putting their emergency fund and children's college savings into the stock market. Before the stock market crashed in September of 2008, Kathleen shared that she and her husband had $24,000 saved for each of their sons for college and $120,000 in emergency funds. After the crash, she lost half of the savings for her sons - dropping to $12,000 each - and an additional $50,000 from their emergency fund. Kathleen and Tony wanted Suze's help to figure out how to continue with their plans to pay for their son's college with the loss of their savings.

Suze recommended that Kathleen and Tony use the savings for their younger son to pay for their older son's college needs and consider a Stafford Loan to pay for the other. According to Suze, Stafford Loans can be borrowed by the student or by the parent with a Parent Plus Loan, and do not have to be paid back until after the student graduates. Taking out a Parent Plus Loan will allow Kathleen and Tony to save while their younger son in in college to pay back the loan after he graduates.

Suze's 2009 Retirement Action Plan:

29 year-old Kristin admitted to making the decision to not contribute to her 401K plan any longer after watching the total continue to decrease. Suze used Kristin's story to share her Retirement Action Plan, which includes:

• Don't panic if the market goes down
• Continue to invest monthly in your 401K or IRA
• If you need your money within 5 years, do not put it in the stock market
• Only put money in stocks if you don't need it for 10 or more years

Suze's 2009 Action Plan Pledge:

Suze and Oprah asked viewers to commit to Suze's 2009 Action Plan Pledge which included the following points:

1. Don't spend any money for 1 day
2. Don't use any of your credit cards for 1 week
3. Stop eating out at restaurants for 1 month