Four Suze Orman Insights That Can Strengthen Your Finances

With a dozen New York Times best sellers, an Emmy winning television show, and a widely followed podcast, Suze Orman has built a media empire by sharing her signature approach to personal finance and money management.

From Broke Restaurateur to Financial Advice Queen

Suze Orman's financial savvy comes from her own experience getting wiped out by a rogue Merrill Lynch broker, and her own climb to a VP executive position at Prudential Securities.

Orman developed her financial expertise the hard way. After borrowing $50,000 to open a restaurant, she lost the entire sum when a Merrill Lynch broker placed her money into risky options trades without her consent. Determined to understand what went wrong, she took a job at Prudential Securities, learned the industry from the ground up, and eventually rose to a VP-level position before striking out on her own.

While Orman has faced some controversy over the years, including criticism of the Bancorp Approved prepaid debit card for its fees and claims about improving credit scores, the core of her financial guidance remains rooted in practical, common-sense principles. Much of her advice focuses on preparing for worst-case financial situations, an area where she is particularly strong. Her recommendations on insurance, credit cards, estate planning, and emergency funds are built on solid fundamentals that listeners can adapt to their own circumstances.

Below are several key insights Orman has shared about protecting yourself when life takes an unexpected turn.

Insurance

Term Life Insurance is a key element of Suze Orman's worst-case scenario preparation formula.

• Term Life Insurance: Suze Orman advises people to augment any no-cost workplace life insurance with term life insurance that pays 20-25X their annual income to protect their families. Term Life  policies that can pay as much as a $1.2 million death benefit can be had for as little as $30 per week, but if the insured is the family breadwinner, this can be a crucial protection from getting a house foreclosed, impoverishing the family, or other disastrous after effects. Orman adds that choosing an annual renewable policy will keep the premium the same for budget management purposes.

• Why Term Life Over Whole Life: Suze Orman strongly favors Term-Life over Whole Life. She cites that Term Life delivers far higher payouts for a much smaller premium. For those who were thinking of a Whole Life policy, which may triple or quadruple the premium cost for the same payout, Orman advice is to take the premium differential and invest it or add it to an emergency savings fund.

• Homeowner’s Insurance: Orman warns people against homeowner’s insurance policies that pay out based on cash value, since these wind up only covering depreciated value. Instead, she prefers policies that will pay out on replacement value.

• Automobile Insurance: Suze Orman has found that people often drop comprehensive coverage for their older cars in order to save on the premiums. She warns that for those people dependent on their cars for daily commutes and other necessary travel, cars lost in a disaster (accident, fire, flood, etc.) that lack comprehensive coverage will not receive any insurance payout. People with a second vehicle may have the luxury to take the risk, but single car families may not.

Credit Cards

Orman is more open to the use of credit cards than some of her contemporaries, like Dave Ramsey. However, she is a stickler for reducing high interest to a manageable level. Many of her callers are those who have gotten caught in a high debt treadmill and can’t get out from under. Some of Orman’s common sense tips include:

• Calling the issuer to request a lower rate. Since the average rate is 22% and the competition is heavy, issuers will often lower rates by a few points to keep a customer.

• Try to do a balance transfer deal that will give a moratorium on interest charges for 12 to 18 months to pay down a balance, before charging a measurably lower interest rate than previously.

• If possible, try to rebudget to afford an extra $50 per month towards reducing credit card debt balance, which will greatly accelerate getting out from under the debt spiral.

• Conduct an honest review of “needs” vs. “wants” to proactively discipline one’s spending from going beyond their means and incurring further debt.

Taking the “needs vs. wants” principle into more granular detail, the follow steps are especially crucial for seniors who have accumulated a substantial debt overhang:

• When reviewing “needs” vs. “wants”, seniors need to take a fresh perspective in those categorizations. For example, maintaining 2-cars might have been a “need” while one car commuted to work while the other was used for taking kids to school and for general food shopping and other errands. As retirees, two cars might no longer qualify as a “need.”

• Once a genuine “needs vs. wants” list has been compiled, eliminate using credit cards for purchasing any “wants”, and as few “needs” as possible, opting instead for debit or cash.

• Be careful of Medical Credit Cards and read the fine print. Most of them are designed to help families with loans to deal with unexpected medical bills when caught cash short. While there may be no interest charged on the loan for anywhere from 6 to 18 months, once the moratorium period expires, the interest rate can be as high as 27% or greater. Therefore, Orman’s advice includes:

* Only use a Medical Credit Card for emergency procedures, never for elective procedures.

* Request a payment plan if the medical provider suggests a Medical Credit Card, as the payment plan will often wind up cheaper.

* Only use a Medical Credit Card if sure the entire bill can be paid before the interest charge moratorium ends.

Estate Planning

Suze Orman’s podcasts cover a wide range of estate planning topics, citing the use of trusts, ways to avoid probate, and handling beneficiary issues. However, some often overlooked topics include the following:

• Funerals: While an estate often has assets and dollar amounts intended to bequeath to specific heirs cited in a will, funeral and burial arrangements and their associated expenses are frequently overlooked or underestimated. For example, average burial services are $8,500 and average cremations are $7,500. Keeping family sensibilities in mind, Orman suggests:

* Listing the type of funeral service desired in advance, and if a corresponding budget allocation from the estate can be segregated as well, even better.

* Specify casket wishes, since the average price is $2,500, and some can easily triple that amount.

* The above and any other details should be made as explicit as possible, and entered into writing to avoid any post-mortem ambiguity.

• Health Care Proxy: A Health Care Proxy, in the form of an advance directive, spells out one’s medical wishes.  This is especially crucial if a person is rendered comatose or unable to articulate their medical future, such as if they need to be put on life support equipment. The Health Care Proxy involves nominating a designated person with the prerequisite power of attorney to serve as one’s official health care agent in instructing doctors and other health care workers as to your wishes, which, for example, could include a DNR, ie., “Do Not Resuscitate” directive.

Emergency Savings

Suze Orman is adamant that people protect themselves against unexpected financial upheavals with Emergency Savings Accounts, even if they take years to build up.

One of Suze Orman’s fundamental principles is the notion of maintaining an Emergency Savings account to handle sudden financial shortfalls or emergencies. The Emergency Savings account ideally will hold liquid funds equivalent to one’s annual salary. Studies have found that 80% of women with no emergency savings funds suffer from constant financial stress. Suze Orman advises a series of short term goals of building emergency savings in 3 month sized amounts to get to a full 12 month fund.

• First step includes an honest cost of living breakdown of necessities and their monthly costs. This should include monthly insurance, utilities, communications, fuel, rent, groceries, and the like.

• That sum, multiplied by 3, is the savings goal. The savings goal should then be divided by 12. For example, if 3 months living expenses is $7,500, $625 per month saved over the course of a year would accumulate to a 3-month Emergency Savings Fund.

• If that amount is too steep, she advises dividing by 18 or even 24. The goal is to be proactive in getting towards the 3-month Emergency Savings Fund target, even if it takes 2 years.

• Once the 3-month Emergency Savings Fund target amount is reached, continue to get to 6 months, and repeat until a full year’s worth has been accumulated.

• A High-Yield Savings Account, which can earn as much as 4%  APY or more, is an ideal vehicle for keeping the funds liquid, interest bearing, and insured by FDIC.

While Suze Orman’s suggestions may not work for everyone, there are enough tried and true principles behind her methodology to find something worthwhile for their own use.

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