Suze Orman's Action Plan (5 page)

Three universal rules govern all the specific advice in the following chapters:

Rule #1: Let go of the past
. There is no way you can move forward if you are still holding on to what “used to be.” As in: “My 401(k) used to be worth…” or “My house used to be valued at…” or “My job used to be secure” or “My credit card rate used to be 5%.” You can’t get where you want to go—where you need to go—if you are looking in the rearview mirror. All eyes on the road ahead. All decisions must be based on what is real today, not what used to be.

Rule #2: Plan on moderation
. As I write this in the fall of 2009, the tea leaves suggest that the official recession is over and the recovery is beginning to gain momentum. But it will be a recovery of moderation, a state of affairs that has been dubbed “the new normal.” Instead of growing at the 3% annual
clip that persisted for the past few decades, Gross Domestic Product (GDP) is expected to rise at a more moderate 2% rate in the new normal. That slower growth will ripple throughout the economy and your finances. Stock returns are expected to be more moderate, as are the prospects for home values. And without a booming economy, higher unemployment could be a fixture of the new normal; businesses are expected to take a slow-go approach to increasing their payroll as they grapple with the ramifications of more moderate growth and profits. New times indeed.

I also want you to understand that while the worst is over, we are not completely out of the woods. To repeat what I said a year ago: I expect we will be on a roller coaster until 2014 or 2015, because the markets, the economy, and the entire global financial system will need time to fully digest the toxic assets that still abound on many balance sheets.

Rule #3: Respect risk
. Absent from the conversation throughout the stock and real estate bubbles was this crucial calculation: “What is the risk?” It’s as if everyone refused to entertain the possibility that risk existed. During the Internet stock bubble, you bought into the argument that we were at the dawn of paradigm shift—remember how often we heard that one?—that would see market gains more than double the historical rate and sustain them. When the 2000–2003 bear
market hit, you were shocked—
shocked!
—to see your stock portfolio get creamed. And it never occurred to you, during the real estate bubble, that home values would ever—
could
ever—fall. It wasn’t just you; the trends and data Wall Street used to fuel much of the real estate mania didn’t even address the possibility that home values could decline! And let’s just say that Washington regulators also seemed to be asleep at the wheel in terms of managing systemic risk.

So much of the carnage could have been avoided if every one of us—individuals and institutions—had respected risk. Notice I said respect, not avoid. The goal is to stop at every juncture and make sure you understand the potential risk, and then make a conscious and deliberate decision on how to mitigate that risk. Owning a home is very risky when done with an exotic mortgage whose initial rate is artificially low but can skyrocket when it resets. Owning a home with a fixed-rate mortgage in which the monthly amount due is the same in month one as in month 360 (30 years down the line) is a whole lot less risky. An IRA invested 100% in stocks when you are in your 50s or 60s is very risky. An IRA that holds bonds and cash is a whole lot less risky.

The call to action is that you must be your own risk manager. Yes, we all should expect Washington regulators to do a better job, and let’s hope they will. But you can’t afford to rely on this; you
must assess your own tolerance for risk and understand the stakes. Your own resolve and vigilance will keep you from being hoodwinked by the next bubble. That’s right—I said the next bubble. Bubbles have long been a part of our history, for better or worse. That doesn’t mean they have to threaten your financial life; it is up to you whether you buy into them or choose to watch from the sidelines.

Feeling down? Feeling like this is so depressing? Okay, enough of that. Listen to me: This is a phenomenal opportunity. When you are so shaken you know you will do everything never to revisit that feeling, you have all the motivation you need to get it right once and for all. A year ago I wrote the
Action Plan
to help you survive the crisis. Now my focus is to give you the tools to thrive. Yes,
thrive
. That’s what you deserve, is it not? Not just this year, but every year.

The tragedy of the financial crisis is that it has robbed so many of you of what is most important: living your life to the fullest. You are stuck obsessing about money. You are worried sick about money. But the truth is, worry doesn’t fix a thing. Action does. So let’s get started.

T
his is one breakup that makes me really happy. I know it is painful for you, but trust me, the cold shoulder you are getting from the credit card industry is the best thing that could have happened to you.

I’m just sorry this unhealthy relationship dragged on for so long. For years you, the American Consumer, were on an insatiable spending spree. Unstoppable spending seemed to be downright patriotic. So what if you lacked the income to pay for all those purchases? Why worry about that small detail when you could just ring up a tab on your credit cards?

Credit card issuers were willing suitors. They plied you with near-daily offers of new credit; in 2007 consumers were flooded with an estimated
5.2 billion credit card offers, or about 23 for each American over the age of 18. The offers often came with 0% teaser rates and balance-transfer terms that encouraged you to keep up the charade of believing you have more money than you do. By the end of 2007 the nation had collective credit debt of more than $950 billion. (Yes,
billion.)
Yet it was far from free money. The banks collected an estimated $18 billion in late-payment fees and billions more in interest charges. The credit card industry saw their profits rise $27 billion over 2003 levels. Wow.

Then suddenly it was all over. As the credit crisis gained velocity, beginning in the summer of 2008, many banks had a chilling change of heart. They cut credit lines, closed down accounts, and raised fees and interest rates in an effort to protect their balance sheets from rising payment delinquencies. That continued throughout 2009, as the highest unemployment rate in 26 years sent the delinquency rate even higher.

So here we are: Many of you are nursing a painful case of withdrawal that includes everything from pangs of regret to moments of anger for being dumped so unceremoniously. After years of spending with impunity, you not only couldn’t borrow more, you now face huge financial penalties on your existing balances. Even people with sparkling credit scores and pristine credit reports were caught in the maelstrom; a FICO credit
score of 800 provided no protection from a credit line cut.

The about-face turned by so many banks couldn’t have come at a worse time for those of you using your credit lines as virtual emergency savings funds. Your plan was that if you ever needed to cover an unexpected expense, you’d just charge it or take a cash advance. But just when layoffs, furloughs, and pay cuts hit with a vengeance during the recession, your financial lifeline vanished.

As wrenching as the credit squeeze has been, I have to tell you that it presents a wonderful opportunity to catapult you to a happier and more secure way of life. You’ve no doubt heard the saying “Once bitten, twice shy.” After what you have been through, or watched friends and family cope with, my hope is that you are now sufficiently motivated to never allow yourself to be bitten again. Please do not let yourself fall victim to your own faulty assumptions and poor spending choices or to the fickle and costly practices of the credit card industry.

For make no mistake: The days of easy credit will return. Maybe not as easy as it was in years past, but certainly not as tight as 2008–2009. It’s the nature of the credit industry to give credit. Make it your business once and for all to be smart and powerful in how you choose to use credit.

The New Rules for Credit mean you pay as you go. The closer you can get to being able to pay off your credit card balances at the end of each month —
that is, not owing the card issuer a dime in interest—the closer you are to financial freedom.

Your first job is to clean up any existing mess that may exist. If you don’t already have an emergency savings fund in place, dealing with your credit card debt has to move to second place on your to-do list. My recommendation is that you first use your available cash to build up a solid federally insured savings account at a bank or credit union. You can’t rely on your credit card to be a backup emergency fund. It was never ideal, and as I explain later in this chapter, it became an extremely dangerous gambit in 2009.

Once you have the savings account in place, you are ready to tackle your credit card debt. It may take you three months or three years to work your way out of the hole. Just vow to stay focused on the endgame: no longer being at the mercy of the credit card industry.

• If you have an eight-month emergency savings fund, make it a priority to pay off your credit card balances.
  

• If you do not have an eight-month emergency savings fund and you have credit card debt, look into a balance transfer to a credit union credit card. Then split your money between building up your emergency savings and paying down your credit card debt.
  

• If you have a high-rate credit card and you cannot transfer to a lower-rate card, and you do not have an eight-month emergency fund, pay just the minimum on your card and focus on increasing your emergency savings.
  

• Read every statement and all correspondence from your credit card company to make sure you are aware of any changes to your account, such as skyrocketing interest rates.
  

• Work to get your FICO credit score above 740.
  

• Be very careful where you turn to for help with credit card debt. Debt consolidators are often a very bad deal. The National Foundation for Credit Counseling is a smarter choice.
  

• Resist the temptation to use retirement savings or a home equity line of credit to pay off credit card debt.
  

• Vow to use your credit responsibly.