Suze Orman on the financial basics, FICO

Marketplace Staff Jul 22, 2011

Suze Orman on the financial basics, FICO

Marketplace Staff Jul 22, 2011

Tess Vigeland: Alright, so there’s some advice to follow as you move slowly through the humid haze this weekend. Nothing terribly complex. But what if we were giving you advice you just really didn’t want to hear.

Suze Orman: Here is what I want you to do. I want you to sell the house.

Woman gasps

Orman: Ah! Forget about it. You listen to me. You can’t afford the house, the house is too much. You’re in San Francisco, I want you to sell the house.

You listen to me! Or listen to her. That’s Suze Orman, of course, taking one of her viewers to task for retiring way too early. We brought you the first part of our conversation with Orman a few weeks ago. Today a little more from behind the scenes. She says the begging for permission to do dumb things with money doesn’t stop when the cameras stop rolling.

Suze Orman: A lot of ’em will say, “No, no, no. You didn’t have this right. No, I can do this, let’s do this again.” But here’s the thing, if you have credit card debt, if you don’t have an eight-month emergency fund, if you’re not funding your retirement account to the max, if you’re not doing what you should be doing, then I am not going to allow you — at least on my watch — to buy something that is a want, not a need.

Vigeland: Well, you will often say to people, “Hey, look at what you just said to me. There’s your answer.” I wonder how much of what you tell your audience do you think they actually kind of already know, but they just want to have it affirmed by you?

Orman: I think that some of them, obviously, have a feeling. But a lot of them, honest to God, they do not. Just the other day I did a thing of somebody who wanted to know if she could afford to retire. She was 60 years of age and saved $782,000 and that’s everything she had. And I told her no. She, right now, has written two or three long e-mails saying I am wrong, she absolutely can afford to retire. She cannot believe it, she’s totally embarrassed. But she thinks, ’cause she has $800,000 she can afford it. At the age of 60, she can’t start Social Security yet. $700,000, $800,000 today, in a retirement account will only generate for you — if you are lucky — about $30,000 a year of income before taxes. After taxes, you’re looking at $20,000 a year. Who can live on $1,800 a month?

Vigeland: But, boy, you look at those numbers and you think about some of the average 401(k) balances that are out there. I mean, you know, there’s studies that the vast majority of people who are in their 50s and 60s don’t have more than $100,000 stashed away.

Orman: That’s right and that’s why they’re going to have to work for a long, long time. So it’s not only how much money you have, but how much is the interest rate you can get on that money going to generate an income for you. It’s what will the tax brackets be, it’s what are your expenses. All of that has to be taken into consideration.

Vigeland: You know, I’ve seen criticisms for being too basic, that the things you advise people on are just so common sense. Why do you think so many of Americans need those basics?

Orman: We have to get so basic, because you can’t put together sentences unless you know the alphabet. When it comes to money, they don’t know what a Roth IRA really is, they don’t know the difference between a bond and a bond fund, they don’t understand APR on their credit cards, and what is a FICO score and why do these things matter.

Vigeland: And I guess, again, this is a problem with both education and a lack of talking within the family about money.

Orman: Yes, and you know, we don’t talk about it. We’ll talk about sex, we’ll talk about all these things before we’ll talk about how much credit card debt we have.

Vigeland: You have a long standing relationship with Fair Isaac.

Orman: Yes.

Vigeland: I am fond of asking who died and made FICO king. Do you think their rules are fair?

Orman: No. I think the truth of the matter is, if it were up to me, all FICO scores would be absolutely free. I also believe that the FICO scores that the way that they happen to be calculated are not a good indicator what people will or will not do with their money. I think it’s an absolute travesty that Experian, which is one of the credit bureaus, will not allow you to buy your FICO-Experian score anymore. The only thing they will sell an individual is this Vantage score and only maybe 10 percent of the creditors use them. And I also think it’s absolutely nuts that we have three credit bureaus. I think we should form a whole new one and get rid of all the other three, but that is beside the point. But I think the people need information about themselves, and I think that all of that should be given free to everybody.

Vigeland: Suze Orman, thank you so much for being with us today.

Orman: Thanks for having me Tess.

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