Good riddance to the old American dream says Suze Orman, financial guru and author of a new book, The Money Class: Learn to Create Your New American Dream (Spiegel & Grau, $26). Why? Because the old dream became a nightmare for many people as they overspent, overmortgaged, overindulged and then were brought up short by the financial crisis of 2008. “It all happened very quickly,” Orman said in an interview with The Fiscal Times. “It happened because of the greed, deceit and lies of the financial industry.”
But that was then, this is now, and in Orman’s vision, it’s time for a new American dream, one in which we “take a clear-eyed accounting of exactly where we are, and how we plot a course that addresses our truth.” You can either afford something or you can’t, she says. She urges having little or no debt, saving for the future, spending only what you need to spend — and for many people, renting instead of buying a home.
“Some people have been seriously scarred and never want to be burdened with home ownership again after what they’ve been through. You’re going to see many more people in the future be renters rather than home owners
In her bestselling books and on her popular TV show on CNBC, Orman, 59, has been passionately spreading the gospel of fiscal restraint and common-sense wisdom. The new American dream, she says, must be based on “honesty and integrity.” That means no excuses. That means a straight-up reality about money. She elaborated:
The Fiscal Times (TFT): You vigorously stress saving for the future. You say there’s ‘pleasure’ in saving, that saving should be ‘part of our national conversation.’ Explain.
Suze Orman: You can’t just live for today. You have to live for tomorrow, and tomorrow comes a lot faster than you think. Look at how many people, including friends of mine, are now going to have to work until the day they die because they refused to save for the future. They bought a Mercedes, they bought an Audi, they went on this vacation, they went on that vacation. They put it all on credit cards and didn’t worry about it. I used to think, how can they afford that? What are they doing? Now they’re kicking themselves.
TFT: This is not just personal for you – is this what you see across a broad swath of America?
SO: I see and talk to people who have lost their jobs. They’ve lost their homes. They’ve lost ten years of growth in their retirement accounts. They have no equity left. People are pawning the wedding rings that they bought for $1500 for $200 combined, because they need the money. The question I get asked the most today is, ‘Should I declare bankruptcy?’ The other day a 76-year-old woman told me she’s out looking for a job because she has almost nothing left to her name. She retired at 65 and thought she was going to be OK until the day she died. But she’s competing with the millions of other people out there who are also looking for jobs that don’t exist anymore.
TFT: Living ‘below your means but within your needs’ is the way to not just survive, but thrive, you say.
SO: I’m here to say it can be done. People can move in a positive direction and take control.
TFT: Give us an example.
SO: A 13-year-old called my show the other day and asked, ‘Can I afford a $120 pair of True Religion jeans?’ I asked her, ‘Would you still want those jeans if the money you spent on them today grew to $2,000 by the time you’re my age?’ She got it. But because she was on television, she also said, ‘Well I’m still going to buy those jeans, because that’s why I came on your show.’ Look, if we talked to kids more about money, about the value of things, and about how money can grow over time, instead of just trotting out the line, ‘We can’t afford it,’ which teaches them nothing, they might grow up and not make the same mistakes that today’s baby boomers have made.
TFT: So you’re saying it’s the parents’ responsibility to teach financial smarts and practical wisdom, not the schools’ or anyone else’s.
SO: I don’t care what the schools teach. Whatever they teach gets unlearned at home. Parents are the primary professors when it comes to money, and kids do what you do, not what you say. You should have a money class right in your own home every single day when it comes to your children.
TFT: For those approaching the college years or already in college, or for parents looking at this option for their kids, you’d say what?
SO: If you can’t afford [a traditional four-year] college, the kids can go to a community college. And I don’t think it’s a bad idea that kids take one or two years off after high school to gather up some money – then go to college. I do not think that we need to rush directly from high school into college and then into the world, since there are no jobs anyway. Kids are leaving college with student loan debt that they can’t find jobs to pay off. Student loan debt is not dischargeable in bankruptcy in most cases, so these kids’ lives are ruined and it’s the first loan they’ve decided not to pay. They can go into forbearance, and $20,000 turns into $40,000, which turns into $80,000, which turns into $160,000 and then you hear from the student loan companies.
TFT: Let’s move to another very prevalent example: buying a $5 cup of coffee every day on the way to the office. Safe to say you don’t approve?
SO: Do people realize that they’re spending $100 or more a month on Starbucks or wherever they go, and that that money could be growing for them? I have told people, ‘You’re pouring a million dollars down the drain over the course of your life.’ Once in a while, people understand it. But they also have this attitude of, I work hard for my money, I’m entitled to the little pleasures of life. They can continue to live that dream if they want to, but the truth is that depending on their situation, one day they will look back and say, ‘What was I thinking?’
TFT: And for those who are nearing retirement, give us a critical financial rule of thumb.
SO: The best thing is to have your home paid off in full, especially if you’re going to stay there the rest of your life. Many people have lost so much in value that they’re not going to be able to make that up in time and generate the income that they need to pay your mortgage. So it’s far easier, truthfully, to simply just pay off your mortgage. That’s probably one of the biggest mistakes people make: They go into retirement still with a mortgage payment.
TFT: You’re saying the mortgage interest deduction doesn’t justify holding on to the mortgage.
SO: No. The banks know people sell their houses every seven years, on average, which is why your big mortgage deductions are in the very early years of your mortgage. So the banks get to charge you that interest as if you kept the house for 30 years – even though you maybe only kept it for seven. In the later years of a mortgage there’s very little mortgage deduction. It’s all principle; you paid the interest up front in the beginning. Not worth it.
TFT: What about walking away from a home? Plenty of people have done it.
SO: I think it serves the banks correctly if they refuse to work with people. A friend of mine who bought a house in Tampa for $720,000 and put 20 percent down – and then watched the home’s value drop to $150,000 – tried to do absolutely everything to get her bank to work with her on a loan modification. They refused. They wouldn't talk to her. She ended up claiming bankruptcy. That was the only way to make sure the state and the IRS did not come back to her for the money. I do not have a problem with people walking way if they honest-to-God cannot afford it. And I don't have a problem with them walking away if they're more than 50 percent underwater. I just don't.
TFT: When all is said and done, you say there’s a hopeful message in taking control of one’s money and one’s future.
SO: You can accomplish anything you want as long as you know that you've provided for yourself with what you need. The old American dream had to die, because it was based on falsehoods. I see this is as a positive turning point in American history, one that will give people the security they've been looking for their whole life, as opposed to the false security of bigger houses, bigger cars, and more clothes.
Suze Orman vs. Warren Buffett: Whose Advice Should You Follow? (Business Insider)
Is The American Dream Dead? (ABC News)