Suze Orman has a very popular segment on her CNBC show called, “Can I Afford It?”. She appeared on Oprah this week for an hour long version of that segment. It was a pretty good show.
One of Oprah’s audience members was pregnant with her second child and wanted to stay home when the baby was born. She and her husband have a combined income of $9,000, an emergency fund of $6,000 and expenses including child care of $6583. When they looked at the numbers for the family if this mother stayed home their income dropped $3,000 a month but their expenses only dropped about $800. Suze pointed out that this woman’s figures did not include expenses for the new baby. She recommended they start trying to live on just her husband’s salary until the baby was born, which would give them 6-8 months to practice and see if they could pull it off.
The next example was a young woman living in Boston who graduated from college with $63,000 in student loans. She is working full-time plus has a part-time job at Starbucks to make ends meet. She is spending $800 a month on car expenses alone. She showed off her bedroom, which included a $1400 bed and a $300 iPod. She never says no to her friend's invitations to go out and she is getting regular manicures and pedicures. This young woman was very distressed and feeling helpless. Astonishingly her expenses were $3237 a month and her income was only $2010! Oprah pointed out that this sort of balance sheet is what caused the economic problems we are currently experiencing. Since Suze met with this young woman, she has cut $700 a month from her expenses. Her question for Suze was could she afford to stay in Boston, as opposed to moving back home. Suze said she could stay in Boston because she’d done such a good job cutting her expenses. I was stunned. She’s done a good job but she is still $300 a month upside down. Suze gave her three months to find a better job. If she can’t then she has to move home.
Example number three was a single woman who wants to buy her first house. She makes $2900 a month, has $1845 in expenses and has $8500 in her emergency fund. She plans to take $5,000 from her emergency fund to use as a down payment. Obviously Suze denied her plan to use her emergency fund as her down payment. Suze advised her to build up an 8 month emergency fund AND a down payment fund before she started house shopping. She was already approved by her lender for a $150,000 mortgage. So, clearly the banks still aren’t looking too hard at their borrowers.
The next example was a 50 year old woman who wants to retire in six years. She currently has an income of $9100 with expenses of $8200 and $393,000 in retirement savings. She expects her retirement income to be about $6500 with expenses of $6300. Suze told her she could not afford to retire. This woman had not factored in inflation and higher medical costs during her remaining lifetime. Suze told her to cut her expenses a lot more and build up a good emergency fund and perhaps she’d be able to retire at age 60.
The final example was a labor/delivery nurse who wanted to buy an SUV. She makes $3400 a month and has $2500 in expenses. Her current car payment is $316 a month on a lease vehicle, which will be over in March. She has $800 in credit card debt. She has about $1200 in savings. Suze said she could buy the SUV because she has to be out late at night in the snow and needs a dependable vehicle. Suze said that her new payment needed to be the same as her current car payment. She recommended that this woman clear her credit card debt and start working overtime to sock some money away before purchasing a used SUV when her lease expires.
What do you think? Do you agree with Suze’s decisions? I wonder how many of these people actually follow her advice.
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