Suze Orman: 3 Things She Won’t Waste Money On
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Peter Burns
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Suze Orman, a financial advisor, author and podcast host, has a few opinions on avoiding bad financial decisions. On a recent episode of the Suze Orman show, she details three things she would never do.
While she admits there may times to make an exception, your finances will likely benefit from avoiding these things.
Never Name a Minor as a Beneficiary
Parents want what’s best for their children, especially when they’re young. Because of this, it may be tempting to list your child as a beneficiary in financial accounts such as life insurance policies, retirement accounts or bank accounts in case something happens to you. However, the process is more complex than it appears.
Orman explains that minors can’t inherit money right away. The funds will end up in a blocked account until the child is 18 years old. In most cases, the court will appoint a conservator to manage the money, who may not be someone you would’ve chosen. The conservator may need to file annual accounts with the court, so fees would cut into the inheritance. It also doesn’t restrict what the funds are for, and when the minor comes of age, they can retrieve the funds and spend them on whatever they wish, according to ElderLawAnswers.
Orman suggests getting a living, revocable trust and naming that as the beneficiary, and the trustee can take care of your child. These trusts allow a trusted person to make financial decisions on the child’s behalf, avoiding legal disputes.
Never Cosign a Loan
There are many reasons why someone may ask you to cosign a loan with them. A young person may want to buy a car but doesn’t have the credit history to qualify on their own. A college student may need a private loan to cover the cost of their classes. A family member might have a business idea and need some help getting started. In all of these cases, Orman wants you to say no.
“When you cosign a loan, you are responsible for that loan no matter what happens,” Orman warns.
It’s true that if you decide to cosign a loan to help someone, you’re not responsible for just a percentage of the debt. You’re responsible for everything if the other party cannot pay it back. In a situation where you now have all of the debt, you can watch your credit score tank and your debt-to-income ratio skyrocket. It’ll also cost you a large amount of money, so it’s better to be safe and say no as Orman suggests.
Never Finance a Car for More Than 3 Years
Taking on debt for a car can jeopardize your financial health if you’re not careful, which is why Orman said you should never finance a vehicle for over three years.
As an investment, cars are a terrible choice. Kelley Blue Book states that new cars drop in value by 55% within five years. If you take on a multi-year loan to pay back your car, this can put you underwater on the loan. Underwater car loans happen when you owe more money on the auto loan than the vehicle is worth.
For example, buying a new car for $30,000 with a six-year loan and paying 6% interest means you’ll pay close to $500 per month. In the first year, you’ll pay about $6,000 in total with a little over $3,500 going toward the principal amount. If your car depreciates by 20% in the first year, it’ll only be worth $24,000, and you will still have $26,500 to pay back on your loan. Even if you sell your car for its maximum value after one year, you will still be in debt from the loan.
Because of this, it’s important not to extend loans for too long. Being underwater on a car loan can be financially crippling. Orman said, “If you cannot afford a monthly payment that’s over a three-year period of time, you are buying a car that’s too expensive.”
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