Going into 2021, Suze Orman thinks many people need a financial reality check. When asked what one financial move young folks should make in the new year, the financial expert, bestselling author of "Women & Money," and the host of the "Women & Money" podcast said, "I would take a really good look into the financial mirror and make sure you like what you see."
Orman rattled off a list of common behaviors that could land you in a difficult financial situation. Some of them you may recognize. Read on for four of the moves you may be making that the money guru says are "financially foolish."
With stay-at-home orders forcing Americans to shop, dine out, and travel less, consumer credit debt sank by 9% in 2020. But that doesn't mean it's not still a big problem for millions of people; the average household still owes a little less than $8,000 in credit card debt, according to WalletHub.
"If you have credit card debt that you can't pay off at the end of every month, you're being financially foolish with your money," Orman says.
There are numerous strategies for finding your way out of debt, but no matter which one you go with, you'll have to curb spending, says Orman. "If you're wanting to go on vacation all the time, you're wanting to go out to eat when the restaurants open … you're wanting to buy the latest iPhone and all of that, you are being so financially wasteful."
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One of the biggest areas of overspending, she says: cars. "I myself keep my cars for 10 years. What do you do? Do you buy a new car every three years? Are you leasing it? Financially foolish," she says.
"The most important building block, so that you can grow, financially speaking, is that you have a financial foundation that you can stand on. So when something goes wrong, it doesn't collapse," Orman says. For her, that means building an emergency fund that's large enough to cover a year's worth of living expenses.
Most financial experts recommend stashing away 3 to 6 months worth of expenses, but the pandemic has taught us that a crisis has the power to cripple your finances for an extended period, Orman says.
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"Even eight months now of an emergency fund isn't enough. It is eight months since this started. It's longer than that. It's going to be a year. It could be even longer than a year," she said in November. "So the truth of the matter is it's probably that you should have one year of an emergency fund right now."
It's unlikely you have a year's worth of expenses on hand to plunk into an emergency fund, so you'll have to build your stash gradually. To get to $1,000 in 2021 (a sum that would put you ahead of 41% of Americans) you'd have to contribute $36 per biweekly paycheck. Up the amount to $135 per pay period, and you'll hit $3,500 by year's end.
If one is available to you, you need to be contributing to your 401(k), says Orman, especially if your employer offers a matching contribution. "If you are not fully maxing out to the point of the match, if offered to you in your employer sponsored retirement plans, you aren't being financially foolish. You are just being stupid, plain and simple."
If an employer offers a full or partial match of your contributions to your workplace retirement plan, experts typically advise you contribute at least enough to grab that "free money."
Video by Ian Wolsten
Orman suggests contributing to a Roth account as well, either a Roth 401(k) if your employer offers one or a Roth IRA. These accounts are funded with money you've already paid taxes on. Your investments in them grow tax-free and you can withdraw your money without paying taxes in retirement.
If you don't have a Roth IRA, "you are missing out on the compounding years of your life," she says. "You are young. These are the years that it's not a dollar that you're investing. It's like $10, $20 in future earnings."
You may be asking yourself, do I even need life insurance? If you're young, single, and don't have children, you're much less likely to need a policy. But if you have people in your life who rely on your income, it's worth considering signing up.
Life insurance comes in two flavors: term policies, which stay in effect for — you guessed it — a predefined term, and permanent policies, which include universal and whole life insurance, which last until you die.
"If you need life insurance to protect your family, the only type of life insurance you should be looking at is term insurance," says Orman.
That's because term life insurance is much cheaper than the other options. It allows you to have a policy for when you need it, say until your young kids grow up and go to college, or until you retire and can live off of your savings.
There are plenty of online calculators that can help you determine what a policy might cost you. According to the one provided by Policygenius, a 30-year-old male in good health can expect to pay between $38 and $47 a month for a policy that pays out $500,000 if he dies before the age of 65.
These aren't the only financial challenges that folks face, Orman says. But addressing your financial shortcomings now is the best way to prepare yourself for the future. "Those are the things that would make you financially smart," she says.
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