Recession Reality Check
Are you sick to your stomach and scared out of your mind? Money expert Suze Orman is here to explain what's really going on—and how you can protect yourself. "We have built an entire economy on lies and deceit," she says. "It's like building a home or an entire building on a sinkhole. You have a foundation, supposedly. But a little crack, if something goes wrong—a little earthquake, a tremor—and it starts to open, everything starts to fall down and, Oprah, that is exactly what has happened in the United States of America."
These companies made money by selling investments like mortgages to people who couldn't afford them, Suze says. "Have you all ever wondered, 'Why does Suze Orman say people first, then money, then things?'" she says. "It means if we cared about people more than we cared about money, we would not be having what happened today, because the people who run the corporations, if they had cared about all of you, they wouldn't have created loans that you couldn't afford."
A lack of regulations also contributed to the downfall—and Suze says there weren't more rules established because they would cut into the bottom line. "The more money the brokerage firms, the mortgage companies and all those companies made, the better the economy was. Because if they lent you money, you had money now that you could spend," she says. "When the economy looks great, everybody feels like, 'Oh, we're doing good.' The stock market goes up. When the stock market goes up, the price of shares go up. The compensation for the CEOs go up."
As things progressed, Suze says many people fell under Wall Street's spell. "A lot of you have built your personal financial foundation on deceit and lies. You bought a home that you couldn't afford. ... You spent money like it was going out of style and it wasn't your money to spend, because why? They were borrowing it," Suze says. "When you borrow money, you leverage yourself. The United States of America leveraged itself so high that when it started to come down, the whole thing now has fallen down."
In terms of investments, Suze says people close to retirement may need to reconsider. "Many people now have seen their 401(k) either cut in half [or] down 40 percent," Suze says. "[People] may have to work a lot longer than they planned, may not have enough money to generate income to send their kids to school."
Homeowners will also feel a burden, Suze says. As people lose their jobs, fewer homeowners can afford to pay their mortgages and property taxes. "The less amount of people that are paying property taxes, the less your state has to pay the firemen, the police department," Suze says. "The more your property taxes go up, the less you can afford your mortgage."
With all of these economic puzzle pieces in play, Suze says she wouldn't be surprised if we switched to a cash economy—which means buying only what you can afford now. "Banks aren't going to want to give you money where they're afraid that you might not pay them back," Suze says. "I personally think that's a great thing."
So what can you do to protect yourself? "People, stop living the financial lies that you have been living," Suze says. "If you don't have the money to pay for something, can you just not buy it? Can you wait? Can we start looking at keeping our cars for 10 years rather than getting a new one every three?"
Tammy says the bills added up before they knew it. "We are taking every bit of money that we do make and putting it toward our credit card payments. We're very proud people and never have been late in 20 years on our payments," she says. "We tend to take our cash, pay our credit cards and then use our credit cards to pay our mortgage and put gas in our car and feed our kids."
Tim says he and Tammy have no idea what to do once their credit is maxed out. "Right now is where we really need the most help," he says. "We're open for any advice that we can get."
Suze's suggestion is a harsh truth for Tammy and Tim. "I love you enough to tell you what you need to do to not only save yourselves, but to save your children so there's enough money then to buy them health insurance, for them to have life insurance," Suze says. "You need to sell your home."
Tim says he's concerned about putting his house for sale in a depressed market. "If you had just been honest a year ago, two years ago, that you couldn't afford the mortgage payments—you couldn't afford the lifestyle that you were living—you would not be in this situation here today," Suze says. "If you get rid of the house, you will start to live an honest life without lies. You'll start to make more money. You'll feel better."
Tim and Tammy want to know what their next step should be. "Let's put the house on the market to sell. Let's see what it should be priced at. Talk to your bank about possibly having to do a short sale and just see what happens from there. That is our first step toward honesty," Suze says.
It won't be easy, but Tammy says they're ready. "Whether we've been naïve or not, it's a reality, and now we're finally seeing the light and realizing that it's a change we need to make," she says.
If you're 10 to 20 years away from retirement, Suze says there's no reason to panic. "As long as you are invested in good quality mutual funds, diversified across the board, as this all goes down, you're buying more shares," she says. "The more shares you buy, eventually, when it turns around ... the more money you'll make."
The situation is more serious for men and women planning to leave the workforce in the next year. Suze says if you recently lost money in the stock market, there isn't time to recover your losses. "The harsh reality there is what? You are going to have to work more," she says. "For something to recover—even at an 8 or 9 percent annual average rate of return—it could take you 12 years to get back there."
If you need to start dipping into your savings in the next 10 years, Suze says it's best to take your money out of the stock market and invest in CDs and treasury bills or bonds. "For those people who need the money to be safe and sound, you need it to generate income now. You have to come out [of the stock market] at this point," she says. "It doesn't mean you can't go back in."
Suze says people may also want to start rearranging their funds. "You might put your money in something that gives you a dividend of 4 or 5 percent, so even though it's low, you're getting your income so you can live off of it," she says. "Then if the markets go back up in those areas, you'll make your money back."
From California to South Carolina, they have seen a lot, but they're not ready to park their RV just yet. However, with skyrocketing fuel and food costs, Jill says their nest egg is shrinking more quickly than they expected and derailing their retirement plans.
"We want to know, can we continue living a life on the road?" she says. "We have really, really enjoyed the lifestyle, and we hope we can continue it."
Like many couples across the country, Jose says he and his wife are worried about their future. "We're scared with everything that's going on," he says. "We're saying, 'Jeez, do we have enough to continue this?'"
"This is a couple that's done everything right," Suze says. "They have a serious sum of money in both of their retirement accounts. They just didn't want to touch it. They have money coming in. ... There is so much money there that as long as you continue to live like this, you're fine."
How did Jill and Jose put away such a sizable sum? For five years, Jill says they lived off Jose's salary and banked her income, which Suze says is the greatest decision they made.
They also spent years researching their retirement plan. "From a financial planning perspective, we kind of did the budget," Jill says. "We did the spreadsheet, [and] we said, 'What's inflation going to cost us? What's our rate of return going to be? And what are we going to pay for fuel? What are we going to pay for food?'"
Suze says more families should follow Jose and Jill's lead. "Fabulous, fabulous, fabulous, you two," Suze says. "You are seriously on the financial road for the rest of your lives."
FDIC insurance covers up to $100,000 per account in your name. If you have more than $100,000 in one bank account, look into opening more accounts so you'll always be protected.
To see if your bank is protected by the FDIC, go to www.MyFDICInsurance.gov. From there, Suze says you can answer a few questions and find out whether your savings are safe.
"If it's not, you're going to move it to another bank that it is," she says. "If it's insured, you have nothing to worry about. Even if your bank goes under, you will have access to your money. You'll be fine. ... FDIC has the taxing and authority of the United States government behind it, so you don't have to worry."
Is your money in a credit union? Chances are, it's protected. What Suze says you should know about keeping your money safe in credit union accounts.
"If the other corporations, the other banks, the other brokerage firms are just willing to be honest with what's behind the curtain, this will end sooner than later," she says. "If everybody is still trying to rob Peter to pay Paul and wants to continue to live a life of deceit and lies, this will get worse before it gets better, and it will continue."
From this moment forward, Suze says every penny you spend should be a penny you can afford. "If you can live an individually honest life, change can happen from the bottom up," she says.
Though the financial future may look bleak for some, Suze says this is the opportunity of a lifetime for people with cash to spend. "A fortune is going to be made over the next few years from all these stocks that went from 100 to 10, 90 to 0," she says. "But you can't take advantage of it unless you have cash, and you don't have cash if you have credit card debt and a house that you can't afford."
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