Financial motivator Suze Orman: Managing and investing your money

Suze Orman is the author of three consecutive New York Times bestsellers. Her latest book, "The Road to Wealth," hit the bestseller list after just one week on sale. Ms. Orman is a sought-after speaker, a contributor to several publications, a frequent television guest, the host of a QVC show about financial freedom, and has her own Los Angeles radio show. She joined CNN.com chat room from Birmingham, AL.

CNN: Welcome to CNN.com Newsroom Suze Orman. We're glad to have you with us today.

SUZE ORMAN: Good afternoon, everybody. I look forward to giving you the tell-it-like it is answers to what you need to know. So let's start!

CNN: Suze, how does your latest book, "The Road to Wealth" differ from your two other bestsellers -- "The 9 Steps to Financial Freedom" and "The Courage to be Rich"?

ORMAN: "The Road to Wealth" is a pure financial book of course couched in Suze-isms! It is 2052 questions, 2052 answers, no stories, just the facts. And, it comes with a newsletter that starts August 15th, tomorrow, and goes until December 15th of 2002, every other month, that is about 7,000 words in length. So, this book is an interactive book with the newsletter. The password to the newsletter is in the book. So, given that this is now a New York Times bestseller as of last Sunday, for approximately $20, you are getting 600 pages that give you the answers to every phase of your financial life, along with this newsletter. This book will serve as a reference guide for the rest of your life, which is very, very different from my other books.

CHAT PARTICIPANT: I have just invested in mutual funds are these safe investments in your opinion?

ORMAN: The question shows why there is such a need to educate all of you on your money. There are 12,000 different mutual funds out there, all with different objectives. Some are good, some are not so good. So, when one asks a question, that I'm investing in mutual funds -- is this good? There is no way possible to answer that question, regardless of the intelligence of the financial advisor answering it. In general, however, are mutual funds a great way to diversify if you have small amounts of money? In my opinion, yes. The key is which mutual fund, how much are they costing you, and what are your financial goals.

CHAT PARTICIPANT: If I am self employed with no retirement benefits, should I get a regular IRA or a Roth?

ORMAN: My preference is for a Roth IRA, if you qualify. I go into great detail in "The Road to Wealth" book on this, which, by the way, is updated with all the new tax laws. So, go Roth, and you'll be happy in the end.

CHAT PARTICIPANT: Suze, at what age is ideal to open an IRA and what kind should a college student start with?

ORMAN: The earlier you can do it, the better. For instance, if you put the maximum in a Roth IRA, starting at the age of 18, and do so every year until you are 28, and then never put another penny in, you will have more at the age of 65 than if you started at 28, and put the maximum in every single year until the age of 65. So, time is of the essence. It is never too soon to begin. A Roth IRA is the name of the retirement account that I would suggest for you, and I would be purchasing at this point in time the Vanguard Total Stock Market Index Fund.

CHAT PARTICIPANT: I have been working with a credit counselor for two-and-a-half years to pay off $30K in debt. My car will be paid off this month, which gives me an extra $475 per month. Any recommendations on how to manage this "extra" money?

ORMAN: Yes, take that $475 and apply it towards the remaining balance on your credit cards. It is far better spent there than in a stock market that currently does not know which direction it wants to go.

CHAT PARTICIPANT: Suze over last six months my stocks went down by 30%. Should I pull out and put money in index funds?

ORMAN: It is again hard to answer that question, since I don't know the individual stock that you own, but even if you were to pull out of those stocks, I would not advise putting all that money at once into an index fund. I would be dollar cost averaging into any investments I would be making now. I would also want to make sure that I did not need this money for at least 10 years, and that I understood the tax ramifications of any moves that I made.

CHAT PARTICIPANT: How do you save money when something always comes up to take away from it?

EXTRA INFORMATION The new rules on 401 (k)s

ORMAN: You have to ask yourself the question: Why is it that something always comes up after you have saved? What are you doing to make something always come up? I know, that sounds very mystical, like what would you have to do with the fact that your car broke down, or your water heater busted, or that you needed a new roof. Well, friends, money is mystical, money is the currency of life. And believe it or not, you are that powerful, to create external obstacles to your own wealth. I would ask myself the question, why is it that I don't want to have more and be more? Think about it.

CHAT PARTICIPANT: How do I find a "good" financial planner? What are questions one should ask before "giving" them my financial information?

ORMAN: The best financial planner is one you will find if you look in the mirror. Nobody cares about your money more than you do. With that said, a good financial planner should be one that you seek out that does not seek you out. For if they have time to call you to look for new business, they aren't busy enough. You don't want them. You should go to their place of employment and look around to see if they're orderly. For if they are a chaotic mess, they will make a mess of your money as well. They should without you saying a word, tell you how they make their money. Before they tell you how to invest your money they should ask you questions, such as: Do you have credit card debt? Will you be inheriting money? Are you healthy? Will you be responsible for your children, your parents? Do you need to make a major purchase in the next few years? That's a start for you.

CHAT PARTICIPANT: Why should I choose a term life policy over a whole life policy? Term life does not accumulate cash value does it? This confuses me. I have $175K in whole life, should I opt out and into a term life policy?

ORMAN: You have bought the ticket that most insurance agents have tried to sell you, and I see they were successful in doing so. Insurance was never meant to be a permanent need, but meant to be there for a specific term while you were younger, in case of an unexpected death, and you did not have assets accumulated to protect you. The amount of money that you are paying for a $175,000 whole life policy, I am sure is five to ten times the amount per year that a term policy would be costing you. If you took the difference between those two, and invested that over a 20-30 year time, you would find you wouldn't need insurance at all. One should carry term insurance only until their youngest child is about 24 years of age. Then, chances are, you do not need insurance any more. I would first qualify for a term policy, make sure it is in place, and then and only then, drop the whole life. Whole life insurance is the biggest rip off out there, by far. Don't be a sucker.

CHAT PARTICIPANT: Is it better to consolidate debts into one lump payment or try paying off each one individually?

ORMAN: It would depend on the kind of debt that you are consolidating. Student loan debt, as of next year, will be tax deductible, regardless of how much interest you pay each year, if you meet the income qualifications. Credit card interest, or debt consolidation outside of a home loan, are not tax deductible, so please be careful if you are thinking about consolidating student loan debt and credit card debt into one. With that said, I am still not a big fan of debt consolidation, if all you have is credit card debt. The true goal is to get the lowest possible interest rate on all your debt, and pay the most each month that you can possibly afford.

CHAT PARTICIPANT: I just have set aside some money to invest. Should I let a broker do all the work? How do I begin to do research on mutual funds, stocks, etc.?

ORMAN: There are many great magazines, but truthfully, one of my favorite ways for you to educate yourself, is for you to listen to a man on the radio by the name of Bob Brinker. You can look him up at bobbrinker.com, as to when he is broadcast in your area, listen to him. If you like him, you might subscribe to his newsletter (I do not get a referral fee, he doesn't know I recommend him), and I truly believe you'll find a good education in mutual funds, and how to invest, coming from him. And of course, you can always watch me. :)

CHAT PARTICIPANT: What is the minimum a person should try to cover in a will?

ORMAN: The question becomes that, whether you know it or not, everything you own is covered by the state that you live in, whether you write a will or not. What a will will do for you is allow you to decide where you want everything to go, rather than the state. So, it's not the minimum that should be covered, it's the maximum that you should be asking about. The truth is, a will is not the best document to have. You should have a will, but also a living revocable trust. Again, I cover both of these in great detail in the "Road to Wealth" book.

CNN: If the headlines about the ever-rising cost of college tuition are to be believed, will anyone but the very wealthy be able to afford to send their kids to college?

ORMAN: One may not be able to. If that is the case, you need to start talking to your children about it today, so tomorrow is not a total surprise to them. With that said, you might want to start to take advantage of 529 college savings plans, the new increased limits on the education IRAs starting next year, and starting earlier, rather than later will help ease the burden.

There is nothing wrong with your children, however, deciding for themselves that if they want to go to college, they either have to get good enough grades to get a scholarship, or that they are responsible for their student loans, and that mommy and daddy cannot save them that way. I put myself through college, had to work at the same time, while all my friends were paid for. I now can buy each and every one of my friends ten times over. It's not such a bad thing.

CHAT PARTICIPANT: Do you think real estate prices in some markets (I live in the Boston area) are riding a bubble about to collapse? ORMAN: I don't think it's a bubble about to collapse. I think residential real estate follows commercial real estate, and commercial real estate is starting to slow down. I think you'll see especially the higher end real estate start to decrease if it already hasn't. Do I think it will bust? I do not.

CHAT PARTICIPANT: You have said before that maintaining a home usually costs a specific percentage of the overall cost. What is that percentage?

ORMAN: The percentage is 45%, usually of your mortgage payment. ... if you do not have at least 20% to put down.

CNN: Do you have any final thoughts for us today?

ORMAN: Time flees so quickly, does it not, when you are having financial fun. You all have it within yourself to have more and be more. Just go do it. I love you all so very much. ---Suze

Suze Orman joined CNN.com Newsroom via telephone from Birmingham, AL. CNN provided a typist for her. The above is an edited transcript of the interview on Tuesday, August 14, 2001.