9 small financial steps that will pay off big in the future

According to financial guru Suze Ormon

American financial guru and self-made millionaire Suze Ormon’s nine financial steps are a great overview of personal finance, and while most of the steps would apply to most people, all steps don’t suit everyone.

Susan, ‘Suze’ Ormon built a career as a US financial adviser who progressed into a range of areas including hosting her own personal finance TV show and authoring books on financial matters.

First and foremost, according to Suze, conquering fears is the key to financial freedom. In other words, most of the limiting factors to financial success exist in the walls we’ve built up in our own minds, and achieving success lies in knocking down those walls. Once this preliminary action is sorted, Suze advocates a nine-step personal financial process. Let’s take a closer look at these nine steps to see which might apply to you, and what might need some adjustment to meet your needs.

1. Save a bit at a time

Suze recommends building your emergency savings account by saving money a little at a time. Even if money is tight and regular savings sounds hard, just focus on what is within your power: the sums you can tuck away every week or month to get closer to what you're trying to achieve. For example, if you put $50 a week into a bank savings account earning two percent interest, in three years you’ll have more than $8,000.

2. Have a little self-discipline!

Eliminate non-necessity spending from your budget. To do this, Suze suggests looking through your last three bank and credit card statements and highlight every charge or debit that is not a necessity, then ask yourself, "Can I eliminate this cost entirely?". If not, can you scale it back 30 to 50 percent (for example, opt for the less-pricey cell phone package)?

Every time you cut expenses you can put the money toward the things that really matter – major goals.

3. Automate your plan

So many financial dreams are thwarted by the failure to act upon good intentions. Even if you commit to step two and free-up funds, using it wisely can be a challenge.

The solution is easy: Put your financial life on autopilot as a form of "forced" saving. This means making payments for your emergency fund, retirement plan, and savings account automatic. Regularly scheduled transfers can make saving money and paying bills a breeze.

4. Make the most of your employer’s contributions

Suze suggests contributing enough to (the US equivalent of) KiwiSaver to receive the maximum amount of matching funds from your employer, which is three percent.

5. Make the most of government contributions*

Suze’s advice on this matter is for a US audience with US taxation rules – but an approximate equivalent for New Zealanders is to ensure that you’re receiving the government KiwiSaver contributions of $521 per year. Not doing this, or step number four, is the same as turning down free money – which 1.5 million Kiwi’s did last year!

* This was previously called the ‘member tax credit’.

6. Subtract your age from 100 and put that much in stocks

This is perhaps Suze’s most controversial recommendation…

She suggests a percentage that you should invest in stocks (the share market) is your age subtracted from 100. The rest should be invested in bonds.

While Suze’s overall message with this step is a good one – that people should invest in a diversified way and adjust their investment allocation to suit their investment time horizon – this sort of “one size fits all” calculation is probably not the best for most New Zealanders. For instance, due to differences between the US and NZ, most ‘mum and dad’ NZ investors can probably obtain more cost-effective and tax-efficient investment solutions than directly investing in bonds and shares, and usually like to diversify into other assets such as directly held or listed property investments.

7. Spend $50 a month for peace of mind

Suze advocates allocating $50 a month to a life insurance policy which should give you and your family peace of mind.

Once again, personal situations can vary so widely that it’s hard to agree with Suze on this sort of guideline. For example, for someone nearing retirement who has no mortgage and no dependants, $50 a month may be a waste, while for another person in a high-risk career and with a sizeable mortgage and young children, $50 a month may provide too little protection. That said, the idea that people should understand the risks the face and take steps to mitigate them is good message.

8. Create the three most loving documents in existence

Suze stresses that every person should have a will, power of attorney for finances, and power of attorney for healthcare.

9. Increase your mortgage repayments

Suze suggests increasing monthly mortgage repayments by about 10 percent. This will get you mortgage-free a lot faster.

Summary

Suze Orman offers a financial plan that covers everything from spending habits to investing for retirement. Her nine steps are most beneficial to individuals seeking to simultaneously reduce debt and build a nest egg.

As you might’ve noticed from some of our comments, the major issue with Suze’s general advice is that it’s just that - too simplistic and generalised. A one-size-fits-all approach may work for some clothing items but doesn’t work so well for matters of personal finance. As everyone’s situation is different, the same financial plan will not work for everyone.

That said, Suze’s nine steps are a good starting point for someone just learning about personal finance and should give many people the prompt they might need to take action.