Suze Orman Says There's 'One Unifying Principle' to Being a Smart Borrower. Here's What It Is

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KEY POINTS

  • Suze Orman believes the key to being a smart borrower is living below your means.
  • When you focus on living within your needs, you help set yourself up for financial success in the future.
  • Your debt-to-income ratio, which measures how much debt you can handle, should be kept below 35%.

This one piece of advice will give you the financial breathing space you need.

Financial guru Suze Orman has gone on record stating there's "one unifying principle" to being a smart borrower. That principle is simple: Live below your means, but within your needs. In other words, don't spend more than you earn, and borrow the least amount possible that will provide for your needs. This approach can help create more financial breathing space and ultimately lead to better decisions in the future. Here is what Orman means and how it can help you become a smarter borrower.

What does living below your means mean?

Living below your means is not just about spending less than you make; it's also about managing debt responsibly by borrowing only what is necessary to fulfill your basic needs. Sounds simple enough right? However, according to the Federal Reserve, credit card balances in the fourth quarter of 2022 hit an all-time high of $986 billion, surpassing the pre-pandemic high of $927 billion.

This doesn't mean giving up all of the luxuries that life has to offer. It simply means understanding where you can afford to spend, where you need to save, and when it makes sense to borrow money. This will vary from person to person based on their individual financial situations and goals. Fortunately, you can easily set up a budget using apps like Mint and Rocket Money that can track this for you. The key is understanding what you need and how much you can realistically afford without taking on too much debt.

How much debt is too much?

There are many rules of thumb when it comes to how much debt you should have. The debt-to-income (DTI) ratio is an important financial measure often used by banks when assessing a customer's eligibility for borrowing money. It is typically expressed as a percentage and is calculated by dividing your total monthly debt payments by your monthly gross income. So if your income is $5,000 per month and your total monthly recurring debt payment is $1,000, then your DTI is 20%. Anything over 35% if considered too high, so your goal should be to keep it as low as possible.

Another rule of thumb is keeping your credit card utilization rate below 30%. This rate is calculated by dividing your total debt by your total available credit. For example, if you have three credit cards with a total available credit of $10,000 and you have $5,000 in credit card debt, your utilization rate is 50%. Having a low utilization rate can be beneficial for your credit score since it makes up 30% of it. It can also help you qualify for better loan terms when you need to borrow money.

The benefits of living below your means

When you live below your means, you are setting yourself up for future success. By focusing on spending less than you earn and borrowing only what is necessary for your current needs -- not wants -- you can use the extra money to build an emergency fund, save for retirement, or invest in yourself. You can even invest in something that can bring value into your life, such as starting a business. Plus, living within your means helps ensure you don't take on too much debt at once.

Living below your means may not be easy at first, but with discipline and careful planning it is achievable. When done properly, this strategy allows borrowers to stay out of debt while still meeting their basic needs and having some left over for savings or investments. Suze Orman's one unifying principle to being a smart borrower should be at the top of everyone's list. Live below your means but within your needs! Doing so will help ensure healthier finances now and into the future.

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