Suze Orman Money Matters

This is the month of living dangerously when it comes to spending. No matter how disciplined we may have been during the rest of the year, somehow when December rolls around it's hard to resist the temptation to spend at any cost.

But while doing so might make for a festive holiday season, the hangover is hellacious come January, when you realize the steep price you pay for your December forays into bad personal finance.

Blowing a Bonus Bounty

It amazes me how often I hear people gleefully report how they intend to spend their holiday bonus. It's rare when someone mentions how they intend to save and invest it instead.

A bonus should be approached as valuable compensation, not some funny-money lottery bonanza to blow on a spending whim. It's irrelevant what the size of your bonus is -- your first inclination whether you get $500, $5,000, or $50,000 should be how you can use the money to build a more secure financial future.

Don't tell me you deserve to treat yourself to a shopping or vacation spree with your windfall. What you and your family really deserve -- and need -- isn't a beach vacation in February that no one will remember by April, but the security of knowing that you've taken care of all of your important long-term financial needs.

Here are my top five uses for this year's bonus:

1. Pay off high-interest-rate credit card debt.

Sound obvious? Please. Anyone willing to carry an unpaid balance that charges 18 percent interest is the sort of in-the-moment indulger apt to spend a bonus.

If you use your bonus to pay off your balance instead, you get an immediate 18 percent return on your investment. Given how the markets are struggling right now, that could very well be your best investment opportunity for 2008.

2. Fund a Roth IRA.

If you get your bonus before the year ends, you can spend $4,000 funding a 2007 IRA and then wait for the calendar to flip to Jan. 1 and fund your 2008 IRA. (Note that the limit rises to $5,000 in 2008.) Tuck that $9,000 away for the next 20 years and you'll have more than $43,000 in tax-free money waiting for you in retirement, assuming your money compounds at an annualized 8 percent rate.

If you're over 50, take advantage of the catch-up provision that allows you to invest an extra $1,000 a year in a Roth. (That means a $5,000 max for 2007 and $6,000 in 2008.)

3. Create an emergency stash.

Bankrate.com reported last year that less than 40 percent of people surveyed had an emergency fund that could cover at least three months of living expenses. As far as I'm concerned, three months isn't nearly enough protection; ideally, you should eventually build up a cash cushion equal to at least six months or more of living expenses.

The what-ifs of life just keep getting more expensive, from job uncertainty to helping aging parents deal with their living costs to coping with the high out-of-pocket expenses if you become ill. And if your current savings account doesn't earn at least 4 percent, you need to shop for a better deal. Right now, EmigrantDirect offers an account yielding 4.75 percent and HSBC has a 4.5 percent payout.

4. Build a mortgage adjustment stash.

If your mortgage is scheduled to reset in the next year or two, and your current plan is to hope that you'll be able to refinance or sell when the adjustment time nears, you're flirting with disaster. Look how well that plan has worked out for all the homeowners caught in the foreclosure trap.

If I were you, I'd take my entire bonus and hide it in a separate savings account right now. That way, you'll have cash ready to pay the higher mortgage if in fact you aren't able to refinance or sell.

5. Buy more insurance coverage.

As I explained in my last column, many people unknowingly count on homeowner's insurance policies that are woefully inadequate. In the event that you suffer a major loss, you could find yourself needing tens of thousands of dollars to cover the difference between what your policy will cover and what it will take to repair or rebuild your home.

Think back to when you first bought your insurance policy. Did you opt for the least expensive options as a way to save some money? Did you want to shave a few hundred dollars a year off your premium, even if it meant not fully protecting an investment worth $200,000, $300,000, or more? That's financial Russian roulette. Get on the phone with your insurance agent right now and upgrade your policy. Details about the right coverage you need are in my previous article.

If you have all of the above under control, and you're on pace with retirement and college funding, then by all means treat yourself to some bonus spending.

Gift-Buying Gaffes

Holiday spending is expected to slow this year; according to the National Retail Federation, the increase in spending will be just 3.7 percent, or about half the increase of last year. Still, the bottom line is that consumers, on average, intend to spend more this year than last. The average holiday outlay is expected to be $925 per person -- no small sum no matter how much you earn.

Here are a few things to keep in mind before you get into gift-buying mode:

1. Make a list. Seem silly? Well, the surest way to stay on track is to stick to a plan; that way you won't be seduced by all the strategically placed come-ons at the mall, or the teases on the checkout page when shopping online.

2. Leave your credit cards at home and use cash at the mall. Go to the ATM once before you head to the stores; when you run through that money, you're done. No ifs, ands, or buts. I guarantee that when its time to pay the bills in January you'll be thrilled that you didn't go card-crazy in December.

3. Speaking of which, don't open a store credit account no matter how emphatic the cashier is at the checkout counter. Those tend to be the absolute worst credit card deals, with rates on unpaid balances typically at 20 percent or more.

4. Finally, if you're shopping for consumer electronics, it usually doesn't make economic sense to pay for an extended warranty. Even when a gadget needs repairs, you'll usually come out ahead paying out of pocket rather than spending the money for a hefty warranty.