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Friday, Jul 10, 2009
In the first installment of a new series, "Talk to Me Like I'm 5," expert Ilyce Glink explains what all Americans should be doing with their finances.
By Sarah Hepola
Read more: America, Government, Economy, Recession, Life, Sarah Hepola
Oct. 29, 2008 | When the economy fell apart, I panicked like everyone else. I read the papers. I watched the news, and I learned the talking points so that I could nod, gravely, when cocktail banter turned toward the sorry state of financial affairs. Only problem was -- I didn't exactly know what I was talking about. Mortgage crisis? Government bailout?
You can say that I'm an ignorant American (and you'd be right). You can say that I should know more about my personal finances (and you'd be right). The fact remains that I'm a reasonably intelligent, college-educated American who didn't know what an "FDIC-insured bank" was. Hey, I like to drive, but that doesn't mean I know how to build an engine. Don't we have people for that?
Still, as the country's financial infrastructure collapses around us, the idea of learning the basic vocabulary of our economy's engine has become not merely attractive but mandatory. The media is awash in data, panic and fear, but there's not enough clear-headed advice that someone like me can understand. So I decided to consult experts for a new financial series named after the phrase I want to say to every talking-head economist on TV right now: "Talk to Me Like I'm 5."
Ilyce Glink specializes in translating economic subjects for the masses. "If you can't tell a 10-year old about a financial topic and have him understand you, then you don't understand it well enough," she told me. Glink is a radio host ("The Ilyce Glink Show" in Atlanta) and author of bestsellers such as "50 Simple Things You Can Do to Improve Your Personal Finances" and "100 Questions Every First-Time Home Buyer Should Ask." Her column "Real Estate Matters" is syndicated in more than 110 newspapers and Web sites. She has even appeared on "Oprah." All of which makes her an ideal candidate to begin our series.
She spoke with me on the phone from her home in Chicago.
What should I be doing with my finances right now?
No. 1: Save money. I know this is not exactly what Secretary of the Treasury Paulson hopes you'll do, but it's important. Most people who feel out of control of their finances can quickly regain control by reining in their spending.
Any expense that doesn't directly relate to food, shelter, utilities, debt and education for your children should be eliminated. Of course, you can't go to Bouley for dinner because you say, "Well, I have to eat." No. You can buy pasta and sauce and make dinner for less than $4 a person. Paying for your utilities doesn't mean you get to have every channel in the world. It means basic cable, maybe no cable at all. It's a return to basics.
You don't need a high-priced expert to tell you to spend less than you earn, to tell you that you shouldn't charge things on your credit card that you can't afford.
So that's the No. 1 thing I should do right now. What's No. 2?
Trade down. This is a continuation of stopping your spending. If you're going to the theater on Broadway, spending $70 on tickets, go to the movies instead. If you're going to the movies, maybe start renting. If you're renting movies, think about what things you can do for a buck or for free. Do the same with your food budget: Trade down in order to spend less.
And why not just stop going out to eat? Stop going to Broadway shows?
Well, I could say that, but it's like when you're going on a diet or trying to quit smoking. There's the temptation to backslide. So people should make a conscious choice to do more with less and take an active role in how to do that. If you're buying a newspaper every day -- and I love newspapers, so I'm sorry to say this -- it might be time to start reading the paper online. Share a subscription at the office.
There are car shares in which, for a certain dollar-per-hour amount, you can get a car when you need it. And it's better to pay $8 per hour for the hours you really need that car than pay several hundred dollars a month. Or maybe trading down could mean buying a used minivan instead of a new one. This same thing is true for home buyers. People are getting the message, finally, that you can't leverage a home by a thousand percent.
Can you explain what you mean by that?
Well, the way home buying works is, you put money down upfront. Usually you put down 20 percent of the price, and you owe 80 percent. You've leveraged your money to buy the home.
What happened was, people were putting down nothing and borrowing the cost of the entire house. Worse, they were making interest-only payments, which meant they were never paying anything toward the balance of the mortgage, or they were paying for these properties with what we call "option ARMs" [adjustable rate mortgages], which are now going bad in droves, in which they paid even less than the interest that was owed.
For example, let's say I make $50,000 a year, and I want to buy a $500,000 house. Let's say I'm only going to pay $1,000 a month on that house. But really, I should be paying $3,200 a month to pay down [the mortgage]. The missing money that I owe, that $2,200 I'm not paying, gets tacked onto what I already owe on the home with a pay-option ARM, so at the end of the third month I don't owe $500,000 on the home, I owe $506,600. By the end of the year, I'm up to $526,400 -- more than I borrowed to begin with. That's why we're in such trouble today. People were buying houses they couldn't afford. So buy cheaper. Buy something you can afford.
Now, No. 3. Keep funding your 401K. This is incredibly difficult emotionally. It's tough for me. It's tough for my financial advisor. Nobody wants to put money into the stock market right now. It's nerve-racking. But if you're in your 20s, 30, even into your 50s, you're not going to see that money for maybe 15, 20 years at the very least, most likely more.
When we look back at the Great Depression 80 years ago, we can't even relate to those people, those pictures in black and white. Forty years from now we're going to see this moment as a major blip -- a blip that had a major impact on some lives, yes, but a blip. But we will go back to building this country again, and you have to continue to invest in the future.
Now, you may not want to put so much in emerging markets --
What's that?
It's a market in any third-world or second-world country where there's a lot of growth. India, the Baltic States, China, Latin America. We call them "emerging" because they're in flux, and there are tremendous risks but also tremendous potential for gains. However, most people don't have the stomach for it. Consider what happened in Russia, where they recently decided to close trading for the week.
Next page: What you should be investing in
Who will save the economy?Return of the Long Depression
My big, fat, unpaid credit card bill
