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Open House

Protecting Your Money: How to Keep It Safe; How to Protect Yourself As a Homeowner; Panel Answers Your Money Questions

Aired October 04, 2008 - 09:30   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

GERRI WILLIS, CNN HOST: Hello, I'm Gerri Willis and this is a special edition of OPEN HOUSE, the show that saves you money.
Today, we are all about protecting your money. It doesn't matter what your finances look like, everybody needs a little help now and then. Here now to help us do just that, Doug Flynn, a certified financial planner, Gary Schatsky, the president of ObjectiveAdvice.com and Laura Rowley from "Yahoo Finance."

OK, guys, the economy, not so strong. Stocks in bear market territory. We've seen what's going on with the credit markets. Gary, start us off here. How do I keep my money safe?

GARY SCHATSKY, PRES., OBJECTIVEADVICE.COM: Well, you know, the question is do you want to make major changes? And most people shouldn't. You have to take an inventory of what you have and you have to ask yourself, how much risk do you have? And for many people, they're going to find out they have the right amount of risk that doesn't mean they haven't lost money.

WILLIS: Right, and these are really complicated questions, actually, determining what kind of risk you have. You know, most families, you know, they face tough choices in times like these, they're trying to decide what to do with their money, Doug. People out there are saying to themselves: should I contribute to my 401(k) Or should I not?

DOUG FLYNN, FLYNN ZITO CAPITAL MGMT.: Well, the question is if you take away the money you're saving into your 401(k) you're not going to have the same amount of dollars after tax that you would putting it into the 401(k). So, if you're maxing out at 15,000, if you stop, you might only have 10,000 of money to do something else with and then you've stopped centing to your retirement. I don't think your retirement is going away, so I would absolutely not stop adding to your 401(k). These are the times you want to be adding, actually for a long-term goal.

WILLIS: Well, you know, and the stakes here are even higher than your 401(k), the money you're going to use years from now, decades from now, it's about your bank now. Is your bank safe -- Laura.

LAURA ROWLEY, YAHOO FINANCE: Well, you know, I would also say from a psychological point of view it's about your comfort level. So, I've been hearing some people who traditionally invest in the market saying I feel a recession going forward, I think inflation's going to take off, I would be more comfortable maybe owning real estate than stocks. When you're at that place you need to talk to a financial planner, because...

WILLIS: Or a shrink. Right, I know a lot of people out there are really worried, though, about the money they have in the bank. Now, let's switch our focus from 401(k)s for just a second and talk about that money that you're using every week to buy groceries with, you know, to pay your rent or to pay your mortgage. Doug, is your bank safe?

FLYNN: Well, it shocks me to this day how many people still don't understand FDIC rules and how many people may have over $100,000 in a bank. It's just very simple. You have to make sure you have below those limits in the bank. And should you be with banks that are sort of in the news that may not be as safe? I don't think so. You can drive down most streets and there's a multiple amounts of banks to choose from. So, I don't think there's anything wrong with that. But, generally if you're FDIC insured, even if your bank goes under, you will be OK.

SCHATSKY: And there's plenty of ways to expand the coverage. It's $100,000 for an individual, you can have a joint account and add another $100,000, you can have a self-directed retirement account for quarter of a million dollars. You can have literally millions of dollars of insurance even at the same bank or you can break it out to separate banks.

WILLIS: And of course, some of these limiting will be changing likely and I'm sure we'll be talking about that in the future. You know, you guys aren't economists, but you talk to a lot of people. Do you think the worse not the economy is over -- Laura.

ROWLEY: I don't think so. I mean, I think you're going to see at least another two years, at least a year-and-a-half possibly two years.

WILLIS: That's so depressing for a Saturday morning.

ROWLEY: I do, and you know, I was one of those people three years ago who was saying this is going to be really, really bad. I think it's time to shore up your castle, increase your cash, you know, make sure you got three months in the bank in case you lose your job. I do think it's going to be much worse than people expect because we have seen major, major institutions fall so far, so fast and that is not what anybody expected.

WILLIS: You know, some people are recommending that you stop investing in your 401(k) and put your money in cash. Is that a smart thing?

FLYNN: You know, for most people probably that the worst thing they can do.

WILLIS: Why?

FLYNN: You know, and you have to ask yourself, do I have enough cash? If you do have a sufficient cash position, 401(k) opportunities are annual. You can't make it up next year if you didn't max out this year and say, well, I want to catch up. So, you really have to kind of evaluate, do you have sufficient cash situation? And if the reason you don't want to contribute to a 401(k) is perhaps you've lost money, well, there are conservative investment choices in every single 401(k).

WILLIS: But, Doug, I'm worried about my job. Let's say I'm in a business, an industry that is laying off people. Shouldn't I just -- you know, as Laura says, you know, like let's put walls around the castle, let's throw every penny we have in a place we can actually get to it?

FLYNN: Well, it gets back to what we've been talking about all along and the sort of core foundations of financial planning which is you do have to have an adequate cash reserve. You've heard it a million times. But, to me, it's amazing that there is so many people that not only don't have enough cash, they put their savings into the stock market and then they worry -- these are the things that ride into the fear.

If you have the right amount of money in cash, three to six months expenses, whatever you want to call it, you're be OK for times like that including if you lose your job, you have a little time to get yourself situated. And then you should have some intermediate term investments and then your long-term investments.

WILLIS: Right. All right, guys, thanks for your help. You're going to stick around, though, because we're going to have more tips for our viewers. Stay with us, you're watching OPEN HOUSE.

(COMMERCIAL BREAK)

WILLIS: From the mortgage to your debt to your savings, we are helping you protect your money. With us today, Gary Schatsky, the president of ObjectiveAdvice.com, Doug Flynn, he's a certified financial planner and Laura Rowley from "Yahoo Finance."

Laura, I'm going to start with you. We're talking mortgages this segment. What's the No. 1 thing you want to do to protect yourself as a homeowner, right now?

ROWLEY: Well, make sure your rate is fixed, if possible, and make sure you're paring back elsewhere, if you're an adjustable rate mortgage so you can afford that payment. I mean, I think it's pretty straightforward.

WILLIS: But it's tough now, Doug. You know, a lot of banks don't want to want -- they don't want to give you a loan, if you're looking for a home equity line of credit, forget about it, they're not writing new debt. What do you do?

FLYNN: If you need additional debt? Yeah, it's really tough. You have to look at your credit scores and know where they are. A lot of people don't have a clue as to where they are. If your credit scores are about would have 700, you probably don't have much of an effect of all this stuff going on because you can get credit. But if you're in the 600 to 660 range, where you're sort of a moderate credit person, it's not like it was where you can just go in and sign your name and get money. It's a lot tougher.

But, you have to focus on paying your mortgage. That's the single biggest thing in terms of keeping the house and if you have to sacrifice something else, then you do. And if you can't, you have to seriously consider alternatives of possibly selling. No one wants to sell in this market, but what you'll do...

WILLIS: Sometimes you got to do what you've to do, right. Gary Schatsky, tough choice, do you buy now? If you can buy now, is now the time to buy?

SCHATSKY: You know, if you can buy now or you can wait, I'd probably wait.

WILLIS: Really?

SCHATSKY: You know, very frequently, the home purchase decision is an emotional one and I have many clients that are saying I really want a place and I can't wait anymore. Well, prices have come down, but, unfortunately, I think they're going to come down more. You know, it depends on what geographic area you're in, what the pressures are. But for many people, waiting some period of time might make a lot of sense, but bear in mind, a house is not an investment, it's a home first and an investment second.

WILLIS: Well, I think some people might disagree with you who have really tried to...

SCHATSKY: Then you have to wait. If it's a pure investment decision, absolutely, most people should be waiting.

WILLIS: All right. You look at homeowners out there, they are beleaguered. Right? I mean, they've watched the value of their home decline, they're worried about the stock market, they're worried about losing jobs. What's your advice to them?

ROWLEY: Well, you know, you have to take a broader perspective. I recently interviewed someone who consults with people on life's misfortunes, the broad array. You have to remember, money is one of the easiest problems to fix. If you have a sick child or you have health problems yourself, that's much harder to fix.

You can spend less, you can get a second job, some of your children can work, you know, mowing lawns or babysitting, whatever it is. You have lots of things you can do regarding your spending and your savings. Yet you're going to have to make some hard decisions, but it is one of the life problems that is actually the most straightforward to solve.

WILLIS: OK. Straightforward, I like that. Doug, let me give you a tough choice. Do I pay my credit card debt or do I pay my student loan debt first?

FLYNN: Well, student loan debt typically is at a lower interest rate and possibly tax deductible, depending on how much money you make, so when you look at that, in the good debt versus bad debt category, I'm not a big proponent of paying down very rapidly tax deductible debt that's at a low interest rate. And typically, credit card debt is at a high interest rate and certainly not tax deductible.

So, in order -- what I always tell everybody is to focus on the interest rate first. Put everything you owe down and mark it in interest rate order. What people do, though, is they put it in balance order and then many times what they're doing is trying to pay down things with the balances and ignoring the interest rates and so they're paying and it takes a lot longer to pay that off.

So, if you just turn everything into interest rate order, top to bottom and focus all -- pay the minimums from the bottom up, and focus every other dollar that you can at the top, you'll have a much greater way to pay everything off faster.

WILLIS: You know, Gary, you have something interesting to say about credit card debt, about how it's almost paying yourself.

SCHATSKY: Yeah, you know, one of the -- for many people, the best investment you can make is paying down your credit card debt. I mean, why is that true? A, it's a guaranteed interest rate. Why is it guaranteed? Because you know you're not going to pay someone a sum of money.

It's a high interest rate almost always, unless you have a teaser rate, and for many people, particularly in the market like this, the good news is people are going to start focusing on their whole picture and say, wait a minute, why do I need to play with uncertain markets when I can guarantee myself an eight, 12, 14 percent savings by paying down debt?

WILLIS: Nobody believes me when I say you can get a guaranteed rate of return. You can by paying your credit card debt. OK guys, great job. You've e-mailed us your questions all week about your money and we're going to put them straight to our panel. That's coming up next.

(COMMERCIAL BREAK)

WILLIS: Savings, cash, growing your nest egg, protecting your money. It all sounds good. Your questions keep rolling in. It's time to get some answers. Back with us again, Doug Flynn, Gary Schatsky and Laura Rowley.

OK, Doug, I'm going to give you the first question from Twilla, she asks: "We have a 401(k) plan and 100 percent is in company stock. I've heard we need to diversify. We're 39-years-old and we want to retire in our late 50s." Company stock, 100 percent in a 401(k).

FLYNN: Well, I'm glad she's heard that she needs to diversify. That's the first thing you have to focus on is get it out of there. Our normal recommendation is no more than three to five percent of your money.

WILLIS: Why? FLYNN: Well, because there have been too many people who have worked at Lehman, WorldCom, and you know, all those -- Enron who thought while it was going up this is the greatest thing ever and when you have everything in one place, your income is tied to that company, the money they're giving you is probably tied to that and then to put your own money in there, too, you could end up with zero. No matter how great you think the firm is you're did working for.

So, you have to get it down to three or five percent. And then you have to either hire a financial adviser by going to cfp.com and searching for one that you can feel comfortable with to help you if you don't know how to do it yourself.

WILLIS: Go to CNNMoney.com and get an asset allocator there, that'll help you too, if you want to do it on your own. Trisha from Arizona says: "My 401(k) is with principal funds," that's a kind of mutual funds company, "I've been told it's not protected by the FDIC." What's wrong with this picture, Gary Schatsky?

SCHATSKY: Well, your 401(k)s are normally not protected by the FDIC, period.

WILLIS: It just doesn't work that way. I mean, it's hard for people to understand, but it's not a bank.

SCHATSKY: So, you have to be careful about what selections you're picking up. Obviously, fees matter so you're mentioning principal. They often have very high fees, but that might be the only set of choices you have.

But, within it, everyone has aggressive options and conservative ones. And if you're concerned about risk, being more conservative among their choices is the way to go. You know, people, unfortunately, they're now painfully recognizing that losses in their tax sheltered accounts, in addition to being losses, are not even tax deductible. So, that's another good reason...

WILLIS: Another thing to think about. Let's move on to the next e-mail from Tom in Indiana. I'm trying to get as many questions as I can, because these people really want access to you guys. He asks, "I have a CD that will mature in about two weeks. I plan on renewing it plus add a substantial amount," of money, "Since money is getting tight right now, I'm thinking about holing onto it for a little while to see if the rates go up, then buy one. What do you think?"

ROWLEY: I think he should hold on a little bit. With the bank consolidation we've seen, these banks are cash starved, we're starting to see interest rates start to creep up, four or even five percent on certain CDs. So, I'd take it out, I'd wait a little bit, and then I would roll it in when you see the best deal.

WILLIS: Good news for savers. I love that. We haven't had good news for savers lately. Jennifer asks: "I'm 29 years old and I have two private student loans of $180,000 and $96,000 with variable interest rates. I make $170,000 a year and contribute the maximum to my 401(k)," That's good news. "My company does not match my contribution. Given the sate of the market, should I suspend contributions..." I have to stop right there. One word answer, Do you suspend.

SCHATSKY: No.

WILLIS: Yeah. Why not?

SCHATSKY: Well, you're saving for your future. She is earning a relatively high income. So therefore, the tax deduction is incredibly valuable and the student loans probably have a very low interest rate. So, it might be one answer, which is no, but there are many reasons.

WILLIS: Right, exactly. You know, is there any reason to stop contribution to your 401(k) -- Doug.

FLYNN: Well, if cash flow is that tight and you absolutely have to protect the house and your entire livelihood, that might mean then you have to delay your retirement if you were thinking of retiring at 60, you are going to have to go at 62, you have to know what the effect is.

But yeah, I think if you are going to lose your home, that might be a reason but, barring that, you have to realize that again, for every $3 you cut back, you are only going to see $2 of it because of the tax deduction that gives you. So people think I'm going to cut out my $600 a month 401(k) contribution, you are only going to see about $400 on average of that. So, is it going to do it for you?

WILLIS: Right, right. OK, let me move on to another question that I know people are asking about because they are in trouble right now, having a hard time finding money, the banks don't want to lend, where do you go for emergency money? You don't have the emergency fund. Mom and dad aren't kicking in any cash. What do you do?

ROWLEY: That's really tricky because if, for example, you have lost your job, you're not going to be able to get a home equity loan, you're not going to be able to get a home equity line of credit. You might have some possibilities. I mean, over the last few years, we've seen the rise of these pier to pier landing Web sites like Prosper.com, you may find somebody who...

WILLIS: Lauren, they don't have any backing from the federal government. I mean there's nothing standing...

ROWLEY: But, you are looking to borrow money, correct?

WILLIS: I am.

SCHATSKY: Other choices you might look at, obviously, if you have securities, you might want to sell them. You know, there is a question about whether you are selling them at a loss or doing something most people shouldn't do which is margin the account. You might have whole life insurance policies, which I rarely recommend, but if you find yourself with it, there might be a source of borrowing at a relatively moderate interest rate. And of course, as you kind of ruled out family lending. Well, there's a time and place to take a look around and say, we're family.

WILLIS: That's the easy money, if you can get to it, right?

ROWLEY: And some of those Web sites will handle the details of those loans between family members so you don't end up with both a financial loss and relationship loss.

WILLIS: That's great news. OK, well great job, guys. Really appreciate your help. And I want to tell our viewers, keep those e- mails coming. You can also send us iReport questions. We want to hear from you. Head to ireport.com/issueone. Ask a question, share a comment, hey, you can share your tips on how you are getting by during these tough economic times. Bottom line, we want to hear from you.

Retiring, the accounts are shrinking.

(BEGIN VIDEO CLIP)

UNIDENTIFIED FEMALE: We see the little guys who seem to suffer for the fat cats, the Wall Street executives who are making all this money and who ran amuck.

(END VIDEO CLIP)

WILLIS: How some Americans are being affected and what you can do to protect your 401(k).

(COMMERCIAL BREAK)

WILLIS: Americans over 55 are feeling really vulnerable during the economic crisis and rightly so because they have more to lose in less time to gain it back when it comes to their investments, particularly if they're depending on the value of their homes to get them through retirement.

(BEGIN VIDEOTAPE)

WILLIS (voice over): The Chaney's, Claude and Yvette think they have found their perfect home for retirement, and Italian-style villa with a clubhouse and tennis courts in a new community for active adults over 55 near their current home in New Jersey.

CLAUDE CHANEY, HOMEOWNER: How many homes have elevators in them?

WILLIS: They have already visited 10 times.

YVETTE CHANEY, HOMEOWNER: This is a bedroom I could use for my parents.

WILLIS: Snapping photos on their cell phones to remind them of their dream house. The only thing holding these two school teachers back, selling their own home. Yvette thinks they have lost at least $100,000 in value since last year. Like other seniors across the country stung by the housing crisis, they are angry about the bailout.

Y. CHANEY: We are the little guys who seem to have to suffer for the fat cats, the Wall Street executives who are making all this money and who ran amuck.

C. CHANEY: You couple that with a lack of concern for your fellow Americans, especially the one who has to work a lot and sometimes have two, even three jobs in some cases, this is just not right.

WILLIS: more than half a million Americans over 50 lost their homes in 2007 or were about to, according to AARP. You might be surprised to know the number of Americans 50 or older wit older with mortgages has increased significantly, from 34 percent just two decades ago, to over 50 percent now.

Y. CHANEY: It's very disappointing that, you know, I feel that maybe I should wait, maybe things will turn around or prices will go down. I don't see builders bringing their prices down.

WILLIS: With 200 people turning out at a recent open house, the developer is not feeling the pinch, yet.

SHANT GUEYIKIAN, BYRON HILL HOMES: The amount of purchases has been slower than we hoped but we are still getting them.

WILLIS: The Villagio's builder thinks he has a winning formula to weather the current reception. After all, he made it through the 1980s savings and loan crisis.

PAT MALONEY, COMMUNITY BUILDER, VILLAGIO: We all thought that was the end of the world. Mortgage rates hit 21 percent and such like that, but when the recession lifted, you know, it was a springboard effect.

Y. CHANEY: This is my dream.

WILLIS: It could turn around quickly, but will it be quick enough for Yvette and Claude?

C. CHANEY: Hope springs eternal.

(END VIDEOTAPE)

WILLIS: If you want to make sure your dreams aren't put on hold, you will get serious about your retirement savings. As with anything else, knowledge is power, here's what you need to know. Stop focusing on quarterly losses in your 401(k) statement. Like a long distance runner, your money needs to work over a long period of time, decades, not months or weeks. Instead, check out your asset allocation, your mix of investments, stocks, bonds, cash, and make sure it's appropriate for your age.

Go to CNN money.com's asset allocator tool for help. If you are in your 20s or your 30s, don't scrimp on stocks, you'll need them to reach your goals. Remember, take charge, your money is your responsibility, find out what's inside your mutual funds by using MorningStar.com's x-ray tool. Make sure you don't duplicate holdings between funds, minimize your investment in company stocks, investing in your employer's stock doubles your risk, and don't stop investing. Markets fluctuate, but your goals, they stay the same. That's how to make the most of your 401(k).

You can hear much about the impact of this week's news on your money on "YOUR MONEY" with Christine Romans and Ali Velshi, Saturdays at 1:00 p.m. Eastern, and Sunday's at 3:00, right here on CNN.

As always, we thank you for spending part of your Saturday with us. OPEN HOUSE will be back next week, right here on CNN and you can catch us on "Headline News" every Saturday and Sunday at 3:30 p.m. Eastern Time. Don't go anywhere, your top stories are next in the CNN NEWSROOM, have a great weekend.