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Special Edition: Family Money; Buying a Home to Managing Savings; Paying Off Your Debt; Kids and Money

Aired May 29, 2010 - 09:30   ET

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

STEPHANIE ELAM, CNN HOST: Good morning, everyone. I'm Stephanie Elam.

CHRISTINE ROMANS, CNN HOST: And I'm Christine Romans and this is a special family money edition of YOUR BOTTOM LINE.

ELAM: Yeah, from buying a home to managing savings and paying off your debt, we have you covered.

ROMANS: And we're talking about kids and money. We're going to help you set their allowance, teach them how many to budget and how to plan for the often overwhelming cost of college.

ELAM: Yes, a lot of you parents are freaked out by that already. Well, the show that saves you money -- it starts right now.

ROMANS: All right, no one knows more about the American family than the credit reporting bureaus. So we've asked Equifax to boil it down for us. How are we doing on our debt? They've got some good news. Americans are shedding debt like crazy. Since October 2008 we've paid off $626 billion of our debt.

Our home mortgage debt burden is down five percent, credit card debt down 12 percent, but student loans, unfortunately, up a whopping 50 percent. No surprise there without a job -- try and go back to school. The average credit score, according to Equifax, the way that they measure, is a little better too, it's actually trending slightly higher 704.

ELAM: So that means people are doing a little better, but in this changing environment, we know you need to work with the best ways to manage your family finances and here to help us do that is clinical psychologist Jeff Gardere and "Money" senior writer Donna Rosato who is joining us today from Washington.

Thank you both for being here with us.

JEFF GARDERE, CLINICAL PSYCHOLOGIST: A pleasure.

DONNA ROSATO, MONEY.COM: Great to be with you.

ELAM: So, you know, when you hear this conversation, when you hear all of this stuff and, Donna, I want to ask the first question of you. When you hear all of these fluctuations going on in the economy, no matter if we're up or down, what's the best way to insulate your family's money?

ROSATO: Well, you know, a lot of people are feeling insecure these days, even though the economy is starting to improve. You really -- it's a personal thing. Like real estate is local, your personal finances are very local, too. The best way to insulate your family against problems and worries is really to reduce the amount of debt you have.

I think a lot of people have learned in this great recession that we can't carry a lot of debt. Our home values aren't going up. We need more of a cash cushion and so we need to do without. The good news is, when you aren't spending so much money, you learn to enjoy the simpler things in life just sspending time with your children, you know, spending time with your spouse and your family. There are a lot of things can you do without spending money and racking up debt.

ROMANS: She talks about peace of mind, Jeff. This is incredibly important for families to get away from the consumer culture of the last 20 years and realize that cash is king, and cash brings peace of mind and that's how you build your family's wealth going forward.

GARDERE: Absolutely. It has to become a culture with your home to get away from the credit card debt, to look at budgeting which is something I know you'll be talking about, but also to have the cash available, and to spend within your means. For a long time, the family culture was, just charge it, charge it, charge it, but I think when we can get family members to work together, they then, now, have that peace of mind, and they're on the same page, and that's what really does help to get your finances in control.

ROMANS: I wonder how long this lasts? And this is -- this is something that we've been debating for the past year or so because even the National Association of Business Economists, or economics, recently said they don't think people are going to be as thrifty as we had worried about and that will be good for the economy. Well, if it's good for the economy, it might not necessarily be good for your family.

ELAM: Good for them, right? And also so many people talk about this. I never grew up talking about money. I just asked and either got a yes or no and then got to college and I got credit card and I was like, whoa. That happened to a lot of people.

GARDERE: Yes.

ELAM: So, doesn't something need to be changed here about when you start talking to your kids about money?

GARDERE: I believe that's one of the things we can chalk up to this great recession is that we have people now paying attention to finances, learning how to do Excel, actually talking about budgets. We're talking with our children about being financially literate now.

They now understand what money's about much more than we did as we were growing up, so if we can keep that going, if we can keep that momentum and the positive reinforcement being saving money and living within our means and keeping the family debt down, then I think this is more than just a fad.

ROMANS: Donna, let's look at the numbers that we've got here about living within our means, shall we? Because we do have an awful lot of debt out there. The average consumer with an open account has $7,700 in credit card debt. These are all from CreditKarma.com, these are April figures -- 177 grand in home mortgage loans, 50 grand in home equity, $14,000 in auto loans, $27,000 holy moly, maybe you don't have all of those at the same time, but you certainly have some mixture of those.

Some debt is good debt. Some debt is going to hold you back. Do you think that we are learning the difference between good debt and bad debt?

ROSATO: Well, we are having to learn that, and there's nothing wrong with, you know, having some debt. And I think what we're realizing is that we can't be overloaded with debt. I think a lot people don't understand what good debt is versus bad debt.

Here's a simple rule of thumb to understand whether it's good or not. Any debt that you incur that is going to increase in value, whatever you're investing in, whether it's a college education, or hopefully your home that is good debt. But, you know, we've been spending the past couple of years, a lot of people are realizing, that the debt they put on their credit cards for vacations, for home improvements, those really aren't things that are going to improve the value.

GARDERE: If you can walk away with any lessons from this, that's the important thing. You may not be the greatest saver or you may fall back a little bit, as we've learned, but as long as you learn a few things and live with your...

ROMANS: We'll talk about those few things and we'll talk about how to live with your means. Jeff Gardere, Donna Rosato, I want to hear from another special guest right after this guest. Don't go away. Thanks guys.

ELAM: Yep, and up next what to do when you're expecting, not like this means anything to us at all, even after the baby is born. We're all about helping you with your family finances. YOUR BOTTOM LINE will be right back.

(COMMERCIAL BREAK)

ELAM: All right. There's nothing like starting out on the right foot, in that, when we talk about that we're talking financial footing. We're talking about couples, newlyweds and those of you, who may be like us, are planning to have a baby very soon.

ROMANS: That's right.

ELAM: So, listen up to what we have here. We still have with us Donna Rosato and Jeff Gardere and also joining us is the editor-in- chief of TheNest.com, Carley Roney.

Carley, thanks for joining us.

CARLEY RONEY, THENEST.COM: Thank you for having me.

ELAM: All right, so let's talk a little bit about this because I think this is a question most couples don't actually think of themselves. When you are looking at that point, like, I think I'm going to marry this person, when is the point that you bring up what you're going to do with your finances?

RONEY: I mean, honestly, you really should be doing it before you actually get married, so right after the engagement. I mean, we say on "TheNest," like bear your financial soul. You fell in love, let's see if you're really in love with each other's backgrounds and finances. And that means every bit of money you make, every bit of debt you have, get it all on the table, because only there can you really establish the trust to then figure out how to move on and have a real financial life together.

ROMANS: And you know that fights about money are like this horrible thing in couples and couples -- sometimes savers marry savers and spenders marry spenders and sometimes you find someone who was so generous when dating and then -- you're being a spendthrift. How do you make sure you put those behind you or you at least learn to be compatible with your differences on money?

RONEY: I think if you have to put it right there in the beginning and recognize what style of person you are and set it out there and really figure out thousand manage your money day to day and that's what sets it apart. Basically, do you have a joint account and then two separate accounts so everyone has their own spending money, they have enough control while still having the feeling that we're on the same team.

Figure out what's -- we have run down a bunch of different scenarios and that's the most common these days. Like, 50 of the people, and TheNest.com has mother, they have the joint and they have a separate account, because I want to be able to buy those shoes and not have you poking your nose into my finances.

ELAM: I just want to make sure I can get your birthday gift and you won't know what I got you, but...

RONEY: Because we love love and marriage, we have to show this.

ELAM: Give you an idea what happens between the folks who get divorced and how much of it has to do with their financial disagreements, so it's a huge deal that people need to speak about here.

ROMANS: This is from a researcher name Jeffrey Dew who does couples and money, and he has a great -- this great -- the thrifty are the happiest, thriftiest are the happiest is his report. But it shows you as the lines go up, that's the number of fights during the month, and your chances of getting a divorce. If you're fighting about money, specifically. So, Jeff, this is -- this is one of the big things. Divorce lawyers tell us all the time that people can be incapable about money and money is sort of the root of the description in a couple?

GARDERE: That's right, it's a major stressor for almost every couple I've ever worked with and the statistics show if you're having disagreements about money all the time, chances are it may lead it a divorce.

So, this is something you have to address. I think Carly is absolutely correct, I think though, you have to start even before the actual marriage or serious dating. Look at the PC, what I call it, not politically correct, but the precursors. What is it about that person that tells you about their spending habits, their attitudes about money. The same...

ROMANS: Like what?

GARDERE: Well, for example, you go out to dinner with someone and they refuse to open up their wallet and help you pay for that dinner. First few times for a guy, for example, to be a gentleman, that's OK, but when you are constantly going out and that person sits back and let's do you that, I think it tells you a lot about whether this person wants to be your partner or a dependant financially.

ELAM: I think you may be starting a bunch of wars, there.

Donna, I want to ask about this, though. Because when it comes to the idea of what people fight about, and if you take a look at debt levels. When you get married, your debt is my debt. We all come together, no matter what, right?

ROMANS: Until debt do us part.

ROSATO: That's right. You know, when you marry somebody you get their assets, but you get their liabilities, as well. It's important to understand what that might mean for you and your marriage. It's a huge stressor if you marry somebody with a lot of debt and you didn't know about that before. But, it's also important for people to know what it means for them too.

Now, if you have -- if the spouse you married had a lot of debt before you got married and you don't sign up for any of the -- you don't put your name on those accounts, you're not necessarily liable for it, but any debt you wrack up during marriage, you're going to be liable for, so you need to know what you're getting into ahead of time.

ROMANS: Well, first love, then marriage, then comes -- I mean that's the way it used to be, at least. Then comes the baby in the baby carriage. So, let's talk about the money because we know you guys have broken down the numbers at TheNest.com and you know this is not a small, cheap undertaking for American families?

RONEY: It is not. Did the research and went down and did it for ourselves, had three babies, went down the numbers it could be $30,000 of your first year of having a baby, going through the pregnancy. I mean, the supplies themselves are $6,500 and that's just the formula, the getting all of that gear that you need in there, the diapers themselves, $1,000 for that first year.

ROMANS: Is this is the gear that you don't need that end up getting that you don't use?

RONEY: You know what, this is a very low price for gear. And exactly. I scale it back, so like this is impossible that it cost this much, but it's true. and then the other expenses, people don't calculate in lost wages during maternity leave, the actual child care costs. $9,000 for that first period of time in that year, the fact it costs $400 to add a dependent onto your basic health insurance.

These are not figures that people have calculate in advance, so suddenly it's already stressful enough to have baby and then you suddenly have financial stress on top of it. So, we really encourage couples, start to save right away and before you have a baby, figure if you're financially prepared for it.

ROMANS: You guy, thank you so much. Fantastic conversation. Carley thank you so much for dropping by, TheNest.com. Fantastic stuff. Also Donna Rosato, "Money," thank you, Donna, and best of luck to you, as well.

Next, how to save for your child's college education or should you even save for it in the first place?

ELAM: Ooh. Big questions.

(COMMERCIAL BREAK)

ELAM: All right, here's the deal. You need a plan. Saving for your child's college education has become a bit more complicated these days. And that's not a surprise.

ROMANS: No, and that's not to mention those who say you shouldn't be saving for your child's education in the first place, you should be focusing on your own retirement first and let your kid borrow money to go to school because you have no idea what's around the corner.

OK, joining us Jeff Gardere, "Kiplinger's Personal Finance" editor, Janet Bodnar is in Washington. Gosh, so I'm a big a proponent, both of you, for saving for college. I mean, you really need to be saving. In the perfect world, Jeff, you are saving for your retirement and you're saving for college and your child grows up to the smart and well adapted and gets a job right out of school.

GARDERE: Well, that's in a perfect world, but we know, even when we save for kids for college, they may still take on debt themselves and you have to look at the value of that. I think it's something that you should. I've done -- didn't for my two younger kids, I didn't do it for the two older ones.

I learned my lesson with that and so I'm hoping that even with that, they understand the value of money and will try to get as much scholarship as possible. But there are so many tax savings with that too, so it's a good idea all the way around.

ELAM: So, if you're trying to instill this knowledge, Janet, of what the value of a dollar is and why it's important, when do you start this lesson? When do you start having an allowance that you start giving your kids?

JANET BODNAR, "KIPLINGER'S": Well, I like the idea of starting an allowance when the child is around, six or seven years old, in first grade, starting to learn about money and school, money equivalencies. You're starting to make some abstract connections so they know that one dollar equals four quarters equals 10 dimes so that when they get an allowance and the key to an allowance is to have them make their own choices with how they're spending the money, they can actually handle it.

If you start earlier, the kids aren't always ready for it, they're on much more concrete terms. First and second grade is a good time.

ROMANS: OK, Jeff, I want to bring in Jeff here because there's a study recent by the Schwab Foundation that found that parents of -- parents said their adult children were better with money if they were kids who had to take out the trash, who had to do chores.

Four for or more chores, regularly, growing up, they considered their now young adult children to be very financially responsible. Not necessarily paid for those chores, by the way, but had to pull their weight in the house, Jeff. Should you be teaching your kids through example as well, not just allowance, but expecting them to follow through and be responsible?

GARDERE: I think when you look at this from a holistic point of view, it really is about instilling self discipline, as you've said, your place in the family, being a team member. And we're seeing that more than ever since the recession that we have couples working as teams and we have families working as teams. So when we are able to get our kids to do these chores, now we see that they actually step up. They do better in school. They do better as far as social interactions and even tend to spend a little less time on the computer, which is also good.

ROMANS: I also think we talk about teaching the value of a dollar and Jane and Jeff, both of you, I think this is fascinating but these kids know the value of a dollar, it's 99 cents for an iTunes. They get it. they also know the value in terms of their cell phone plan.

I mean, there are ways that we can, as parents, we can to mentor our kids, especially as they get into young adulthood about what money is worth by making sure they're managing these things, you can have, for example, on your debit card, you can give a debit card to a kid, right, but you can get your own text alerts when the kid is spending the money and you can see exactly how they're spending it and you can have a conversation, Janet, right? I mean, you can have a conversation with your kid about these things.

BODNAR: Right. And the real key is they need to spend their own money, you see. Even if they have a debit card arrangement, you don't want to be topping that card or don't want them to think that you are going to top up the card every time they need more money. So, again, making their own choices, using their own finances, being responsible for part of their cell phone bill, buying their own iTunes so that they're not always coming to you for money. That's the thing that really instills responsibility and that's really the key word.

ELAM: And I think for a lot of people who are coming out of high school, these people do not realize just how expensive college can be. In fact, let's just take a look at the average cost of college. This is from 2009 through 2010 school year that we're talking about , here.

ROMANS: Close your eyes with a junior in high school, right now, because you don't want to see it.

ELAM: Look at these numbers, a private four-year, you're talking over $26,000 a year, public four-year, $7,000, public two years, you got $2,500 there. You know, when you look at this kind of data here for lot of people that's daunting, Janet, because we are talking about one year, obviously. So, what do you say about saving for college?

BODNAR: Well, a couple of things. First of all, at Kiplinger we do like state sponsored 529 plans and in fact at Kiplinger.com, we have rated all 50 states that have state-sponsored 529 plans, which ones we like and which ones are good investments, so I think that starting to save early and also getting the family members, the grandparents, the aunts, the uncles involved in saving for college is a good thing. You get tax breaks on these accounts and small amounts when your kids are young, really do tend to grow into large amounts later.

ROMANS: And I would encourage people to go to Finaid.org and also to Kiplinger's because there's incredible calculators that you can use to figure out how much money you need to save.

For example, did you know that if you save $200 a month for 10 years when the child is young, the replaces borrowing $396 a month for 10 years when the child is trying to start their life. So, just think about that. You can run these calculators and find out exactly what you need to do and how much you need to save.

ELAM: There's resources to help you out there. Well Janet Bodnar, thank you for so much for joining us. Jeff, thank you for going through this with us again.

GARDERE: Absolutely.

ELAM: All right, grab that pen and paper. We have the best ways to invest for your family and save for retirement. That's coming up next.

(COMMERCIAL BREAK) ROMANS: All right, the rules have changed how you save for retirement. Are you doing it? Are you doing it right now? The amount you save for retirement and the age when you can retire. You have to know the answer to all of those questions to build your financial future.

ELAM: Yeah. And you know, something that most people probably don't want to think about too often but you have to, so we've got Jeff Gardere, he's back with now and one of our most favorite people on the planet, Valerie Morris is also joining us from Oakland, California.

I'm a little jealous because she is in California, there. But, Val, thanks for being here.

VALERIE COLEMAN MORRIS, CALERIECOLEMANMORRIS.COM: My pleasure, absolutely.

ELAM: All right, so here's the question. I think this is something that a lot of families need to discuss, but we've been talking about saving and investing, what's the difference?

MORRIS: It's really important that people understand it because sometimes people think those terms are interchangeable. We know they aren't. Saving is something that you want to do that's absolutely has no risk. It's something that you want to accumulate, a three to six- month, we call it emergency fund to make sure if something happens you have at least three to six months worth of living expenses in a liquid, which only means an accessible account. Right?

Investing on the other hand, is where you take man that you have saved that you then allot to put into an asset that you hope over time will grow and will pay you back, will offer you something for your investment. So I think it's really important that families understand there's savings and there's investing. And you shouldn't really invest until you have your savings absolutely rock solid.

ROMANS: And Valerie, I think that's such a great point and we know with the people -- people who are out of work on average out of work for like 30 weeks, so you really need to have that -- that emergency money is really emergency money. I mean, you're going to -- you could have to use this money so it's not something to be tapped for other things.

And also, you make a very good point, before you can startsangyo veo t debt, too. There's several steps the all of this, right in.

MORRIS: Well, absolutely. And you know, debt is really the trauma and the drama for families. And it's the reason why I like to talk about money through a three generation lens. One of the ways to get out of debt as a family is to make sure the entire family knows this is what it feels like.

Debt is not financial freedom. Debt means we cannot do the things we feel we need to do. Debt is what happens when you don't know the difference between needs and wants which is a lesson that a lot of adults never learned and the reason that we continue to have problems.

ELAM: Jeff, we keep coming back to that.

ROMANS: Living within your means sounds so cruel.

GARDERE: But it is true.

ELAM: To the Americans who are around in 2006 and seven.

GARDERE: You want to find the range that works for you. And when we talk about reducing that debt, it's also about just getting on top of it to begin with. You don't have to completely clear up the debt but as long as you have a plan in place and you're following though, and as Valerie says, you work as a family.

It is not a secret. It's not dirty laundry. This is the real deal, you need to know what it feels like to be in debt, how it can hurt you and how it's not financial freedom. There are better things that you can do with your money, but you've got to be empowered.

ELAM: Jeff Gardere, thank you so much. What an incredible half hour.

ROMANS: And Valerie, love to have you on, Val, thank you so much.

ELAM: Good information, there, always, but right now it's time to check on your top stories in the CNN NEWSROOM. Enjoy your weekend.