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CNN Live At Daybreak

Author Answers Viewer Financial Questions

Aired July 18, 2001 - 07:36   ET

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

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
COLLEEN MCEDWARDS, CNN ANCHOR: This is a very big day in the financial markets. The Federal Reserve chairman, Alan Greenspan, is going to be speaking on Capitol Hill, as he does twice a year, to give a sense of the state of the economy. There are also a lot of earnings reports coming out today from some really big companies that are probably in your portfolio.

So we want to give you the opportunity to ask questions today, if you've got some financial issues, anything that's grating on you or you want to have cleared up.

We have got David Ramsey with us -- a bit of a financial guru. He joins us from Nashville.

CAROL LIN, CNN ANCHOR: Hi, Dave.

DAVE RAMSEY, AUTHOR, "FINANCIAL PEACE": Good morning.

LIN: Good morning.

Big earnings coming out today. But you know what? It seems that the only sector so far that's been sort of consistently hot this year has been the housing sector. I mean, what if you just dumped tech stocks, take the loss, and go buy some real estate?

RAMSEY: Well, real estate is always a good bet as far, as a good single-family home, in most areas the country -- there are a few areas that haven't done well. But where you guys live, where we live, it's obviously a great investment long-term, so there's no problem with that.

The housing market remains firm because the interest rates have stayed down. And they continue year after year after year; for a decade now, we've had a strong housing market. And I think we're going to see pretty stable numbers on that today. There is no question about that. And that's a reflection that Joe and Susie are just kind of coasting along, and honestly, a lot of Joes and Susies probably don't even know the great god Greenspan is going to speak on interest rates today.

MCEDWARDS: Aren't people getting a little nervous, though? We keep hearing stories about the number of layoffs. We keep hearing stories about people's confidence maybe being shaken a bit. But where do you see it, if anywhere? RAMSEY: Well, that's the thing that Joe and Susie are concerned about. We are approaching a million layoffs this year, depending on whose numbers you read, which gauge you go with. But a bunch of folks have lost their jobs this year and have either become new entrepreneurs with those severance checks -- but at the end of the day, they were pretty close to the edge of that cliff, and the credit cards, the student loan that has been around so long you think it's a bet -- this stuff is now a problem when you get the job layoff. So now there's a reality to those statistics that does hit home in Middle America.

LIN: Well, let's take some e-mails here, Dave. One from John Coggeshall of Pentwater, Michigan. And he writes, "I am self-employed and must set aside a percentage of my earnings toward income taxes. Between tax seasons, should I invest this money, and if so, where?"

RAMSEY: Well, I am in the same situation. I have to do those dreaded quarterly estimates because I am self-employed. So you've got to park that money for, basically, a year -- some of it, and some of it half a year, and so on. I use just a straight money market account with a mutual fund. If you invest money, I call that five years or longer, because you've got to be able to ride these ups and downs, with earnings reports coming out today, and that kind of stuff. And you don't want to do that with tax money, because you want to be sure you pay the IRS -- I mean the KGB. And you don't want to miss this, right?

LIN: Nothing personal.

RAMSEY: Nothing personal.

LIN: Editorial there.

RAMSEY: But you know, the truth is that you've got to be ready to do that, so that has to be money that's safely set aside. So 5 percent or 6 percent in a money market account is just fine.

LIN: But there are also money market accounts that are tax-free that invest in state bonds, right, so that people still can get a tax- free advantage short term and have some stability?

RAMSEY: Well, you can, but your tax-free yield, your after-tax yield, rather, on that, by the time you pay your taxes and so forth, you're really not going to come out on that. And bonds do fluctuate; they are guaranteed at maturity, but there is a marketplace for those that fluctuate in the meantime, based on interest rates. So that very bond you're talking about may have a problem today, based on what Greenspan says.

So again, I want to park it where it's just a savings account. I just know it's there. Taxes aren't something I want to worry about.

(CROSSTALK)

MCEDWARDS: You don't want to take risks with that money, that's for sure. OK, David, thanks very much for that. Now another e-mail, this one from Dale Friesen. He says, "Assuming that there will be a mild consumer-led recovery next year, with continuing low interest rates, where is the best place to put the money?"

I guess maybe we should ask about that assumption, first of all.

RAMSEY: I don't think I agree with the assumption. It would be a great one, but a consumer-led recovery is probably not in the offing. The consumer doesn't have any money or credit left. They've spent everything. We have a negative savings rate. We have no disposal income left. It's all going out in stinking credit card payments and car payments right now, so for the consumer to spend us out of this, whether he's got confidence doesn't matter or not: He's got no money.

MCEDWARDS: But people are spending, though, aren't they?

RAMSEY: Well, they are, and credit card debt is up again, and it's amazing. But the disposal income -- meaning the money after we pay our necessities -- that's left to pay those bills is just down to almost nothing, so there's going to be an end to this at some point. And I'm not Chicken Little. I don't think the sky's falling. I think there's a lot of hope when people back up, cut up their credit cards, and make a decision to control their lives. Then the consumer will have some money to continue to drive the economy.

MCEDWARDS: Where do you put that money, though -- the second part of his question.

RAMSEY: Again, long term, even in that situation, I don't think our economy is in trouble. Again, I'm not Chicken Little, so I do good long-term investments and good long-track-record mutual funds -- good growth stock mutual funds -- growth in income, aggressive growth, international -- and I spread across those four types with a five-year or a 10-year track record.

That's if you're investing for five years or longer. Again, if you're parking money for the short term, use something like a money market.

LIN: All right, Dave, an important figure is coming out today on housing starts, and we've got a viewer who has a question about housing. Here it is from Melanie in Naperville, Illinois: "What advice can you offer someone who is considering a home purchase versus to continue to rent and put money into the market? I am looking at a home to purchase right now."

RAMSEY: A home purchase is an excellent purchase. Now, as far as the "rate of return," the financial aspects of it, it may or may not keep up with a growth stock mutual fund over time.

But one thing about it is on your personal residence, you can take up to a half a million dollar gain every two years tax free. I like tax free a lot. So Joe and Susie buying that home have got a tax-free growth on that home, plus there's a lot of emotional, spiritual and family things. This is personal finance, and owning that home feels different to Mom, those kids -- even to Dad, because he gets to cut the grass.

MCEDWARDS: Another question for you, Dave, just about the earnings report that are coming out today. Things didn't look too bad yesterday. There was a bit of a bounce. But the companies today coming out are real bit ones, like IBM, Ford -- those kinds of companies. Is there anything people should be watching for, based off those stocks in a portfolio? What should they be watching for today, and should you really be making a decision on whether or not to continue to own those stocks, or are those just stocks that, no matter what happens today, no matter what they say, you've got to have them in your portfolio?

RAMSEY: I don't have them in my portfolio, except for the fact that the mutual funds that I own them. Those are Dow stocks, big blue chip companies, big dinosaurs. They pretty much sit there. They're not going to be very volatile. It's not going to be like the tech world last year, when the sky came crashing down, or something like that. So it's not going to be this devastating news is going to come out of Coca-Cola, for goodness sake. It's just not going to happen.

So these are stocks that in your mutual funds that are good -- keep, hold onto forever. If you own them individually, that's fine. I don't like the risk of the individuals because then I have to worry about days like this. I don't worry about days like this. I just ride through because I'm thinking five, 10 and 15 years out all the time.

LIN: We've got a viewer here with a question about long-term mutual funds. Let's take it off the screen here from Gail Carroll: "What funds do you recommend investing in for someone who is opening an SEC 529 college investing plan with an 18-year investment timeframe?" What is that?

RAMSEY: Well, the 529 plans are a new type of college plan that has just had some new changes to it in this latest tax law. It allows the money to grow tax free. Personally, the first $2,000 I did, starting next year -- starting January -- from then on, I wouldn't do there. I would go to the ESA, the Educational Savings Account, nicknamed the Education IRA. It's very simple: You open a mutual fund, put $2,000 per year in there per child, and it grows tax free for college.

If you want to do the 529s above that, there are two types. These are state plans. Thirty-eight states now offer them, and basically, New Hampshire, Delaware, and Massachusetts are probably my favorites; that's the Fidelity Company -- we'll give them a little ad there, I guess.

But I like the static type of plan, meaning that you pick a portfolio, and you lock it in, and they don't move it around, and you don't move it around, and you can look at the mutual funds that it's in before it goes in. There's another type where they monkey with it all the time based on your age. I'm not comfortable with that one. I want to pick it and lock it in. I want to have that sense of control. So buy a static plan, a locked-in plan, if you're buying a 529.

LIN: All right, thanks Dave. I feel richer already.

MCEDWARDS: Richer for your advice. Thanks so much, Dave Ramsey.

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