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CNN Live At Daybreak

What Do Falling Fed Rates Mean to Your Wallet?

Aired August 22, 2001 - 08:37   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.
CAROL LIN, CNN ANCHOR: Stocks took a dip after the Federal Reserve dropped interest rates. Analysts believe the quarter-point cut is a sign that an economic turnaround is not yet in sight. By closing bell Tuesday, the Dow Jones industrial average fell 146 points. The Nasdaq also went south.

So what does all this news from Washington and New York mean to your wallet?

COLLEEN MCEDWARDS, CNN ANCHOR: Our money man Dave Ramsey will help break it down for you. He joins us from Nashville this morning to help answer your questions. We got a pile of e-mails, Dave. Thanks for being here.

LIN: Good morning, Dave.

We'll kick it right off with a question from Bill Bunting, Charlotte, North Carolina. And he asks: "I have around $50,000 in federal student loans with interest rates running from 6.4 percent to 6.8 percent. These have been coming down over the past few months, abut is there anything else I can do to take better advantage of the interest rate cuts?"

DAVE RAMSEY, DAVERAMSEY.COM: No. The student loans are not directly tied to the Fed rate, like hardly anything is directly tied to the Fed rate, except what banks lend to other banks doing. So you probably won't see a lot of move on that. You've got the variable student loans.

I'll tell you one thing I would consider doing with those. Sallie Mae has a program where you can consolidate them all on a fixed rate loan. While these rates are down, and we don't know that they're going to continue to go down, I would probably would lock in a 5 and a half or a 6 on $50 k in student loans to attack that thing.

MCEDWARDS: David, question from Ontario, Canada.

Someone asks: "How much of your gross income should you save yearly? And what percentage should be allocated to retirement, savings plans, bonds, stocks and cash?"

RAMSEY: Oh, great question. Well, I -- people always ask me, how much you should save? All you can, how wealthy do you want to be? I mean, don't go crazy, but a minimum, let's have some target goals. We need to have three to six months saved for expenses, grandma's rainy day fund, the emergency fund, and we need to be saving up and paying cash for our stuff that we have to buy, then on retirement, a good rule of thumb is if you save about 15 percent of gross income as a minimum, you will retire with dignity if you start that at just about any age, and dignity is a matter of I guess impression.

LIN: Depends what you're used to, right, Dave.

RAMSEY: Yeah.

LIN: And someone named Bronco wants to have a little bit of fun, Dave. Bronco writes, "Would you consider saving money a little a time and then spend it on wants? Or should you spend in on wants then not save as much?"

RAMSEY: Well, I would save now, and the reason I would save now -- and I'm a spender, that's why God makes me teach this every day, OK. It's my nature. My wife is the tightwad. My nature wants me to spend it and have fun -- it's Friday. But what I've learned is if I live like no one else now, I can live like no one else the rest of my life. So save while you can and go crazy, and get the pain over with, because you have that nest egg thing going, and then leave that thing alone; don't crack and scramble it.

MCEDWARDS: Here's the question I know that on everybody's mind on this environment of falling rates, but mortgage rates not necessarily doing as much as people hope they would.

Vicky Pavlovic in New York writes, "I am buying a house, borrowing about 206,000 and looking for a 30-year mortgage. Should I lock in my rate now or wait to see if interest rates will go down again. Thank you."

RAMSEY: Well, I don't know. He who lives by the crystal ball eats glass. I don't have a clue what it's going to do next week. The mortgage rates have not dropped but about a fourth of a percent since January, while the Fed has done seven cuts, so mortgage rates and Fed rate are not directly tied mathematically. It's more of a matter perception in the market and how the bond market views inflation and the bond market is not convinced yet, because mortgage rates have not dropped substantially. They are now down under 7 percent. It's never a bad deal when it's under 7 percent. Even if it went to 6 1/2 and you locked at 6 3/4. So I probably would lock because I am kind of conservative.

MCEDWARDS: Well, would you go longer term or shorter term, though?

RAMSEY: I want to go down and lock down now, and I don't do a 30-year ever. Always do a 15 year. It saves you 15 years of bondage.

LIN: Dave, can't you get a 30-year, you have the option of having a lower payment, and prepay and add a little more to monthly payment and it kinds of turns into a 15-year.

RAMSEY: If you pay a 30 like a 15 year, mathematically, it will pay out. The problem is I've learned if I want to be wealthy, I have to quit lying, and what happens if I never do that; 97.3 percent of the loans are not systemically prepaid according to the FDIC. Everyone talks about the theory of prepaying it. Prom dresses and transmissions and sick kids and I get laid off, and there is always something every month that messes with my idea, my theory of paying a little extra, we'll start next month. You -- just do the 15 and it always pays off in 15.

MCEDWARDS: I know you favorite subject those credit card rates never seem to go anywhere. People have got to focus on getting those paid off as well, right?

RAMSEY: Absolutely. And the strange thing is Fed has cut interest rates by 3 percent. Credit card rates are down by 1. How can we account for the other two. Greed. Possibly.

MCEDWARDS: Then we say they've got to pay off bad, people who don't pay off their credit card...

LIN: Bad customers!

RAMSEY: What a crock. They could charge 5 percent over what they are borrowing money at and still be lending money at 10 percent on credit cards and making a ton. But it's all about making extra. Plastic is a scam.

MCEDWARDS: All right, another one here, I think it's from Mary, Mary Perkins. "My husband and I have some money that we would like to invest. Is this a good time to be getting into the market, or should we wait until things are more stable?"

RAMSEY: Well, the market didn't like yesterday. The market expected captain Greenspan to knock off a half a point, and he only knocked off a quarter, and they went ah, and so the market took a little dive yesterday. I think things are on sale. It's a great time to buy. Yes, it's a little unstable, but 97 percent of the five-year periods in the stock market's history have made money; 100 percent of the 10-year periods have made money. So when things are down, that's when you buy. You are at Kmart, the blue light is on, jump in.

MCEDWARDS: So get in, but stay long term. And where would you park your money, just the other half of her question, real quick?

RAMSEY: Well, I would go with good growth stock mutual funds if you're going to leave it alone at least five years. We talk about four types -- growth, growth and income, aggressive growth and international. If you go across those four types, you'll always be having some fun and always have a little sadness too.

MCEDWARDS: Dave, always a pleasure.

LINE: That's life. Thanks, Dave. Dave Ramsey.

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