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American Morning
Will Fed Rate Cuts Affect the Average Person?
Aired May 15, 2001 - 09:18 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.
DARYN KAGAN, CNN ANCHOR: All right. We're waiting today to see what the Federal Reserve does in terms of interest rates. A lot of experts out there expecting the Fed to drop interest rates about 50 basis points.
Let's get more information about what this means to your financial picture and your investments with Dave Ramsey, a radio show talk host. He is joining us from Brentwood, Tennessee, and also now kind of a frequent contributor to here -- to us here at CNN.
Dave, good morning. It's good to see you.
DAVID RAMSEY, FINANCIAL ANALYST: Thank you, Daryn. It's good to be back with you.
KAGAN: Looking forward to what the Fed might or might not do today, what actual effect is this going to have on the average person when they sit down next month to write their bills and all those checks that they have to send out?
RAMSEY: Probably very little in most households. The biggest thing it can do is it may stimulate the stock market, that and the continued talk and hopeful passage of some tax cuts by the Bush administration. Those kinds of things continue to stimulate the stock market.
And what that does for Joe and Susie, more than anything else, is raise the value of their 401(k), if they're in good mutual funds, or their Roth IRA if they're in good mutual funds, but, as you month to month budget, how much does it change? How much it is interest sensitive to the Fed? Very, very, very little.
KAGAN: Didn't know -- I don't know if you know this, but you're a very popular guy. When we put out a -- the e-mail address to write into you, tons of e-mails. So let's get right to our viewer questions.
RAMSEY: OK.
KAGAN: The first one coming to us from Naperville, Illinois, from Melanie Broussard.
She writes, "I'm the process of buying a home. I have not yet locked in my mortgage rate. How much longer do you think I ought to wait? Will the Fed lower the rate more than 25 basis points or 50 basis points today?"
What -- what should Melanie do -- hang on or just lock in?
RAMSEY: Well, we have no idea what the Fed's going to do. He...
KAGAN: Right.
RAMSEY: ... lives by the crystal ball, eats glass. So I don't know what Greenspan's going to do, but, certainly, we've got a big event today. So I might ride through the end of this week.
Normally, if there's not some kind of interest-sensitive event going on, I would tell her just lock it in now because, hey, we're at 6-3/4, 7 percent, par on mortgage rates, as far as the 15-year fixed goes. It's a really good interest rate.
I used to sell real estate back in the '70s and '80s when we were dealing with 10 percent, 20 percent, you know.
KAGAN: And you were selling?
RAMSEY: Yeah. Way back in those days.
KAGAN: You must have been a good salesman then.
Let's move on to the next e-mail. This one is coming to -- oh, from anonymous here.
Question, though. "When digging out from debt, what percentage of your income should go toward the debt and what percentage should you be putting away in investments and savings?"
Good question. If you are -- especially that huge credit-card debt that faces so many Americans -- should all your money, Dave, be going towards trying to get rid of that?
RAMSEY: Well, what you need to do is develop what we call the baby steps, the step-by-step procedure. One hundred percent of your money needs to go in the underwear drawer until you have a thousand dollars. A thousand dollars for a little baby...
KAGAN: OK. Why the underwear drawer?
RAMSEY: Well, just a little baby emergency fund.
KAGAN: OK.
RAMSEY: You need -- it's a little starter emergency fund.
Then we say list your debts, smallest to largest, paying minimum payments on everything but the little one, and attack the little one with a vengeance, meaning stop everything and a hundred percent of what you can dig up -- sell so much stuff the kids are afraid they're next. I mean, get in attack mode.
When you -- when that little one is gone, you take the money from that little one and you go on down the line, boom, boom, boom, right down the line, and each time you do that, you have more money to attack the next one. So one hundred percent should go on your debts until everything's paid off but the house.
Now if you do that with focused intensity, most people -- they get wired up and fired up. You know, "Rocky" music in the background. Adrienne! You know. They can get out of debt in about 18 months.
KAGAN: And I like your term about plastic surgery.
RAMSEY: Well, absolutely. We know for sure that a plastictomy is a really good first step, you know.
KAGAN: Oh, yes.
RAMSEY: If you'll go ahead and do that, it doesn't require novocaine, although some people pass out when they're doing it.
KAGAN: OK. Moving on -- put that sharp utensil down while we're talking, please. This one is from T.S. in Santa Claus, Indiana. Don't we all wish Santa Claus would show up sometimes? Your recommendation for a mid-30s couple, three children, has a mortgage, a second mortgage, and significant credit-card debt. They're trying to decide the best course of action. It sounds like your last answer might apply to these folks.
RAMSEY: Well, it does. It's get a Visa debit card and then sit down this month and let's do the written plan. John Maxwell has a great quote about the dreaded budget. All a budget is is people telling their money what to do, instead of wondering where it went, and I think that's a really great way of looking at it.
So the fun thing about money -- a budget is it's a money stretcher. When you sit down and tell your money what to do and get in attack mode with it on a month-to-month basis, every month spend every dollar on paper before the month begins, than you start doing smart stuff. What happens to most people, though, is they just kind of wander through life like Gomer Pyle on Valium, wake up broke, and wonder what happened.
KAGAN: Don't do that.
RAMSEY: Don't do that.
KAGAN: I think we have...
RAMSEY: You do the written plan and then begin to hit these steps, a thousand dollars in the bank, then work that debt snowball going smallest to largest. Stop borrowing money. Draw a line in the sand, say, "No matter what, we're not borrowing anymore."
KAGAN: Great, great tips. Dave Ramsey, always a pleasure to have you along.
RAMSEY: Thanks, Daryn. It's good to be back.
KAGAN: Thanks so much. Good to have you with us.
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