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American Morning

Going Broke

Aired September 16, 2003 - 07:44   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.


BILL HEMMER, CNN ANCHOR: There is a new book claiming this year that more children will live through their parent's bankruptcy than their parent's divorce. One of the many sobering financial facts in a new book that examines why middle-class families today are more likely than ever to go broke.
The book is called "The Two-Income Trap," and the author, Harvard law professor Elizabeth Warner, is our guest now.

Good morning. Nice see you.

ELIZABETH WARNER, AUTHOR, "THE TWO-INCOME TRAP": Good morning.

HEMMER: We talked about this yesterday. What explains why the fixed costs have gone up so dramatically from 1971 to now in the year 2003?

WARNER: Well, the principal reason is schools, because the No. 1 increase for families from a generation ago to right now is what they're spending on mortgages. The cost of a mortgage for a median income family has gone up 70 times faster than a father's income, when adjusted for inflation on both sides.

What that really means is they've put mom to work and put virtually all of her salary into trying to buy a decent house. And then behind that, there's health insurance, which has risen about 40 times faster than a father's income. There's the second car, so that mom can be at work. And there's the cost of day care.

HEMMER: Back to the issue of schools...

WARNER: And that combination...

HEMMER: And I apologize for the interruption.

WARNER: Yes.

HEMMER: I know the combination of...

WARNER: No, that's all right.

HEMMER: Your theory states that more people are trying to get into the good school districts, and there are so many people trying to get into the same area, the housing costs in that specific area continue to rise. Is that the premise for your theory?

WARNER: That's right. And what the data show is that families with children are spending considerably more on housing, even when adjusted for family size, than families without children. So, what that really means is that families have lost confidence in the public schools, and they're competing to try to get into the best school district that they possible can.

HEMMER: So then, let's move to advice right now. For couples headed for bankruptcy, what do you tell them?

WARNER: Well, we start out by telling families who are in serious financial trouble to know that you are not alone. Today, if you drove down any street in your neighborhood, statistically speaking, about one in every seven households would be in the same kind of trouble that you're in.

The second thing we tell a family in financial trouble is any family in trouble needs to think like a family at war. Think of the things you care about most, and protect those things. Pay those bills first. Don't pay attention to the noisiest creditor; pay attention to how to protect the assets you care most about.

And the third thing we say is never try to borrow your way out of financial trouble. It won't work.

HEMMER: Yes, and finally here, a financial fire drill is something you recommend and put away about six months in cash. In today's climate for the couples you're talking about...

WARNER: Well...

HEMMER: ... that's a pretty difficult thing to do.

WARNER: Absolutely. But today's families need to take a financial fire drill, even if they don't feel like they're in financial trouble. And we tried to lay out the details of how to do this, because rising fixed costs for middle income families mean that unless they learn how to play the game smarter, they will be part of the statistics that are the rising number of people in bankruptcy, the tripling of home mortgage foreclosures, the increase in the number of people who can't make this month's car payment or can't stay up with their credit card bills.

HEMMER: Well, you paint a pretty dire picture, but nonetheless, thanks for sharing with us, and the advice is well-heeded. Elizabeth Warren, thanks. We're out of time. The book is called "The Two- Income Trap," live today from Boston. Good luck to you. Thanks again, OK?

WARNER: Thank you.

TO ORDER A VIDEO OF THIS TRANSCRIPT, PLEASE CALL 800-CNN-NEWS OR USE OUR SECURE ONLINE ORDER FORM LOCATED AT www.fdch.com.







Aired September 16, 2003 - 07:44   ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
BILL HEMMER, CNN ANCHOR: There is a new book claiming this year that more children will live through their parent's bankruptcy than their parent's divorce. One of the many sobering financial facts in a new book that examines why middle-class families today are more likely than ever to go broke.
The book is called "The Two-Income Trap," and the author, Harvard law professor Elizabeth Warner, is our guest now.

Good morning. Nice see you.

ELIZABETH WARNER, AUTHOR, "THE TWO-INCOME TRAP": Good morning.

HEMMER: We talked about this yesterday. What explains why the fixed costs have gone up so dramatically from 1971 to now in the year 2003?

WARNER: Well, the principal reason is schools, because the No. 1 increase for families from a generation ago to right now is what they're spending on mortgages. The cost of a mortgage for a median income family has gone up 70 times faster than a father's income, when adjusted for inflation on both sides.

What that really means is they've put mom to work and put virtually all of her salary into trying to buy a decent house. And then behind that, there's health insurance, which has risen about 40 times faster than a father's income. There's the second car, so that mom can be at work. And there's the cost of day care.

HEMMER: Back to the issue of schools...

WARNER: And that combination...

HEMMER: And I apologize for the interruption.

WARNER: Yes.

HEMMER: I know the combination of...

WARNER: No, that's all right.

HEMMER: Your theory states that more people are trying to get into the good school districts, and there are so many people trying to get into the same area, the housing costs in that specific area continue to rise. Is that the premise for your theory?

WARNER: That's right. And what the data show is that families with children are spending considerably more on housing, even when adjusted for family size, than families without children. So, what that really means is that families have lost confidence in the public schools, and they're competing to try to get into the best school district that they possible can.

HEMMER: So then, let's move to advice right now. For couples headed for bankruptcy, what do you tell them?

WARNER: Well, we start out by telling families who are in serious financial trouble to know that you are not alone. Today, if you drove down any street in your neighborhood, statistically speaking, about one in every seven households would be in the same kind of trouble that you're in.

The second thing we tell a family in financial trouble is any family in trouble needs to think like a family at war. Think of the things you care about most, and protect those things. Pay those bills first. Don't pay attention to the noisiest creditor; pay attention to how to protect the assets you care most about.

And the third thing we say is never try to borrow your way out of financial trouble. It won't work.

HEMMER: Yes, and finally here, a financial fire drill is something you recommend and put away about six months in cash. In today's climate for the couples you're talking about...

WARNER: Well...

HEMMER: ... that's a pretty difficult thing to do.

WARNER: Absolutely. But today's families need to take a financial fire drill, even if they don't feel like they're in financial trouble. And we tried to lay out the details of how to do this, because rising fixed costs for middle income families mean that unless they learn how to play the game smarter, they will be part of the statistics that are the rising number of people in bankruptcy, the tripling of home mortgage foreclosures, the increase in the number of people who can't make this month's car payment or can't stay up with their credit card bills.

HEMMER: Well, you paint a pretty dire picture, but nonetheless, thanks for sharing with us, and the advice is well-heeded. Elizabeth Warren, thanks. We're out of time. The book is called "The Two- Income Trap," live today from Boston. Good luck to you. Thanks again, OK?

WARNER: Thank you.

TO ORDER A VIDEO OF THIS TRANSCRIPT, PLEASE CALL 800-CNN-NEWS OR USE OUR SECURE ONLINE ORDER FORM LOCATED AT www.fdch.com.