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American Morning

'30, 50, 50'

Aired May 15, 2006 - 09:34   ET

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


SOLEDAD O'BRIEN, CNN ANCHOR: Let's get right back to our special hour of "30s, 40s, 50s" and financial advice.
MILES O'BRIEN, CNN ANCHOR: Let's talk about paying for education. This is always a big worry of any parent. And joining us now, Ellen McGirt, editor-at-large for "Money" magazine and David Bach, who's latest book is called the "Automatic Millionaire Homeowner."

There's nothing automatic about being a millionaire, right? We can talk about that later.

S. O'BRIEN: In your 30s, I know your advice is understand your options, and I think for many people in their 30s, they think, well, there are so many options. Maybe you have young children, so you start thinking about them. Maybe you have a home, so you think about, well, how much money should I put into my mortgage. Maybe you have credit card debt. Well, OK, and how much of a percentage of that should be paid off? Maybe you still have your own student loans you might be paying off. How do you figure out -- I mean, is a child who's two, three, four years old really ready to have all that money put into an account for them. Is that when you have to start?

DAVID BACH, AUTHOR, "AUTOMATIC MILLIONAIRE HOMEOWNER": It's all about prioritizing, and I think so many parents right now are putting their kids first, and this isn't very unusual. And I'm a parent. You need to put yourself first. It's very important for someone in their 30s and their 40s to be saving for retirement, so some day their kids won't have to live with them, seriously. So you need to be getting your kid to go some work as they get into their teens, saving them money for themselves, getting your kids to get good grades so they can get tapped into the scholarship program, because it's very difficult to do everything right now. It just is. But I recommend people start very young (INAUDIBLE). I know you're a big proponent of that.

M. O'BRIEN: So a good retirement plan is not making your kids doctors so you can pay for you and your retirement? That's not going to work, is it?

ELLEN MCGIRT, "MONEY" MAGAZINE: That's a gamble. You want to get rid of them (INAUDIBLE) happy, healthy citizens. But absolutely put yourself first. That is the most important thing people can take away today, and that was going to help you negotiate with creditors. It's going to help you sacrifice, so that you don't do the things that can't, so that you can afford things you need later on.

And 529 plans in your 30s are a great option, because everyone can contribute to them, and you've got the gift of time. You've got years before the kids are going to need them, and you can control that money. And one of the best things about is that it's in your name, so that when you go seek financial aid, because you're going to want to get creative when paying for college in your 50s, it will not affect your lending profiles, your borrowing profile so much, because it will be in your name, and that's a very important point.

M. O'BRIEN: So important to stick to your plan, whatever it is, right? A lot of people don't do that.

MCGIRT: A lot of them don't have a plan.

BACH: It's so important to look for the free money, too, because there are billions of dollars in scholarships every year go unclaimed. And people always go, well, that's not for me. It's too good to be true. Well, you know what, spend some time looking for those scholarships, go out look at 10 different schools, see if they've programs available for your kids.

S. O'BRIEN: In your 50s, is when the kids are going out the door and off to school. And I'm curious to know how much help do you think you should give? I mean do you advise parents who come to you and say, well, on the one hand, I have a little nest egg, it could go to retirement, but on the other hand I should pay help junior out. Pay the whole way or half the way? What's your advice?

MCGIRT: It's tough. I would say it's probably less than you think. There's no loan you can take out in retirement, but there are plenty of creative options to pay for education, and I think it's important. I paid for most of my education over time. I did not have expensive loans. My parents helped me out whenever they could. I turned out just fine.

BACH: You turned out great!

MCGIRT: Thank you, David.

The pressure to pay for everything for our kids is so profound these days, but all of our lives are so expensive. Our homes are expensive. Fuel costs are expensive. You have to put your retirement goals first. And if you don't know what that number is for you, you don't know if you're on track or not.

S. O'BRIEN: Wow, this is interesting advice, which is basically me, myself and I.

M. O'BRIEN: Me, me, me!

MCGIRT: Putting yourself within the family. Everyone is important.

S. O'BRIEN: Tough love.

BACH: You know I got to tell you something, we're coddling our kids. These kids are coming back. They're not leaving, Soledad. You think you're almost done? No, they're not -- they come back! (CROSSTALK)

M. O'BRIEN: But they're so cute. You want them to stay, don't you?

S. O'BRIEN: Now they're cute.

BACH: You got to let these kid go. Gets these kids out. Look, you went to school. You're not coming back -- get a job, pay rent. Don't go buy a plasma screen TV. Get these kids out of the nest. This is not Italy; this is America. These kids have got to go out and stay out.

MCGIRT: But also have a budget. Think about public schools, think about less expensive schools, and think about the unique skills that your kids have that might be more attractive to a scholarship. Get a creative.

M. O'BRIEN: All right, we have an e-mail. This comes from one of our own, Andrea Neal (ph) on our staff here. She says this, "I always hear about starting to save for my kids' education when we're in our 20s, but many people I know are having children later. What do you do if you're in your 40s and you're have young children? How do you balance your children's education with your own retirement?" It just makes what you've been saying all the more important, right?

MCGIRT: Well, hopefully, if you've been reading all of David's books and "Money" magazine, that you're far along in your retirement planning by the time you start to have children later in life, and so you may not be in the same kind of crisis.

M. O'BRIEN: So it shouldn't matter too much if you've been doing it.

MCGIRT: Hopefully not. But again, it makes David's advice all the more important. You need to focus what the long-term care needs are going to be. Think about other ways that you can add to that, long-term care insurance. You want to plan for health care costs. You want to make sure that your home equity is where it is if you're going to be tapping as a source of income in retirement. So it's even more important to put yourself first -- David.

BACH: And one lasts tip I would give you guys is this, whatever you're going to do, saving for college, or saving for retirement or saving for a home, make all the savings automatic. So if you're going to save for college, even if it's only $100 every two weeks, get that money automatically going into your checking account, right into the 529 plan. That way if you're a parent in your 40s, you'll really get it done, versus turning around in your 50s and having to catch up.

S. O'BRIEN: Catching up is always ugly.

All right, you guys, thanks. Coming up this morning, we're going to talk about real estate. That's our next segment. What do you need to do to buy your first home in your 30s? What about buying a second home in your 40s? Do you need to downsize in your 50s? Because as David says, the kids shouldn't come back.

Don't forget to give us a call 1-877-AM6-1300. That's 877-276- 1300, or you can e-mail us at AM@cnn.com.

We're back in just a moment.

(COMMERCIAL BREAK)

M. O'BRIEN: All right. Median rent, $593.

S. O'BRIEN: Wow! I haven't paid that...

M. O'BRIEN: Where is that?

(CROSSTALK)

S. O'BRIEN: That pays for your parking space.

M. O'BRIEN: Tough commute. Yes, that's exactly my parking space, as a matter of fact, yes. A space and a half for Yukon XL.

In his latest book, "The Automatic Millionaire: Homeowner Version" -- the "Automatic Millionaire: Homeowner Version" author David Bach says the average homeowner's net worth is over $172,000, while the average renter's net worth is less than $5,000. And that means -- do the math -- yes, the homeowner is 35 times more wealthy than the renter. So how can you get into the real estate market and what should you be thinking about, 30, 40 and 50 timeframes?

S. O'BRIEN: We are back with David Bach and Ellen McGirt from "Money" magazine. In your 30s, many people say, I'd love to buy a house -- I would love to buy a house. I cannot possibly afford to buy a house or an apartment, certainly here in Manhattan, where the rent is nowhere $500-some odd dollars per month.

M. O'BRIEN: Yes, that first purchase is the hard one, isn't it?

BACH: They're wrong. Let's just start with that. They're wrong.

S. O'BRIEN: I love this guy!

(CROSSTALK)

BACH: You need to hear this, OK? If you want to be poor, rent. If you want to have financial security, you need to buy a home. Now, the question simply is, how do you buy a home? The number one thing that holds a young person back from buying a home is thinking they need a big down payment. I have good news for you. You don't anymore. Almost one in two people last year, 43 percent who bought first-time homes last year, bought them with zero money down. They went into the bank, they got a first time home loan program, and they put a little money down.

Now, I'm not telling you do that. You just need to know it's available. You can go in the bank and find out, what do I qualify for? Maybe you'll only put 5 percent down. But you no longer need to put 25 percent down. That's number one.

Number two is you don't need direct credit. So often, young people say to me, well, I've been late on my credit cards, I don't have great credit. Again, almost one in two people who bought homes last year bought them with less than perfect credit. Now, I want you to have a good credit score. You should be going to myfico.com, working on getting your credit score up.

But those two hurdles that so many young people say is holding them back from buying really is not reality. And the third thing I'll tell you is to hold somebody back from buying a home is they want to buy a home that's nicer than what they rent. I can't tell you how many people in New York will say to me, but what I'm renting, I can't buy. You're right. You can't. You have to buy something smaller.

S. O'BRIEN: You are all about the tough love, David!

M. O'BRIEN: That's so un-American, though, to scale back. Right, Ellen? I mean, that's hard for people to do.

MCGIRT: It is, but it's the secret to financial success, is spending less than you make, saving more than you spend and being -- and doing your homework. Because everything that we've talked about today, whether its saving for college or getting out of debt or buying a home, requires you do a lot of work and learn a whole other language. But with a little bit of effort, and getting some expert advice and just sort of calming down and crunching your numbers, you can get wherever you want to go in your financial life.

S. O'BRIEN: Let's run through the advice. For your 30s, you say save for a home, get a home savings account. A starter home is not, as you point out, the dream home. Think about the school system. That means your kids can stay there for a while. And think about how rentable or how saleable it is.

BACH: See, this is so key. People are afraid to buy right now who are young, because they think about the national real estate. I can tell you how to protect yourself against a bubble. Buy a home in a good school system. Because young people are looking for good schools. And buy a home that's the kind of home that young people are buying, which tends to be a three-bedroom, two-bath home, or if you're looking at condos...

S. O'BRIEN: Big enough.

BACH: Big enough. You don't need these 3,000 square foot homes. Buy a home that other starter families will be buying.

S. O'BRIEN: In your 40s, you say, move up to something a little bit bigger. So you should wait until your 40s. Biweekly mortgage, prepay the mortgage. Those are your two pieces of advice there.

M. O'BRIEN: Hey, you know, we have a question. We have a caller with a question on that. Should we put -- let's put him on right now. Edward is in Canton, Connecticut. Edward, you have a question about biweekly mortgages? EDWARD, CONNECTICUT (via phone): Yes. I would like to know, what do you think about biweekly payment on the mortgage and how safe it is? Do you recommend it as a way to go?

BACH: Yes, I do. Let me explain what a biweekly is. A biweekly mortgage, you take the mortgage payment. Let's just use $1,000 as an example. You split it in half, $500 every two weeks. When you do that, you take a 30-year mortgage, and you shrink it down to 23 years. You'll save six years and nine months off your mortgage. Is it safe? Absolutely. You can go back to your bank. Your bank can set it up. You don't have to refinance. It's just a way to pay your mortgage.

And here's one of the key things. If you don't want to pay the fee -- it's about $5 to $10 a month to do this -- if you don't want to pay the fee, you can make one extra mortgage payment a year to accomplish the same thing. One thing you should know is a lot of banks are starting to offer biweeklies for free. So call your bank and say are you offering a biweekly program? What's the cost? Over 23 years, you guys, it costs about $1500, but a person who's got a $200,000, you're going to save well over $500,000. In fact, in many cases, you'll save up to about $75,000 to $100,000.

M. O'BRIEN: But most people move after five years, so, is it really worth doing? You're not going to stay in that house for 30 years.

BACH: Here's why it's worth doing. It forces you to save more money. You're paying your principal down faster. It's automatic. You won't be late on your mortgage payments. That keeps your credit score up. Really, this is a no-brainer way to save some more money.

S. O'BRIEN: Quickly, let's go through the 50s. You say downsize to the right size. Second home or mortgage investment property. And pay down the mortgage and leverage the equity as you start look looking toward retirement.

BACH: Let's just start with downsize to the right size. So many baby boomers in the 50s right now -- if you just bought your home, the home you've got and you just downsized a little bit, you could basically take that extra money, put it in the savings and retire, in many cases, off of that money. And the kids can't come back, as we were talking about earlier.

S. O'BRIEN: You're worried about that.

(CROSSTALK)

S. O'BRIEN: Your child is only, like, what is he? Two and a half years old!

BACH: Jack, you can always come back. Here's the other thing. When you got -- if you downsize, you guys, seriously. Stop! Stop! If you downsize to the right size, really, you can take this equity and buy another investment property, which I recommend. I think baby boomers should be buying...

S. O'BRIEN: Use the money. Use it effectively.

BACH: Use the money. Buy a second home. Buy an investment property. One investment property, if you do it right, you could retire just off the cash flow of that investment property.

S. O'BRIEN: We've got e-mails, we've got phone calls awaiting. So let's take a short break and we'll get back to those in just a moment. The phone number again, 877-AM6-1300, 877-266-1300, or our e- mail address, CNN.com, am@CNN.com. Right there on your screen.

Short break. We're back in just a moment to answer more of your questions.

(COMMERCIAL BREAK)

S. O'BRIEN: We're opening up the phone lines so you can call and talk about questions you have in your 30s, and your 40s and your 50s about your finances.

M. O'BRIEN: Yes, let's put the number up one more time.

S. O'BRIEN: It's 877-276-1300.

(CROSSTALK)

M. O'BRIEN: You are much better at numbers than I am, and so are our guests, "Money" magazine editor-at-large Ellen McGirt, and financial author David Bach are here. We have a couple of callers on the line.

Let's go right to Laura who is in Enid, Oklahoma.

Laura, you have a question? No, Laura.

S. O'BRIEN: Well, I have a question while we're trying to get Laura back on the phone. You know, I know you give advice to a lot of people in all age ranges. What's the piece of advice that you give to best cut your budget. If you could tell somebody the thing you need to try to cut out of your budget, because every decade, honestly, it seems like you might make more money, but your expenses go up. You know, you buy a house, well, then suddenly have all of the expense that with a house. You get a little older, you can finally travel, and now you have to do all of that as well. What's the best thing to cut out?

BACH: Well, I'll tell you what, I've been talking about this for 10 years. It's called a latte factor. Now I call it the double latte factor. You have to look for your fixed overhead, the little stuff that really adds up, and some great examples can be things like cell phones, gym memberships, cable, 250 stations. You only need CNN, right?

Seriously, taking these things that add up that are fixed overhead. Even a blockbuster video membership, they're adding up to $30, $40, $50 a month. The fastest way I've seen to help people cut back is you take these memberships and not just give them, cut them back in half. So if you've got a hundred, literally, a month cable bill, go down to a $50 cable bill, if you've got a $75 cell phone bill, go down to a $35 cell phone bill. If you've got a premium gym membership, go from $110 down to the $80 package. Look for things you can do with a few phone calls that can save you hundreds, and over the years and thousand of dollars.

MCGIRT: What David's really talking about is actually understanding your budget, which is the single most important thing that people just don't do. It's all of the homework that we've been talking about.

S. O'BRIEN: I mean, people's jaws must drop when you say, you know you're spending the $80,000 on lattes over your lifetime, right?

MCGIRT: we interview people all of the time, and we actually walk through the numbers with them, and say, no, it's not me. I don't watch that much TV, I don't eat that much junk food, I don't spend that much money -- Yes, you do.

M. O'BRIEN: But life without lattes? Come on now, what's the point? I'd rather be broke.

S. O'BRIEN: You might be.

MCGIRT: But you can afford that. If you work your budget, you can afford the lattes.

M. O'BRIEN: All right, I think we finally have Laura spooled up there in Enid Oklahoma.

Laura, are you there?

LAURA: I'm here.

M. O'BRIEN: OK, what's your question?

LAURA: My question is what do you do to get out of credit debt in order to buy your first house at my age?

BACH: I didn't hear what your age is, but let me give you a bit of advice.

M. O'BRIEN: She's 49.

BACH: OK, that's a myth that you have to be out of credit card debt before you buy a home. Often buying a home will pull you out of credit card debt. And the reason, as your home goes up in value, you can ultimately sell that home, take the profit, and pay your credit card debt off, or refinance and pay your credit card off. So one, don't believe that you have to be out of credit card debt to buy a home.

S. O'BRIEN: But isn't there a theory that people say, look, if you can't pay a credit card, how are you going to pay your mortgage?

BACH: There is a theory like that. But I can go the opposite of that theory. I have a friend who had $15,000 in credit card debt, who I persuaded to buy a home in Manhattan, and his home went up a half-a- million dollars in value, and he's completely out of credit card debt today. So it depends on where you live and what you do. Again, the key to these credit cards is the interest rate. It is not the debt that will kill you, it is the interest rate. I would go to a Web site like lowermybills.com or bankrate.com. Look at credit card offers right now, look for the 0 percent interest. Move the debt to these 0 percent interest credit cards, and that way it's easier to get out of debt, and then you can also go and buy a home.

S. O'BRIEN: We've got a final phone caller. I want to get to her. She's 56 years old. Her name is Anna. She's in San Antonio. We don't have a lot of time.

Anna just hung up the phone. Thank you, Anna. She got a little scared as we starting getting to her issue.

Final question for you, you get a check back from the government. Whether it's a refund, you get some kind of, I don't know, someone dies and leaves you money, whatever it is. What do you do with that money?

MCGIRT: Walk up the ladder of what your financial needs are. If you don't have a financial safety net, you have no money to stash away in case of emergency, put it there. If you're not maxing out your retirement accounts, put it in there. If it's time to start adding to your stock holdings, put it there. If you need to hire a lawyer to help you put together a will and probate strategy. If you've got kids, I can't even tell you how many people I talked to don't have a guardianship plan, and they need that kind of advice, do that, and if it's time to put together a down payment for a home, even if you don't need one, it's still nice to have cash associated with your home, to expand your home, then do that, but look at your financial needs and walk up right that ladder.

S. O'BRIEN: All right, you guys, excellent, excellent advice. Thank you.

I feel so much better now.

M. O'BRIEN: You do, really? Yes.

S. O'BRIEN: Our pleasure, of course. Ellen McGirt, editor-at- large for "Money" magazine and David Bach, the author of "The Automatic Millionaire Homeowner." That's his latest book. Tomorrow on AMERICAN MORNING, we continue our "30s, 40s and 50s" series. We're talking about career issues for folks in their 30s, kind of starting out, folks in their 40s and folks in their 50s, tips on how to change careers, how to get back into the workforce after maybe you've had a couple of kids, how to maintain a healthy work-life balance. There's no balance. That's ahead on AMERICAN MORNING tomorrow. Don't forget, we get started at 6:00 in the morning.

A short break. We're back in a moment.

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