Roundtable: Managing Personal Finances
TONY COX, host:
This is NEWS & NOTES. I'm Tony Cox.
On today's Roundtable, we're going to talk about that nasty F word, finance. Personal finances can be a nightmare to manage, especially if you've got a sizable debt or you want to put more in the bank for retirement. Or maybe you're looking to invest this coming year and don't know where to start. We've got some experts here who can help with all of these things. Joining today to discuss these topics and more are Anthony Chan, chief economist with JP Morgan Asset Management. He's at Magnetic Studios in Columbus, Ohio. At her office in Chicago, Illinois, Melody Hobson. She's president of Ariel Capital Management and a regular financial contributor on ABC's "Good Morning America." And lastly, at WBGO in Newark, New Jersey, Lynnette Khalfani, money coach and author of "Zero Debt: The Ultimate Guide to Financial Freedom."
Welcome to the program, all three of you.
Mr. ANTHONY CHAN (Chief Economist, JP Morgan Asset Management): Glad to be here.
Ms. LYNNETTE KHALFANI (Money Coach and Author): Thanks for having us.
COX: All right, now you are the experts, so it seems to me, as a person who spends and buys, that growth and debt are the primary issues when it comes to talking about money. Looking in 2006, let's start off talking about which of those is the one you should concentrate on, growth or managing your debt?
Anthony, I've got your name up first. Let's start with you.
Mr. CHAN: Well, I think both of those issues are important. We want to think about growing our assets, while at the same time we want to be cognizant of what our debts are and what our obligations are. So I think you have to worry and consider both of those issues with respect to our future. We also have to be aware of what are our options with regard to financing our debt and what kind of opportunities we have on the investment agenda.
COX: Melody, how do you see it?
Ms. MELODY HOBSON (President, Ariel Capital Management; Regular Financial Contributor, "Good Morning America"): Well, actually, I always prioritize debt first and keep it very simple. You need to pay down, particularly credit card debt. The average American has $9,300 in credit card debt. And until you get that debt paid off, at sometimes interest rates as high as 20, 22 percent, you really can't think about investing your money for long-term growth. And the reason being, the stock market over the long term has returned about 10 to 12 percent a year. So if you have 20 to 22 percent in annual percentage rate interest rates for your credit card, even if you're invested in the stock market, you're still in the hole. So first you want to pay down the debt, then you want to think about investing.
COX: Is that a strategy that you would buy into, Lynnette?
Ms. KHALFANI: I actually absolutely agree with that because, as Melody just pointed out, consumer debt on credit cards is at an interest rate that's much higher than other forms of debt. And at that sort of 15 percent average, when you pay down that debt you're effectively getting a 15 percent return on your money. I'd, in fact, I think take it a little step further and say not only should you, you know, refrain a bit from investing before you pay down your debt, but you should also do some other things like establish a cash cushion, make sure that you have adequate life insurance and disability protection. But I think Anthony raises a good point, which is that you can't neglect your long-term financial future, so nobody's suggesting, for example, that you not, say, sock money into your 401(k) or plan for retirement.
COX: Let me come back to you, Anthony, because what you mentioned has to do, it seems to me, with personal strategy and whether or not--you know, what your level of risk assessment is. Lynnette and Melody suggest that you need to handle your debt before you can begin to invest, but I wonder, is there a way to do both and to do both effectively?
Mr. CHAN: I really think there is. I don't mean to say that if you have 22 percent interest rate obligations that you should focus on trying to invest in the equity market. The S&P 500 this year, for example, is giving us less than 5 percent on a year-to-day basis. So you don't want to take money and invest it and make only 5 percent if you're paying 22 percent. However, you should not make the assumption that the only option is domestic investing. This year, for example, you've seen some of the global markets giving you double-digit rates of return, some of them at 20, as much as 30 percent rates of return. And you should not also assume that all the debt that we have is credit-card related. Some of it may be mortgage-related, and that is tax deductible. So to that extent, the effective interest rate that you're paying is even lower.
So there are many ways that we can address this issue, but clearly if you are borrowing at a rate that is higher than the rate of return that you're earning, of course you have to manage that debt with a higher priority. It's just that not everyone has credit card debt and not everyone invests domestically. Sometimes you look elsewhere. And, in fact, I would go so far as to say that for 2006, global investing looks a lot more favorable than domestic investing.
COX: God, Anthony, everybody I know has credit card debt, I'd suppose. Let me ask you, is there, Melody, a ratio that is acceptable or that is desirable when it comes to debt vs. investment?
Ms. HOBSON: There is no ratio. No, there's no number like that that's widely cited. And if someone tries to tell you there's one, I'd beware. You really have to think about what your income is, what your long-term goals are in terms of how much money you need to squirrel away on a regular basis. You need to make sure that you're prepared for emergency, as was already stated. And then in terms of the debt that you have, you need to make sure in an ideal situation that you can pay that debt off and not carry a balance. You know, in the perfect world, you want to pay off your credit cards on a monthly basis.
COX: Well, you know that the rules are changing with regard to credit card payments. They're being doubled. The minimum monthly is being doubled beginning in 2006. Lynnette, how is that going to impact people who are carrying credit card debt? Will it help them or hurt them, and what should they do?
Ms. KHALFANI: I think this is going to be a huge issue for consumers in 2006. The fact of the matter is, is that in recent years credit card companies typically asked that you only pay about 2 percent of the outstanding balance. For most consumers, that kept them in a cycle of debt. So the fact that credit card minimum payments are doubling to effectively about 4 percent or so in most cases for 2006 is good news for consumers in the long run in that over time you'll pay less in finance and interest charges.
The bad news is that so many people are already living paycheck to paycheck. We've got higher energy prices, you know, higher interest rates, downsizing still across the country in many industries, and so people are already cash-strapped. So when you have so many folks making minimum payments, and let's say their total output for credit card payments was maybe, you know, $1,000 a month, now looking at paying $2,000 a month, it's going to be hard for many, many households. Complicating the issue even further is the fact that we've just come out of the bankruptcy reform bill that passed and took effect in October. That, as most people know, made it harder for consumers to wipe out their debts in bankruptcy. And so it's really, I think, a bonanza for the credit card industry in a number of ways because folks won't be able to have a clean slate, even if they've suffered, you know, a number of, you know, unforeseen circumstances or difficult situations, what I call the five dreaded D's--dowsizing, divorce, a death in the family, disability or disease. And these are the things, really, that drive most people into debt and force them into bankruptcy.
COX: What kind of--Melody, what kind of debt is bad debt, and how can people get rid of bad debt?
Ms. HOBSON: Well, bad debt clearly is credit card debt. And the reason that I say that is because of the higher interest rates and the years that it takes to pay off that debt if you only pay the minimum balance, even with the change that Congress has enacted for 2006 with the higher minimum payment. It takes years to pay off credit cards when you consider the average amount of debt that the American household has. Now that's in contrast to good debt like student loans, you know, where there's a direct correlation between you going to college and/or getting a master's and ultimately getting a higher salary because of those degrees. So that is something that is considered good debt. A mortgage, in many ways, is good debt because it has some tax advantages to it and also clearly you're building up equity and it's a long-term investment.
COX: Anthony, let's talk about savings for a moment as a tool for growth. Banks are offering such dismal amounts in terms of interest. Is that still a good way to grow money?
Mr. CHAN: Well, I think it certainly is an option to put money in CDs, and CDs, of course, are paying higher rates of return today than they were a couple years ago when the Federal Reserve started raising interest rates in June of 2004. But in terms of trying to build your wealth, I think you need to diversify. You shouldn't put all your eggs in one basket, all in either bank accounts or all in stocks or all in bonds. You need to be diversified. And that's one of the reasons why I mentioned earlier the aspect of global investing because it's paying off so much. Again, it doesn't mean that you want to put all your money in global investing, but with growth rates overseas exceeding, or at least the acceleration in growth exceeding that of the United States--because in 2006, I believe, real GDP growth in the United States will decelerate or slow down--I would be looking for other countries. China and India, for example, are growing much faster than the United States and they continue to tower ahead of us, and they will for many years to come. Japan, which basically has been in hibernation, this year we've had almost more than a 25 percent year-to-date rate of return in Japan, and I think we can still see a very healthy rate of return of next year. These should be options that people are thinking about as they try to exceed the rates of return we see domestically.
COX: How risky is this, and how much homework does an investor need to do personally to make sure that they are making good investments, particularly when you talk about on a global scale?
Mr. CHAN: Oh, I think you have to do your homework. If you don't, it'll be at your peril. But that's why you either have a financial advisor or you learn the secrets of diversifying. When you diversify, the risk does come down. That's probably the only free lunch in financial markets, diversifying. So you don't put all your investments either into global investing, domestic investments, bonds or even bank CDs. I think when you do that and you do your homework and perhaps talk to a financial counselor, I think you'll be just fine.
COX: Let me ask you, Lynnette Khalfani, because you're a money coach, do you coach people in this way? Do you think that it's a good idea for them to risk their funds on a global scale?
Ms. KHALFANI: It's absolutely a good idea to diversify internationally. Moreover, people should start thinking about investing across asset classes, as in, obviously, putting your money in different things like stocks, bonds, real estate, etc. They should diversify across industry, across different sector. All of those things are important for investors to think about. And then, of course, they need to diversify across market capitalization range. We hear people talk about large-cap, mid- and small-cap stocks. You don't want to put all your money into one bask--all your eggs, so to speak, into one basket at any level. So yes, global diversification is important as well.
COX: Melody, we hear a lot about trading online and bypassing the middleman in order to save those transaction fees. How risky is that, and what advice do you have for people who want to go about investing that way?
Ms. HOBSON: Well, I don't think it's very risky. Those sites are now very, very secure when you do online trading. They have lots of firewalls and things like that to protect your identity and protect all of your personal information. And it can be done at a very low cost, which, of course, is very attractive. But the only thing that I would say is make sure that you, in fact, do want to do the homework and, you know, want to be the person staying on top of your investments. I think that that's terrific for those who have the initiative, but I don't think that's for everyone. So I tell people don't feel bad if you don't have the desire to follow the stock market in your spare time. That's why there are professionals out there you can help you achieve your financial goals.
COX: Let me ask all three of you, is there a threshold, do you think, that a person should have with regard to whether or not, and when, they should enter the investment market? In other words, is there a floor, a financial floor you should have first before you even consider beginning to invest? Anthony, you first.
Mr. CHAN: I think it's clear that if you are mired in debt and you have high interest rate debt that you don't want to necessarily jump into investment, but that doesn't mean that you don't start doing homework, because when you get to the point where you are in a position to invest, if you haven't done the homework for years and then you just throw yourself in there, you're going to lose. So I think that it's very important that people start to learn about investing even when they're not a position to invest so they can get better and when they get to that position they'll be ready.
COX: What do you say, Lynnette?
Mr. CHAN: It's sort of like a boxer if--when right before a big fight you don't start practicing the night before. You start practicing months and sometimes even years before that big fight.
COX: Lynnette, what do you say?
Ms. KHALFANI: Yeah, I definitely agree that you should educate yourself as an investor, as a saver, as a consumer. You always need to be thinking about getting proper financial information and counsel and advice if you feel that you need it. At the same time you can, you know, even think about starting small. Nobody's saying that if your income is, you know, very shaky, on the borderline in terms of being well below the national average or something that you have to spend or invest an exorbitant amount of money into the financial markets. You know, in a lot of cases, people can get online and they can invest as little as $25 a month through some of these programs--like ShareBuilder.com, for example, comes to mind. So it's not as if you have to do some of these things to the exclusion of other strategies. In an ideal world, you know, I think you try to do multiple things at once. That way you sort of leverage the strength of doing many positive financial things and it makes your finances overall get that much stronger.
COX: We're coming toward the end. I'm going to bring this to you in a slightly different form, Melody, and that's this--the time element that's involved in investing. Do you want to look at something that is really short-term where you have to watch the market daily, or do you want to invest in something where you can leave it for months or years? Which is a better strategy? We've got about a minute.
Ms. HOBSON: Well, I have to say I think it's the perfect question for me. Our company logo is a turtle. Our tag line is borrowed from "Aesop's Fables": `Slow and steady wins the race.' I believe in long-term investing, by-and-hold strategy. I don't believe in short-term investing. I don't think you can make real money that way. Real wealth is created over time.
COX: Would you agree with it, Anthony and Lynnette? Anthony, you first.
Mr. CHAN: If I could just say real quickly I think that long-term investment is the way to go. I think for those who are very sophisticated, short-term investment is an option, but that's only a very small amount. And then the last point, I agree completely with Lynnette that you have to be saving even when you don't have much. You go to countries like China where the level of income compared to ours is so low, and yet you see 25 to 30 percent savings rate. So you can never be too poor to save and prepare for the future.
COX: Go ahead, Lynnette.
Ms. KHALFANI: I...
COX: Go ahead.
Ms. KHALFANI: Just quickly, I'd like to let your listeners consider one--another idea. I have a book coming out in the summer called "Getting Your--to Your First Million" in which I posit the theory that the--really the best investment that you can make is in yourself. And it--I talk about a number of things, like striving for perfect credit, improving your education, pouring money into your own business. Melody mentioned before about education and what that does for you. The Census Bureau statistics show that college graduates earn about 62 percent more over high school graduates. Over a lifetime that translates into about $1 million earning gap. So when you're thinking about investing, also think about investing in yourself.
COX: That's a good place for us to bring this conversation to a close. From Magnetic Studios in Columbus, Ohio, Anthony Chan, chief economist with JP Morgan Asset Management. At our office in Chicago, Illinois, Melody Hobson. She is president of Ariel Capital Management and a regular financial contributor on ABC's "Good Morning America." And at WBGO in Newark, New Jersey, Lynnette Khalfani, money coach and author of "Zero Debt: The Ultimate Guide to Financial Freedom."
Some very good ideas from all of you. Thank you very much.
Ms. KHALFANI: Thank you, Tony.
Ms. HOBSON: Thank you.
Mr. CHAN: Thank you.
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