Financial writer Beth Kobliner on saving money in a slow economy
Beth Kobliner is a former staff writer for Money magazine and the author of the "New York Times" bestseller "Get A Financial Life." A financial editor on MSNBC, Kobliner has made numerous guest appearances on CNN, The Oprah Winfrey Show and the Today Show.
CNN: Thank you for joining us today, Beth Kobliner, and welcome.
BETH KOBLINER: Hi, everyone! Looking forward to answering your questions.
CNN: How do you save money in a slow economy? What should people be looking for?
KOBLINER: The first thing you want to do is to pay off your debts. Now, I know you didn't ask about paying off debt, but that's one of the best investments you can make, especially when you're talking about high rate credit card debt. That's because paying off a credit card that charges you a rate of 15 percent is the equivalent of earning 15 percent on your money guaranteed after taxes, and that's by far a great deal.
CHAT PARTICIPANT: Is it a good time to refinance?
KOBLINER: This is an excellent time to refinance a mortgage. Right now, 30 year fixed rate mortgages are at about 7 percent, which is near historical lows. So, this is an excellent time to refinance your mortgage. A great Web site to check out is http://hsh.com which will help you shop around.
CNN: What about squirreling money away in a traditional savings account?
KOBLINER: I don't like savings accounts because they pay such low interest rates. You're probably getting about 3 percent or so on your bank savings account. One alternative is something called an I-bond. You have to keep your money in there for at least 6 months in order to earn interest, but they offer terrific savings advantages over savings accounts. They pay 5.9% right now, and they're free from state and local tax. Also, your money grows tax deferred in an I-bond. A great Web site is http://www.savingsbonds.gov
CHAT PARTICIPANT: Should people worry that their 401K accounts may not be adequate to support their retirement expectations in light of market shifts this year?
KOBLINER: That's a great question. People have gotten burned in their 401K's mainly because they weren't diversified. Many put the bulk of their money into their company's stock, which may have been doing well, but took a turn for the worse. I think it's time for people to take a look at their 401K's and make sure they're diversified, meaning smaller company stock, large company stocks, and maybe even some bonds. The good news is that the law will be increasing the amount you can put into 401K's beginning next year. Beginning next year, you'll be able to put away $11,000 a year, and that increases all the way to $15,000 in the next few years. Also next year, people over 50 can contribute an extra $1000 to their 401K. So, this is great news to people who have a lot of money.
CHAT PARTICIPANT: With low inflation would now be a good time to take advantage of rates and buy a bigger home?
KOBLINER: Yes. If you can afford to buy a home, this is a good time, because interest rates are at near-historical lows. But buying a home is usually more than just a financial decision, but also a question of are you at the point where you want to buy a home. For instance, can you afford something that you'll be comfortable in for the next ten years, then it makes a lot of sense. But if you're buying a starter home that you'll outgrow in the next two years, then it doesn't make sense. In my book, "Get a Financial Life," I go through the question of whether you should buy or rent. Buying is not always the right decision for everyone.
CHAT PARTICIPANT: What do you do with NASDAQ stocks, like Amazon.com, that you bought when they were high-flying and now they have crashed? Hold? Sell?
KOBLINER: If I knew that, I'd be one smart, lucky person! Nobody knows for sure, and I'm not a stock picker or a broker, but my intuition would tell me that with a company like Amazon, if you already own it, and it's gone down so far, it probably makes sense to hold on. But I want to put a big caveat here... I'm a financial journalist, not a broker, and people have to make decisions that make sense for them. I'd also ask myself, what are the alternatives? If you bought tech stock instead of paying off your high rate debt, or instead of putting money into a 401K that has matching, then you might want to rethink your priorities. But generally speaking, in this particular situation, I would probably wait it out with the stock.
CHAT PARTICIPANT: I just started investing and I don't have enough money to really diversify. What types of investments should I start with?
KOBLINER: Again, I just want to make sure that you have paid off your high rate credit card debt first. I meet a lot of college students who say that they owe $10,000 on a credit card that charges them 18 percent, and at the same time, they're putting money into the stock market. Remember that paying off a credit card that charges you 18 percent is the equivalent of earning 18 percent on your money guaranteed after taxes. There's no stock that can pay such a guaranteed rate. That said, I'm a real fan of index mutual funds that have low expenses.
CNN: In your book, you talk about saving in a "tax favored" account. What do you mean by that, and is that especially important?
KOBLINER: Tax favored accounts are accounts that allow your money to grow without you having to pay tax on the interest you earn every year. The reason this is so important is that money grows much faster in a tax favored account than in a taxable account. In my book, I have an example. If you set aside a thousand dollars a year from age 25 to 34 in a retirement account earning 8% a year, and never invest a penny more, when you turn 65, that $10,000 investment will have grown to $168,600. But, if you don't start saving until you're 35 years old, and then invest $1000 a year for the next 30 years, that's a total investment of $30,000... you'll end up with only $125,000 by age 65. So, the point here is starting early in a tax favored account allows your money to grow incredibly quickly, and that's why tax favored accounts like IRAs and 401Ks are so attractive.
CHAT PARTICIPANT: Is it dumb to shift from a 15-year mortgage to a 30 one to free up cash per month?
KOBLINER: It's not dumb. I would just make sure that with this new 30-year mortgage, there are no pre-payment penalties. In other words, if you start having more cash, and want to start paying off your new mortgage more quickly, that you won't be penalized for doing so.
CHAT PARTICIPANT: It seems that high interest credit card companies would be good to invest in. They are charging everyone and making a good profit. Can you invest in them?
KOBLINER: That's a great question. Generally speaking, many credit cards come from large banks, so while you're right, that the credit card business is a very profitable portion of a bank's business, there might be other aspects to a credit card company that aren't so profitable. You'd have to look at the whole company before making an investment decision.
Also remember that when you've come across a phenomenon like that, a time when a business is making a lot of money, or seems to be making a lot of money, Wall Street analysts have noticed that trend as well, and that information is built into the price of the stock. That's something a lot of people don't pay attention to. They find something that sounds like a great business idea, but in addition to being a great business idea, it has to be a low-priced stock, in order for you to sell at a gain. But you're right -- the credit card business is very profitable for the bank.
CHAT PARTICIPANT: Is it best to pay off your highest principal debt, or the highest interest rate debt? Or a function of the two?
KOBLINER: You want to focus on the interest rate. If you have a credit card that's charging you 18 percent and one that's charging you 10 percent, and an auto loan 8 percent, ideally, what you'd want to do is to consolidate those credit cards into the lowest interest rate possible. So if you were able to put all the credit cards on a card that charges you 10 percent, you should try to pay off that high rate credit card more quickly than the auto loan, and certainly more quickly than you would a mortgage.
CNN: Do you have any final thoughts to share with us?
KOBLINER: I think in these tougher economic times, people should focus in on the basics. They should pay off their debt, start to save in retirement plans like 401Ks and IRAs, and then start investing in diversified mutual funds.
CNN: Thank you for joining us today
KOBLINER: I enjoyed the chat... thanks very much!
Beth Kobliner joined the chat via telephone from New York. CNN provided a typist. The above is an edited transcript of the interview on Tuesday, August 21, 2001.
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