Transcript
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-Welcome back to Money Matters. I’m Tanya Rivero in New York. Has the current economic crisis gotten you
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discouraged about your financial situation? We all know many people are struggling in one form or another,
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but what if you can take a step-by-step approach to building up your net worth? Well my next guest says personal
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finance boils down to just four good habits, and if you follow these habits, the road to financial recovery could be within
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your grasp. Aaron Patzer of Mint.com joins us from San Francisco to talk about these simple steps. Welcome Aaron. Thanks so much for joining us.
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-Thanks for having me.
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-So Aaron let’s start with these four good habits. Everyone wants to know, what are they?
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-Yeah so if you look on the internet on Amazon you’ll find about ten thousand different books that have been written
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on personal finance, and if you boil them down they all really come down to sort of four principles.
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So spend less than you earn which means save money, manage your credit and your debt wisely, invest what you
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save, and then protect your downside with the right types of diversification or insurance.
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-Alright so let’s go through these. When it comes to saving money what exactly should people keep in mind?
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-Well I think the first way to start saving money is to simply know where you spend. Most people really don’t have
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a good feedback mechanism on where they’re spending their money. They use their credit card or their debit card and
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then they never look at their statement. They don’t use a personal finance tool that gives them the breakdown.
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If you simply knew that you were spending four-hundred and fifty dollars a month on restaurants, and that you went to
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Starbucks thirty-two times last month, you’d change your habits, and you’d end up saving more.
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-It is pretty shocking when you really start breaking down what you spend, isn’t it? When you first do it.
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Alright now the next good habit is avoiding debt. How do we approach that because I know that there are a lot of
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there are a lot of emergency situations that can come up so what advice do you have for that?
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Well the first step to improving your situation with regards to your credit and debt is to know your credit score and know
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what’s in your credit report. So if you look at the statistics seventy-nine percent of all credit reports actually contain
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an error in them, and twenty-five percent of them contain an error that’s serious enough to actually affect your ability to
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get a loan, and even if it doesn’t affect your ability to get a loan it means you’re going to be paying higher interest
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on all your car loans, your mortgages, your credit cards, and that’s really going to zap and take away from your savings.
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The first step is to know what’s in your credit report and start to improve it.
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-And what about all those late fees?
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-Yeah so you want to set up your bill reminders on a place like Mint.com that can make sure you don’t pay your credit
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card late, and put everything that you can, all of your utilities, your cell phone, your credit cards even on
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automatic payments so that you don’t get hit with those late fees. As Rameet was saying, ten billion dollars in overdraft
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fees, there are actually fifty-five billion dollars in total bank fees that are expected in all of 2009. If you do the math on
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that that’s, I think, three hundred dollars for every man, woman, and child in America.
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-Unbelievable. You don’t want to be spending that three hundred dollars, do you? Another way, another thing that
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you just say avoid as many finance charges as you can altogether, right?
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-That’s right. If you do the math and just pay the minimum on your credit card, what the credit card company would like
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you to pay and suggests that you pay, you know the average American has say a five thousand dollar balance, it’s going to
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take you about six years to pay that off, and you’re going to end up paying about six thousand dollars in interest at the
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normal sort of credit card rates that they charge. So you’re going to end up paying maybe more interest than you would
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on the actual purchases.
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-And you suggest actually finding a credit card that pays you. Is that right?
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-That’s right. So credit card companies make their money not only off of finance charges which is essentially making
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you a short term loan, but they actually charge merchants two to three percent of every single transaction that you put
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on a credit card, and in order to incent you to use their credit cards over, say another one that you might have in your
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pocket, they’ll give you cash back, say up to one or two percent of that purchase in the form of airline miles,
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in the form of cash, in the form of points, and so whenever you use a credit card make sure that you use one that pays you back at least one percent.
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-Absolutely. It sounds like a very good habit. Now let’s turn to the third habit, which is invest. What should we be investing in, especially now.
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-Well I can’t tell you specifically what to be investing in, but I can tell you that you really ought to be contributing to
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a tax deferred account like a 401k or an IRA, and if you put a hundred dollars every month into a tax deferred account like
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that IRA and you do that for twenty years you’re going to have at about ten percent return which is sort of a historic
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stock return of the past twenty, thirty years. You’re going to have about three hundred and eighty thousand dollars.
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If you have that in a taxable account instead, you’re going to have a hundred and fifty thousand dollars less. That’s sort
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of the power of compound interest and avoiding taxes. So make sure that when you do start investing you put into a
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401k first and foremost if your employer matches and then secondly into a tax deferred account like an IRA or a SEP or a keogh if you’re self-employed.
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-So just start investing and keep investing, right?
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-That’s right. Take it straight out of your paycheck.
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-Take it straight out, that’s right. Don’t even look at it as money you could spend. And your last habit is, you say,
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don’t lose it. What exactly do you mean by that?
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-What I mean is to protect your downside. So once you’ve gone through the trouble of getting out of debt,
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saving money, investing it so that you preserve that wealth, and one of the ways to do that is to make sure that you have
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the right kind of insurance. So if you’re young. If you’re in your twenties or thirties and you still rent you want renter’s
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insurance, but only about twenty-five percent of people actually have renter’s insurance, and you could end up losing
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all your possessions, and that’s a twenty/thirty thousand dollar hit on you to replace all of that.
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-Ouch.
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-Yep.
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-And so you suggest creating an emergency fund to cover these kind of emergencies?
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-You want about three month’s worth of savings in your emergency fund. Three to six months. Depends on your life
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stage. If you’re younger you can get aways with a little bit less because if you don’t have any dependents, you don’t
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have a mortgage to take care of, but if you’re older you want about six months, and you should not let that lie around
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in one of those low-yield savings accounts where you’re only earning five or ten basis points. You want to put that
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into a high-yield account just as Rameet suggest at ING, at HSBC, at Schwab, even Ally which is a new bank that came
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out which used to be the old GMAC. They’re trying to get a lot of customers so they’re actually paying very good interest
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rates. It’s all FDIC insured.
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-And you can do that with any amount of money?
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-Yeah. For those banks it’s zero minimum and you know, no fees really.
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-Alright that’s great, and Aaron quickly because we don’t have a lot of time, but besides renter’s insurance what other
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kinds of insurance do you recommend that everybody has?
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-Well the second thing and probably the most important is for everybody to have health insurance. If it’s not provided
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by your employer it’s absolutely critical as part of your personal finance, fitness actually. Fifty percent of all
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bankruptcies actually have medical expenses cited as one of the primary causes of the bankruptcy. So having health
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insurance, even if it’s the cheaper kind of insurance that you know, doesn’t cover doctor’s visits, doesn’t cover prescriptions,
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but only handles the catastrophic sort of things or has like a two or three thousand dollar deductible, I advise that for
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everyone. When I was self-employed that’s exactly what I had. It only cost me about sixty dollars a month as a young
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guy, covers me from disasters.
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-Alright, Aaron thank you so much. I’m so sorry to cut you off, but we’ve run out of time, but thank you so much for your financial tips.
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-You’re very welcome.
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-That’s all the time we have for today, and don’t forget you can always watch ABC News Now twenty-four hours a day on
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your cell phone. I’m Tanya Rivero in New York. Thanks for watching.