Financial 911: Your Top Seven Money Questions Answered
[Editor's note: This article was originally published in October 2008]
Eighty percent of Americans say they have been affected by the current financial crisis. It's no wonder people are frightened and confused about their money " the headlines are scary!
"We're going to answer your top seven money questions," Dr. Phil says. "You don't have to wheel and deal with Wall Street to feel the trickle-down effect on Main Street."
Joining Dr. Phil is economist and author of How to Ruin the United States of America, Ben Stein, personal finance expert and author of All Your Worth, Amelia Warren Tyagi, and joining the show via satellite from his Mad Money set in New York is Jim Cramer.
1. How will the economic crisis affect me when I don't even deal with Wall Street?
-- Homes: Short sales, foreclosures
-- Jobs: Losses
-- Credit: Freeze, rising rates
"If you're carrying a balance on your credit card, you've got to be paying it down because those credit card interest rates are going to be going up," Amelia says.
Jim says the credit freeze will affect employers. "I think people are going to have to lay people off dramatically. I think there will be downsizing. I've been predicting on my show double-digit unemployment. That would be a tragedy because you know a lot of people are going to get laid off, but we've got to prepare for it," he says.
-- Loans: Stricter standards, rising rates
-- Retirement: Evaporating, work longer
"I'm terribly worried about the retirement funds," Ben says. "If you have a pension plan that goes across your industry or goes across your union, it's entirely possible they'll come up short. Those pension plans pay you when you retire based on an assumption of how much they'll make in the stock market year in and year out. They're not going to be making that for awhile. We've had the stock market basically not move since 1998, which is a long time ago. They're not going to be making their assumptions, and people are going to be coming up short. You're going to have to live either closer to the bone or have more of your own savings. You're going to have to work through retirement. I question, Dr. Phil, about whether retirement as a concept is even going to exist in 10 years."
2. How bad will it get? What's next?
"I think, believe it or not, there will be a bottom," Jim says. "I think the actions that are being taken by the world central banks " those are the banks that run, really, the finances of every country in the world " are going to have an impact. Not in 2008. I believe that by this time next year, things will be better. I don't see a Great Depression as long as they take these actions."
Ben agrees with Jim that there won't be a Great Depression. "But there's going to be a crunch with credit cards," he says. "They're going to cut your credit limit. They're going to be very hard about giving you new credit cards. It's going to be very hard to buy or lease a car. Getting a new mortgage, unless you're a very wealthy person with excellent credit, is going to be nearly impossible. You're going to have a very, very hard time selling your house, very hard time selling your condo. The main thing is your employer is going to be squeezed. They're very likely to have to lay people off. It's going to affect not only your financial life, but it's going to affect your health. The truth is, and it's sad, that when people are terrified of money, it affects their health, it affects their willingness and interest in romance, it affects every part of their life."
What you and your family need to do now before it's too late:
-- Stop spending now
-- Cut back expenses
Jim says he used to take three big trips a year, but now he takes one trip and explores local spots when he wants a vacation. "I don't feel poor doing that, but when I'm finished, I've got money left over," he says.
-- Drive car longer
If you trade your vehicle in every two years, it's time to drive it longer.
-- Pay off credit cards
"Get rid of it," Amelia says. "Cut it up. Bury it in the backyard. You don't need it in your wallet. If you're carrying a balance on your credit card, you're already in trouble. You're one of 50 million Americans who has a hole in the roof, and the rain is coming in." She also says, "Cash is king. As this economy gets tougher, whether we're talking one year of trouble or two years, nobody knows, but no matter what, every dollar you've saved is a dollar of safety for your family."
-- Manage expectations
-- Talk to your kids
"I think we have spoiled our kids to a generation of entitlement. Christmas is coming up. You need to sit down and say, â€ƤLook, it is a difficult time.' Tell them in age-appropriate ways that things are going to have to change," Dr. Phil says.
-- Manage stress
-- Create an emergency fund
3. If the crisis and credit freeze continues, am I apt to lose my job? What then?
Close to 160,000 American jobs were lost in September this year alone. That was the ninth straight month of job losses across the nation and the worst single month in five years.
Simple ways to save on cash:
-- Use cash: Stop overspending on credit
-- Shop simple: Generic brands are cheaper
-- Reduce credit card rate: Call your credit card company and negotiate a better deal
-- Eat in and car pool
-- Have a cell phone? Lose your landline
-- Rent a room in your house
4. What do I do with my money now?
"If you're in a basic insured bank account, that's still the safest place for it to be," Amelia says. "Your 401K, if you're not retiring in the next 10 years, keep stacking it away and don't look at it. Just pretend it's not there. That is for your future, and by golly, folks, you're going to need it. Don't count on social security when you're getting older."
Ben says, "For the long run, your own investments should be in the stock market, but if you're within 10 years of retirement, I think you should pull some of that out and have it in cash, or in treasury bonds. They're the ultimate in safety. The stock market will fluctuate in insanity, like we've seen, but in the long run, it will do well."
What to do with your money now:
-- Stay liquid: Cash on hand for the short run
-- 401K: Do not cash out
-- Keep equity in home
-- Insured accounts
-- Let stocks rebound
-- Government-backed treasury bonds
Ben also says, unless it's a last measure, do not get a second mortgage on your house. "Losing your house in foreclosure is an incredibly, unbelievably traumatic event," he says. "I would say start dipping slowly and carefully in your retirement accounts before you mortgage your house again. I would never jeopardize my entire retirement account or even a large chunk of it, but if it's just a little bit, compared to mortgaging your house, I would do it."
5. Do I need to plan on working way past 65 in order to survive?
This country's retirement plans have lost as much as two trillion dollars in the past 15 months alone. Many are realizing that retiring at 65 has become a pipe dream.
"The idea of retirement was a temporary episode in Western history," Ben says. "I think it's disappearing."
Dr. Phil explains that it's not good news, but the reality is people are going to have to keep working and rebuild the nest egg.
6. If times get tougher, what do I pay first and what do I ignore?
Jim says insurance should be a priority. "All insurance, because you must be sure and prepare for the worst. Home insurance, you've got to have the health insurance and disability. Once you take those off the table, then we can start worrying about a mortgage. There are programs being offered right now in this great country that will allow you to refinance your mortgage, get it to what is known as the FHA. Make those calls. Finally, call the credit agencies, call the debt collectors and tell them about your circumstances. They do not want you to default. It hurts them in the stock market. Make a deal with them, stretch out payments. They will be reasonable."
"So, in other words, don't stonewall people," Dr. Phil says. "Negotiate because it's not going to be a surprise that you're in trouble. I mean, the country is in trouble!"
Ben reiterates that the people on the other end of the phone are people who make money if you keep paying, even if it's not the full amount. He also says to keep unnecessary expenses down, like high-end electronics.
What do you pay first?
-- Pay mortgage
-- Pay credit cards
-- Pay bills
-- Cut out unnecessary expenses: cleaning lady, gym, eating out
7. I am scared. How do I cope with the financial stress and fear?
Dr. Phil says people may have been complicit in this crisis by overspending and living beyond means, "but the truth is, a lot of it was done to you."
-- Forgive yourself/Don't buy into guilt
-- Manage reactions
-- Don't withdraw and isolate from others
"Talk about this. So many people are in the same boat," Dr. Phil says.
-- Recognize and deal with stress
"There are so many things you can do. What will hurt you the most is to feel like you're helpless, and you're not," Dr. Phil says.
-- Affirmatively make and execute a plan
"Whether it's clipping coupons, cutting up credit card, moving to a small apartment, take control so you know you're not helpless," Dr. Phil says.
-- Exercise/Sleep well
Don't neglect your health.
-- Avoid stimulants
"For God's sake, do not start drinking and drugging," Dr. Phil implores. "That is not going to help this situation."