Going For Broke: Financial Advice

Going For Broke: Financial Advice
Dr. Phil invites Elizabeth Warren and Amelia Warren Tyagi to give his guests financial advice.

Dr. Phil introduces his guests and his audience to Elizabeth Warren and Amelia Warren Tyagi (right), authors of The Two-Income Trap.

First, they discuss Nate and Jessica's (left) situation. The couple filed for bankruptcy four months ago after finding themselves $185,000 in debt. The couple also took out a second mortgage on their home in order to get more money. In spite of the situation, Jessica continues to spend money on designer and luxury items. She blames her husband for their financial troubles, saying, "He doesn't make enough money."

Elizabeth likens taking out a second mortgage to "playing roulette with your house." She explains, "It's making the assumption that you're going to put your house out there, and take the spin and hope that nobody becomes unemployed or sick and you'll be able to pay it back. It's the worst single move that homeowners can make."
"But there is a huge push right now from lending companies for people to take out a second mortgage to consolidate their bills and get everything back on track," says Dr. Phil.

"Dr. Phil, that's how they make money," says Elizabeth. "They make money by getting families like this to get into debt. They don't make money unless you borrow more money. The whole idea is to tell you how smart, clever and safe you'd be if you took your house and placed it on the roulette wheel."

Elizabeth also points out that the couple has used up their "get out of jail free" card by filing for bankruptcy. They can't file for another six years, no matter what. "This family is out in the storm and has no place to go," says Elizabeth. "You got a second mortgage on your home and used up your one chance at filing for bankruptcy. If you don't build your own safety net, you're going to go down."

Dr. Phil addresses the fact that even though Jessica's spending has contributed to the couple's financial troubles, she still continues to control the finances.

Dr. Phil turns to Amelia and asks, "You say that husbands are controlling the money in four out of five relationships when there is enough. What happens when there isn't?"

"When families get into trouble, it shifts," explains Amelia. "The husbands start to sidestep. They shut down and aren't there any more. The wives take over the finances and they get into just the cycle we're talking about. They start pointing fingers at each other. Marriage is a partnership. It's about loving and honoring but it's also a financial relationship."

Next, Dr. Phil asks Elizabeth what she thinks of Jeff and Amy's situation. Instead of filing for bankruptcy, the couple sold their home and all of its contents in order to pay off their debts.

"Elizabeth, you don't agree with this, right?" asks Dr. Phil. "You don't think that people should pay the credit card bills instead of the house?"

"No I don't," says Elizabeth. "Kmart filed for bankruptcy this year. Do you think that the CEO of Kmart stayed up at night worrying about the fact that all of the big banks weren't going to get paid? No, he did what was best for his shareholders. I think you need to do what is best for your children and yourselves. Your family is at least as important as those corporations."
"There is no question that if you borrow money, you should make every effort to pay it back," says Dr. Phil. "But Elizabeth's point is that when credit card companies extend that credit, the fact that some people aren't going to be able to pay is rolled into the cost."

"That's exactly right," says Elizabeth. "If you're unable to pay them back, don't worry about the credit card company. They're still making big, big profits. They're rolling the dice with every credit card they send out. They count on the fact that they're making so much money from the people who are making the minimum payment month after month. They know a percentage of folks just aren't going to be able to pay them back. Bankruptcy shouldn't be your first choice. You've got to think hard. Bankruptcy is out there to help the kind of families who are in the trouble that you are in."
After Jeff was laid off, the couple's debt skyrocketed because they continued to spend the same amount of money as they did when Jeff was working. They admit this is because they never imagined his unemployment would last for so long.

"This is exactly how most families get into trouble," says Elizabeth. "The number one reason that families get into trouble is that they build a budget around the assumption that they're going to have that income forever, and then it goes away. People get into trouble when the bottom falls out in a single day. Here's the critical part: They underestimate how long the trouble is going to last. They think it will be over in a week or a month and it ends up taking a lot longer than that."
Matthew and Windy got into financial trouble by making some of the same mistaken assumptions as Jeff and Amy. They're having difficulty paying bills because Matthew spends his paycheck on games and electronics as soon as he receives it. Matthew says he feels his behavior is justified because both he and his wife are working and there is money coming in.

Dr. Phil asks Elizabeth, "If one of them gets so much as a head cold, these guys are in trouble, right?"

"That's exactly right," says Elizabeth. "That's exactly the kind of trouble they're in." She warns the couple that if one of them loses their job and they don't have a back-up plan in place, they could end up in dire straits financially.