May 20, 2005

News & Opinion: The Currency of Bankruptcy

By: 800-CEO-READ @ 7:25 PM – Filed under: Management & Workplace Culture

A number of recent hearings, articles, and other events have given new currency, so to speak, to a recently touted personal finance title, All Your Worth: The Ultimate Lifetime Plan. Whats new? The passage of the bankruptcy bill, for one, as well as the recent Senate hearing on the implications of this bill on credit card disclosure. In addition, both the New York Times and the Wall Street Journal have published excellent articles on the key trends concerning troubling personal finance trends, the myth of class mobility, and the explosion of personal debt in the U.S. Consider the following quote from the May 17 Journal article. For Americans who arent getting a big boost from workplace raises, easy credit offers a way to get ahead, at least for the moment. To some, the expansion of credit is a milestone of democracy, giving middle- and lower-income people financial flexibility that only the rich used to enjoy. Others see the borrowing binge as a way for average households to make up for sluggish growth in income over the past several decades. Since 1990, income for the median American household has risen only 11% after adjusting for inflation, while median household spending has jumped at 30%, according to an analysis by How could the typical family afford to spend so much? Median household debt outstanding has jumped by 80%. We recently mentioned several worthy personal finance titles. Now, given the continuing debate over the structure of personal debt and its role in the economy, it seems like a good time to check back in with co-authors Elizabeth Warren and Amelia Warren Tyagi of All Your Worth. By the way, another excellent book on this topic is Credit Card Nation by Robert Manning, a strident and convincing effort which is backed by an excellent website. Q) Please explain how your background in the broader financial landscape affects your advice to individuals. A) Elizabeth is a professor at the Harvard Law School. Shes been doing original empirical research since 1981. Amelia has an MBA from Wharton, and she is a former consultant with McKinsey and Company. Together, we embarked on innovative research into the financial state of the modern American family. What we found alarmed us. The rules of money have changed, and familiesmillions of ordinary, hard-working, middle-class people with good educations and decent jobsare living on the financial edge. It became very clear that the old harangues to use double coupons and just save more arent cutting it. To get ahead in todays economy, families Americans need specific tools that help them take control over all their spending from the mortgage right down to the tube of toothpaste. Q) How does the recent passage of the bankruptcy bill affect the advice you give in your book? A) It makes us want to shout the advice from the rooftopswith a bullhorn! The safety net is fraying, and that means families need to take stronger steps to protect themselves. This bill means that there is even less margin for error, and that Americans need to be savvier than ever if they are going to get ahead. Q) Your book rebuts the received wisdom of most books about personal finance. Without naming names, what would you say are the worst sins of personal finance titles? What types of commonly touted wisdom would you caution folks to avoid above all? A) Worst advice: Cut out the lattes, save a few pennies here and a few nickels there, and all your financial problems will magically disappear. The truth is, if you cant afford a latte, you cant afford your life. You are in need of a comprehensive overhaul. Not only is the latte problem not real (as the data prove), it is dangerous. This advice has encouraged millions of Americans to spend all their time focusing on the pennies, while ignoring their real problem they are spending too many dollars on big-ticket items. But this advice continues to get shelled out, not because it is true, but because it is so much easier to shake a finger over too many frivolous things without giving any hard advice on how to take control over the things that really matter. Second worst advice: Put a second mortgage on your house to pay off credit card bills. The advisers do a few quick calculations and claim you can save a few dollars on interest. They never mention that if anything goes wrong and you cant pay all those bills, you will lose the roof over your head! Credit card companies cant take your home, but home equity lenders sure can; thats the only reason they give those preferred rates to begin with. Third worst advice: To get into the stock market, you must spend zillions of hours researching stocks and bonds and hundreds of new financial gizmos (or hire someone who will spend zillions of hours on your behalf). This is absurdand it keeps people on the sidelines when they should just jump in. A simple indexed mutual fund will do the trick for most people, and it takes only a few minutes to shop for.