TEXT OF INTERVIEW
Tess Vigeland: Thou shalt not use thy home as a piggy bank. Thou shalt not avoid risk — embrace it, but sensibly. Thou shalt pay off debt the smart way. And treat thy marriage like a business. Thus readeth the new “10 Commandments of Money.”
According to Moses Weston, I mean Liz Pulliam Weston, our good friend, author, call-answerer and more. Her new book, “The 10 Commandments of Money,” arrives as we all figure out how to navigate post-economic armageddon. Glad to have you back, Liz.
Liz Pulliam Weston: Thank you Tess.
Vigeland: The title of this book really suggests — I guess to borrow a phrase from Bill Maher — we’ve got some new rules when it comes to management.
Weston: Yeah, that’s the thing. I mean the rules that we were sort of living by in the bubble years blew up on us. And I think people who thought they knew how things worked and that they were masters of the universe and they were great investors — which is, you know, an easy thing to think when everything’s going well. Everything blew up on them, and they realized, “Hey, maybe I don’t understand how things work.” But we can’t go back to the rules that our grandparents used, because the world’s just changed too much.
Vigeland: One of the first things that you talk about is the monthly budget. You’ve got something that you call the “50/30/20 plan.” Tell us what that is.
Weston: This is a plan that was actually created by Elizabeth Warren. She’s the Harvard bankruptcy professor and she has interviewed so many families in trouble. And she came up with this budget as a way to pound home the point that you have to have a balanced financial life. And the key part of this is the 50 percent, that’s the must-haves. So you take 50 percent of your after-tax income and that’s what you should be spending on things like shelter, transportation, insurance, minimum loan payments, child care. All that stuff that you can’t really put off without serious consequences. So if you keep the must-haves to 50 percent, then you have 30 percent you can spend on fun — on vacations and eating out and clothes…
Weston: Yeah, the good stuff. And then 20 percent goes for paying down debt and savings.
Vigeland: When we talk about having a savings cushion, you say actually, that cash should not be the only thing in the emergency fund.
Weston: It drives me crazy when I hear this advice given to average working families, “Oh you should have nine months worth of expenses in an emergency fund.” Who are these people kidding? I mean, I grow through the math in the book, but really, the typical working family, it can take years just to get three months expenses saved up. So my point with this is you need to have a survival plan that has cash in it — I’m not denigrating emergency funds, you should start one — but that also gives you access to credit, because you never know what’s gonna happen to you.
Vigeland: I want to talk about college education, because if we talk about the rules that have become outdated, there is one old one that says student loan is good debt.
Vigeland: And let’s talk a little bit about some of your thoughts on paying for college and the kind of education that a person needs to plan for.
Weston: One of the things that we really need to understand is that there are two kinds of student loans. There’s federal student loans, which are fixed rate, they are filled with consumer protections and there’s only so much of that debt you can get. That is still good debt. Private student loans are a whole different matter, and I don’t think people make the distinction enough. Private student loans don’t have those consumer protections, they’re variable rate and like federal student loans, you can’t get rid of ’em. So it’s like paying for your education with credit cards, except you can’t discharge them in bankruptcy. So starting with that, we have to understand that there’s a limit to how much college education we can buy. And people don’t like to hear that. It’s like, “I want my dream school,” “I want to give my kid the best possible education; money shouldn’t factor into it.” Well, money does factor into it. And if you have to borrow more for an education than you expect to make your first year out of school, you probably can’t afford that education…
Vigeland: The first year out of school?
Weston: Yeah. So if you expect to come out of school and make $40,000, you shouldn’t be borrowing more than that to pay for your education.
Vigeland: Wow, that is not the calculation that’s being done right now. I mean, I can’t even tell ya how many times we have listeners call in and tell us that they’ve got $100,000 in student debt, $150,000 in student debt, and they just kind of assume that there was going to be a job market out there and they were going to be able to pay it back. And I don’t keno if people are making the calculation of what the value is going to be of that education.
Weston: No, and it’s a lot of expect for an 18-year-old to figure this out.
Weston: Probably, they don’t even know what their major’s going to be. How are they going to know what they want to do when they get out?
Vigeland: We’ve talked about this before, and I think your commandments play into this, which is my skepticism about whether these new habits, these new rules that we’re wanting to follow right now — because we’ve got two years of history behind us, a really tough history — whether that’s going to stick.
Weston: Well, I was just being shepherded around New York, while I was flocking my book, by a 20-something publicist and my editor of the book is also pretty young. I’ve seen a profound change and they’ve seen a profound change in their generation. It’s not unusual for 20-somethings to have a few jobs, not just one, but you’d have a side job. We’ve gone from this situation where the baby boomers were complaining about the younger generation, “Oh! They want everything right away!” And you know, now, it just seems like they’re happy to have a job. So, I don’t know for sure. I don’t think we can change the baby boomers, I think as soon as credit comes back, they’ll be back to their profligate ways. I think there’s going to be a difference in the 20 or 30-somethings, because they came into this with some pretty high expectations that were profoundly dashed. And they’re seeing their friends with good educations from good schools struggling to find and keep jobs. And that has gotta have a profound effect on how you look at security, how you look at risk, how you look at jobs.
Vigeland: Liz Pulliam Weston is a personal finance columnist with MSN and her newest book is titled “The 10 Commandments of Money: Survive and Thrive in the New Economy.” And I’ll tell ya, you follow these and you just might be able to do that. Thanks so much for coming in.
Weston: Thank you Tess.
Marketplace is on a mission.
We believe Main Street matters as much as Wall Street, economic news is made relevant and real through human stories, and a touch of humor helps enliven topics you might typically find…well, dull.
Through the signature style that only Marketplace can deliver, we’re on a mission to raise the economic intelligence of the country—but we don’t do it alone. We count on listeners and readers like you to keep this public service free and accessible to all. Will you become a partner in our mission today?