Find out the fundamentals of personal finance to save money on taxes, save for retirement and buy the right kind of house for your budget
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Bestselling author, financial journalist and member of a presidential advisory council on financial education, Beth Kobliner has been a voice in personal finance for more than 20 years. She first published her seminal book for new graduates “Get a Financial Life” in 1996 and its 4th edition deals with issues young people are facing today. Discussing mortgages, student debt, taxes and the three most important pieces of financial advice \u2014 Beth offers a blueprint for financial success starting as early as possible.
Get Charged Up! about getting a financial life!
TRANSCRIPT: [Duration 00:30:57]
Jenny Hoff: Beth, thanks so much for joining us today.
Hoff: So first tell me a little bit about how you got started in wanting to educate young people on money? The original version of “Get a Financial Life” came out in 1996, I believe\u2014
Hoff: \u2014and has sold hundreds of thousands of copies. In this latest edition, you tackle the challenges that millennials and even older people today are facing. Why is it so important to understand these fundamentals early on in our lives?
Kobliner: Right. Well, I’ve been a financial journalist for over 30 years, and I started writing about this when I was in my twenties, which is what brought me to write “Get a Financial Life” back in 1996. And since then, I have continued to write on this subject for a range of age groups, but I’ve always come back to talking about young people. And recently, I served on President Obama’s advisory council on financial capability for young Americans, where we focused on what people need to teach their kids whether they’re young\u2014three to five-year-olds all the way up to 20, 25, 30-year-olds. I think it’s so important because it’s a topic that we don’t learn in school, and often parents are not clear on what to teach their kids, or they’re afraid to. And so you find yourself in college often baffled by all the different financial choices you have to make. And I think it’s really critical that people get financialized. And what’s been fun for me and interesting for me is seeing the original book 20 years ago I wrote for myself and my friends. It was the first sort of book to talk about people in their twenties and money, and now I’m talking to my children’s age. I have people that come over to me who look like they’re early sixties and say, \u2018Oh, I read your book 20 years ago.’ I’m like, \u2018Wow, am I 110-years-old?’ But it’s really been gratifying when someone comes over and says, \u2018Yeah, I put the most I could in my 401K like you said. And I didn’t think I could, but now I have hundreds of thousands of dollars.’ So that’s always a nice thing to hear.
Hoff: Yeah, absolutely. Does it seem to you weird that in school there isn’t more focus on really making kids financially literate, since it affects every aspect of our lives later on?
Kobliner: It’s really strange, and it’s something we dealt with a lot with the President’s council. I learned that it’s really a state by state decision. It’s really left to the states. So only a handful of states actually have a requirement that they teach personal finance. But even many of those states when they take polls of the teachers teaching it, they say they’re not comfortable with the subject matter. I think it’s kind of a mess. And I think it really should be something, in my opinion, where there’s some really good curriculum that makes sense to teach children at all ages about this. One of the most I’ve found it that occasionally I’ll meet a young person in their twenties, and they’ll say, \u2018Oh yeah, I had a history teacher who taught us about Roth IRAs one day. He said he’s not going to teach us American history. He was going to teach us something that we’ll really remember when we have our first job.’ And that kind of lesson sticks with people sometimes. And I just think we have to smarter as a country in helping people figure this out.
Hoff: Absolutely. I wish that I would have had your book. I mean it was out, but I wish I would have had your book when it was coming out. Because when you’re in your twenties\u2014early twenties and you get your first job, you just don’t take seriously sometimes the 401K options at your work, or a Roth IRA. It feels like you’re putting money away for 40 years down the road, and that just doesn’t seem really tangible, but it’s so important. You miss out on potentially millions of dollars you could have in retirement.
Kobliner: Yeah, it is pretty incredible. And that of course is the magic of tax-free compounding. When money is able to grow tax-free for many, many, many years, it grows exponentially quickly. And the earlier you start, the better. And when people see numbers, and they really get it, it’s kind of mind boggling how impactful it can be. What’s interesting about this generation of people today in their twenties, the millennial generation, is they’re actually somewhat better at saving in 401Ks than the previous Gen Xer generation, which I was part of. They start in 401Ks on average\u2014at least according to one survey\u2014at 22-years-old versus Gen Xers started at age 27 in 401Ks, and Baby Boomers started at age 35. So I think it’s a group that they’re somewhat more aware of how important it is to save, but they have a long way to go to learn more about money.
Hoff: Absolutely, and I want to get to some of the big tips in this book because I really recommend this book to anybody who feels a little shaky about finances who doesn’t totally grasp it. You don’t have to be in your twenties. You don’t have to be in your thirties. I like how you really break it down. You break down the fundamentals. You take us from banking, to investing, to dealing with debt to buying a home, to understanding taxes, to what your perks are if you are in the military and what you need to know. I want to go topic by topic on some of these\u2014some of the big ones and hit your top tips with those. So I want to start with debt, and especially credit card debts. At CreditCards.com we get a lot of questions on people’s credit card debt. What approaches do you share in the book? What do we need to know right now so we can start handling that debt?
Kobliner: Right. Well, the good news again, is millennials have somewhat less debt than Baby Boomers had or Gen Xers had at their age. But, still, carrying any kind of high rate credit card debt\u2014average interest rate is about 15% right now. It’s better to pay that off as quickly as possible. I think just the concept of paying off high rate debts is something you need to grasp. If you pay off a loan that’s charging you 15%, it’s the equivalent of earning 15% guaranteed after taxes on your money. A lot of young people especially feel like it’s really important to have savings. And while that does make sense in theory, when you look at the numbers, if you put $1,000 on a credit card that charges 15%, at the end of the year, you’d pay out $150 in interest. Right? But if you put that $1,000 in a savings account, you probably won’t even get 1%. So you bought 1%, Then you’d only take in $10. So you’re losing $140 dollars by carrying that high rate credit card debt. So credit cards can be great. You want to build up your credit, but you want to pay it off in full each month.
Hoff: Absolutely. Yeah, and I think that’s always interesting because people wonder, \u2018Should I be paying off this debt in full, or should I be saving my money and putting it in a 401K?’ But as you said, the rate of return if you have a 15%\u2014 right now we’re seeing cards\u2014the rewards card especially jump up to 25%\u2014
Hoff: \u2014interest rates. If you have an interest rate like that, you need to be nipping it in the butt immediately, right?
Kobliner: The only exception would be if you have a 401K with matching. Say your company says, for every dollar you put in up to a certain limit, they’ll put in a dollar. Then that would be an immediate 100% return on your money. So if you’re look at the numbers, you would start with that. Put the most you can that your company would match. So that would be dollar for dollar 100%, and then go right away toward paying off the high rate credit card debt. Student loans\u2014which I know we’ll get into. The interest rates on federal student loans are much lower. It’s less than 4%. So that is not\u2014people get pretty stressed out by the student loans. It’s not one of those ones that you have to immediately try to pay off because it’s a low interest rate, and a bunch of your student loans interest can be deductible.
Hoff: Okay. Interesting. So you’d say prioritizing number one, if you’re in a company that’s matching your 401K contributions up to let’s say 3% or something of your paycheck every month. First, max that out.
Hoff: Then tackle the high interest credit card debt or whatever high interest that you have. And then worry about student loans. So basically go from your biggest return on your money down.
Kobliner: Right. And we’re talking about federal student loans. The federal student loans like the direct loans are charging about\u2014I think it’s 3.76%, and it’s fixed. So that’s a pretty low rate, and when you can deduct that, maybe I would get it closer to maybe 1.5%. So really that’s a very, very attractive rates. Graduates are very, very anxious about student loans. The very big generational shift in terms of the amount of debt that young people are carrying. The average debt load of graduating seniors who borrowed has triple since 1993, when I was writing my first book. It was $12,400. Now the average debt for graduating seniors who borrowed is $37,000, which is a lot. Now the median is only about $14,000 so that’s a lot more manageable. But the problem is, and I’ve seen this as I’ve gone around the other book that I wrote, “Make Your Kid a Money Genius”, what I found is I keep meeting parents who say their kids, every now and then, who have gone to a private school or a for-profit school, and they have literally 50, 60, $70,000 in student loan debt. And they’re really not in a good situation to get a high paying job. And it really, really is a tough situation for young people because not only is it sort of figuring out how to pay this debt, but it also changes the equation when they look at, \u2018Well, when do I want to buy a home?’ And now that age has gone up to 33 for a first time home buyer. And, \u2018When do I want to even get married or start having kids?’ And I think that there are a lot of things that a lot of people are putting off because they feel very burdened by student debt.
Hoff: So what do you suggest to people? I’ve talked to students before who have really high student debt rates. Outside of their federal student loans, they had to get other loans that came with pretty high rates. What do you suggest? Do they need to consolidate at all into one lower rate? Obviously\u2014do they need to watch out and keep their federal loans out of that so they keep their protections? What are your suggestions?
Kobliner: Yes. Well, the answer is absolutely keep your Federal loans separate from your private loans. You don’t want to consolidate those two together. The interest rates on federal student loans\u2014direct federal student loans are low. First off, a lot of kids or people who graduate, have no ideal what they owe. So you can go to nsldf.edu.gov, and you go to the financial aid review section, and you see what you owe. And that’s for your federal student loans. Then you can look at\u2014There really are great tools that weren’t around years ago in terms of paying back your loans. So first off, if you’re unemployed, or you have a part-time job, or you’re a full-time student, you can apply for a deferral, a deferment for your student loans, or you might be able to a forbearance. And those will basically allow you to get more time to pay back your loan. The other big thing is look into these repayment methods. There are all different kinds. One is called Pay as You Earn, it has the lowest monthly payments, but it’s the hardest one to qualify for. But the good news is\u2014relatively good news\u2014after 20 years, your debt is forgiven entirely. Then there’s the revised Pay as You Earn loan or the Income-Based Repayment Plan. There are a number of these, and you just go on studentaid.gov, and you can go to the Repayment Estimator, and just plug in what you have, and it’ll tell you which option is good for you. That didn’t exist a few years ago, and I have to say that makes it hugely helpful for you to understand which repayment option is good for federal loans.
Private loans are trickier because they can be as high as 18%, even higher. And it gets really tough. So on the front end, I recommend people to do everything they can to not go into private loan debt for college. That’s just something that if you’re hearing this before you go to college, that’s a really important thing. But if you do have private loans now, you going to have to figure out a way possibly to refinance them. There’s something called privatestudentloans.guru, and it’s a site that offers some of the companies\u2014There’s one called SoFi; there a few others. That allow you potentially in certain situations to refinance that private loan debt. But you have to have very good credit to qualify for it. It’s very important to pay attention to this. And most important in both federal and private, do not miss payments. Because missing a payment will have an impact on your credit report, your credit history, and of course your credit score. And that means going forward, you’ll have to pay higher rates on all kinds of debt.
Hoff: It affects every aspect of your life going forward. It can mean almost a lifetime of being in debt or a lifetime of feeling financially free if you just understand a few concepts before you get started into that cycle of borrowing money, and paying it off, and knowing the importance of credit. It’s incredible. Let’s also talk now about your tips on home buying. So you mentioned that the age of buying a home is going up because of a lot of people have student loan debt, and they just don’t want to take on too much debt, which I recommend. I think that’s great. So let’s talk though about your tips on home buying that you have in the book. What should we consider when looking into buying a house, and why is maybe not for everybody?
Kobliner: Well, I think there’s a tendency\u2014even after the mortgage crisis of 2008, 2009\u2014there’s still a tendency for people to think or hear from their relatives, \u2018Oh, you have to buy a home. It’s really good. It’s the best investment you can make.’ And the fact is it may be better for you to rent for a while then buy a home. Particularly if you’re single, and you don’t think that you will stay in the same place for the next several years, then you should absolutely rent. Because there are a lot of fees involved. Upfront fees when you buy a home. Closing costs, and there could also be broker’s fees. And so the point is renting is not a dirty word, and renting can make a lot more sense for a younger person. But when it comes\u2014if you’re sort of thinking, \u2018Okay, I’m going to start saving up for that down payment.’ Which is usually 20% is a good number to shoot for of the price of the home. You want to make sure first off, your credit record is basically spotless, which is probably the key thing for getting a lower mortgage rate. So really don’t make late payments, just make those payments on time. And then over the next few years, you want to start saving in a very safe place. Probably an online bank savings account where you might be able to get 1% interest. And the goal is just to keep stashing as much money as you can into those accounts because that’s what you’ll use to make that down payment. In a previous version of my book, there was a time where people were making zero money down, and that really led to the whole mortgage crisis. And now I think it’s pretty clear you’ll need 10, ideally 20% of the price of the home in order to buy a home. But just starting to save, making sure your credit is clean. And a job history. It’s often mortgage lenders like it if you’ve worked in the same industry for a couple of years. It seems like you’re more stable. Although we’re in a gig economy right now, and people hop from job to job much more frequently. But those are really the key points to keep in mind. I think home ownership is a great goal, but rushing into it before you think you’re going to stay somewhere for at least three to five years, doesn’t really make financial sense.
Hoff: Do you have an estimate on how much home we can really afford? I get emails all the time across the board. Somebody says, \u2018My credit’s pretty low. I owe $30,000 in credit card debt. I want to buy a house at this price.’ Is there some sort of a formula we can say, \u2018How much home can I really afford versus what I want to be buying?’
Kobliner: Well, there’re two big ratios that lenders look at. They want to make sure first of all that you earn enough to pay the cost of owning a home, so they compare your future monthly housing costs to your pretax monthly income, and they say that shouldn’t be more than 28%. So you can sort of do the math. If your salary’s 60,000 a year, and your gross monthly income is $5,000, you don’t want a monthly payment any more than $1,400. So that gives you a rough sense. Also they look at your debt-to-income ratio. So the first one is looking at your salary, but the second is looking at your debt. And they want to make sure you aren’t burdened with lots of debts so they look at your current monthly debt commitments like your auto loans, student loans, credit card payments, plus your future housing costs. And the percentage they come up with is called the debt-to-income ratio, and they like to see that at about 36%. Lower than 36%. So if that ratio is higher, you’re probably not likely to get a mortgage. And I think those are two\u2014That’s sort of spelled out in my book. But I think those are two important ratios that if you’re not comfortably making them, then you can’t buy a house as expensive as what you hope you can.
Hoff: Okay, fantastic. So keep those things in mind because it’s not fun going into major debt for a house you realize that you can’t afford later. Let’s talk now about retirement plans. We touched on this a little bit before. The importance of a 401K, and there’s also the Roth IRA. There’s a lot of different options, especially when you’re just first starting out on a salary and you haven’t hit any thresholds on maximum salary that you can have to contribute to certain funds. Can you talk a little bit about the 401K, Roth IRA, what options young people have, what options we have, and why we need to get into that game?
Kobliner: Right. Well, I’ll start with the last question first. In my book I have one of my favorite examples. If you set aside $1,000 a year from age 25 to age 65 in a retirement plan like an IRA or a 401K, you’d be putting aside $40,000 total, and by the time you’re ready to retire, you’ll have over $200,000. But if you don’t start until you’re 35\u2014so you just wait 10 years\u2014you’d have only about $100,000 when you retire. So you’re really doubling the amount by starting 10 years earlier. And those kind of numbers really make it clear to people that that money that’s growing in your twenties\u2014the money you’re putting in that and it’s continuing to compound tax-free\u2014that’s been called the eighth wonder of the world. That’s something that it’s mathematically a very exciting thing how quickly that money grows. And it’s really important not to miss out on that opportunity. I think the key with 401Ks\u2014one of the best things about them\u2014are the matching. Because again, if you have a matching plan, if you put in a dollar, your company puts in a dollar up to say 3%, that’s an immediate 100% guarantee after tax return on your money. And you can’t beat that anywhere. So that’s definitely worth looking at. But IRAs are still wonderful. Particularly Roth IRAs. Although you put your money in after tax, they grow tax-free for life. And that’s really attractive for people. And they’re also\u2014If you need it\u2014This isn’t the best thing to do. But if down the road, 10 years from now, you need to get at some of the principle. The money you initially put in, you can after I think it’s five years, take out some of that initial contribution money you put in, and then pay it back.
But I think that it’s really important to start in these. And I think the biggest problem is their names. Calling it a retirement account just turns off anyone who’s not in their sixties. I think it’s just very important to rule number one, when you have a company 401K, take advantage of it. If you don’t, open up a Roth IRA probably after you’ve paid off or start paying of that high rate credit card debt. Because the thing is, you can’t make up for these lost years. That’s the one advantage of\u2014not the one advantage of youth. I think there are many advantages of youth. I can recall them fondly. But I think that when it comes to money, making the most of those years is critical. And I think a lot of young people always say\u2014And I remember this feeling\u2014 \u2018I don’t really earn that much now. I’ll earn more when I’m older.’ But when you’re older, you’ll also probably have kids, get a mortgage, and a car, and summer camp to pay for, and all these other things. So really making the most of this time when you’re young is critical.
Hoff: Absolutely. It’s crazy how it compounds. And $1,000 is a good example, but most people will end up probably putting a lot more in there if you take out maybe just 3 or 500 a month out of your paycheck and you put it in there. And then you’ve got enough to retire on. Instead of a retirement account, we’ll call it a “building wealth account” because that’s actually what it is at the end of the day.
Kobliner: Yeah, I used to call it a “smart savings account” but I like your name better. Let’s use your name. That’s really good. It’s true.
Hoff: So, speaking of tax savings vehicles, let’s talk about taxes. Another topic that you cover in the book. What do most young people need to know about taxes when they’re just starting out, or something we all need to know even if we’ve been filing taxes for years?
Kobliner: Right. Well, I’m a real believer in doing it yourself, and now it’s so much easier to do it yourself. I remember back in the day filling out a paper return and rushing to the post office to get it there on time. And now it’s all basically online. But I think it’s important to do it yourself just so you get a sense of what goes where. Everyone I know who I’ve sort of talked them into doing it, they’re like, \u2018Oh, now I get it. Now I know what those W-2, W-4 forms are for. And now I know what comes in and why I’m paying taxes going out.’ And I think it’s really helpful to do that to get a general sense of your finances. I think the one important point I would make is make sure that you’re taking advantage of really some straight forward deductions. Like if you pay state and local tax on your federal form, you can deduct that. People sometimes overlook that. Donations to a charity: I think that’s something that young people as you’re moving from college or getting a new apartment, there’s a lot of times when you have a couch or lots of clothes you’re donating. Make sure to get a recipe, and that’s a way to reduce your tax bite somewhat. Also student loans is really an important one that you can deduct the interest on student loans up to a maximum of $2,500 in interest per year, which is really beneficial and reduces the cost of that loan which is only 3.5 or 4% on federal loan to maybe closer to 1.5%. So make sure that you’re taking the deductions that you’re qualified for. The good news is now when you’re doing it online, you get pinged for each time as you go through the process, you’re seeing what you can get a deduction for. Which is the reason why I also recommend that you do it yourself. Because you only you know exactly what you do. \u2018Oh, yeah that’s right, I do pay student loan interest. Yeah, I can get a deduction for that.’ Or you might be able to get a deduction on tuition and fees up to $4,000 a year if you’re in higher deduction. I list them all in my book but even as you are just filling out the form, you’ll be going through it online and they’ll be triggered to take the deduction that you would be eligible for.
Hoff: What about attributing to an FSA? If you have a health insurance policy through your work and there’s an FSA that you can contribute to that you can use toward deductibles and everything like that for health insurance. Do you recommend doing that?
Kobliner: Absolutely. I think they still have the rule if you don’t use it, you lose it. So you want to be careful not to put more than you think you will benefit from from an FSA, and make sure you check what your company covers. Typically, they’ll cover added medical expenses that are sometimes not paid by your insurance. One of the big ones is always eyeglasses, or contact lenses, but check the rules and take advantage of them. They’re really useful ways to save a bunch of money. But by the end of the year, you want to absolutely make sure that you use it because you don’t want to lose it.
Hoff: And just for people who don’t know, and FSA is money that you’re getting taken out of your paycheck pretax and put into this account that you can use. So instead of having to pay tax on that money, and then pay those medical bills, you can do it pretax.
Kobliner: Exactly. So instead of a procedure or something costing you $100, it’s costing you more like $50 because you’re not having to pay. If you’re in the 50% tax rate, you won’t have to pay that money on the money you’re using. So it’s really, really beneficial and leads to good cost savings.
Hoff: So let’s go over your three financial rules of thumb. What is imperative to understand now if you take nothing else away from this podcast?
Kobliner: Okay, I would say number one: great news that young people today are in less credit card debt than the previous generations when they were that age. I would say, let’s make sure to stay out of credit card debt. I get a little nervous because sometimes I hear their parents say to me, \u2018Well, I want my kid to get a credit score while they’re still in college.’ And you really do not have to worry about that. Chances are two-thirds of kids have student loans when they graduate, and you’re getting credit when you pay those student loans on time. So my first piece of advice is don’t get into high credit card debt, but if you are in credit card debt, pay if down as quickly as possible.
I’d say the second piece of advice is sign up if you have a company 401K with matching. Absolutely sign up for that immediately, before you do anything. Even before you pay off that high rate credit card debt. And if you don’t have a 401K, sign up for a Roth IRA. You can get a low cost index fund like Vanguard or Schwab. These are great things that you could start early. And again, the advantage of that tax-free compounding is really grows so quickly when you’re young.
And I’d say, the third thing I’d have to say it make sure to get health insurance. There’s so much controversy now about health insurance. And so much discussion about it. But it’s still the law, and you have to pay penalties if you don’t get it. But frankly, more important no matter whether it’s required or not, is that by not getting health insurance even if you’re young and healthy, if something happens\u2014if you have an accident, or some sort of illness happens that you didn’t expect, or you’re traveling and something happens to you, that will be not only a huge financial burden on yourself and it could compromise the kind of care you get, but also it will be a huge burden on people who love you, like your parents. And it continues to be the No. 1 cause of bankruptcy. Health care. So I would say when you’re looking at the financial scheme of things, getting health insurance, saving in the 401(k) and IRA, and paying down high rate debts are probably the three most important points.
Hoff: Okay, fantastic. And finally, our podcast is called Charged Up. What charges you up on educating young people on understanding finance?
Kobliner: I think it’s so exciting because I think there is this myth about how complicated it is, and it’s overwhelming. And I think people of all ages often get stressed out, or they’re embarrassed about how little they know, or embarrassed about how they didn’t a few years ago maybe with credit card debt. And they’re just embarrassed about or ashamed about their money, and I feel like with just a few simple steps, people really can change their lives. I can’t think of that many things that really by doing one or two things\u2014You don’t have to read the Wall Street Journal every day. And I think just getting a little bit of knowledge\u2014And that’s sort of why I think why “Get a Financial Life” has done well over these years because it makes it simple and clear, and it’s not that hard. And sometimes I feel like there are companies that may have invested interest in making it sound so hard because then they have to charge you for giving advice. I am a real believer in making sure to do this, learn it, get over the fear of it because it’s not that hard. And it will really make you feel so much better, I think in all aspects of life.
Hoff: Absolutely. I really recommend picking up this book because if you can master the fundamentals of finance and the earlier you can get started, the more wonderful life will be if you don’t have these financial worries constantly hanging over your head. Beth, thank you so much for joining us today. This has been a really great conversation.
Kobliner: Thank you. I really enjoyed it, Jenny.
See related: Charged Up! podcast: Becoming financially literate