QA: Liz Weston's new money commandments
Personal finance authority Liz Weston talks about bad money habits
To help consumers navigate through a new financial climate, personal finance authority Liz Weston just published "The 10 Commandments of Money: Survive and Thrive in the New Economy."
|Liz Weston, author,
'The 10 Commandments of Money'
Liz Weston, who is the most-read personal finance columnist on the Internet through her MSN Money column, recently talked to CreditCards.com about her new book, released today, as well as what is considered toxic debt, how to get started in righting your financial ship, and even her own financial missteps.
CreditCards.com: Why do we need 10 new commandments?
Liz Weston: A lot of people were terrified by what just happened to us through the financial crisis and credit crisis and subsequent recession. The old rules they've been living by don't really work, and the rules that their parents and grandparentfs lived by don't work either. The world has changed too much.
You really need to know how these systems work to play the 21st century game of money. That's what these commandments are about, trying to give people a road map through the next decade or so.
CreditCards.com: You call credit card debt toxic. Why?
Weston: Because credit card debt is typically variable -- the rates can change -- and it is typically high. Even people with good credit scores are paying 13 percent to 15 percent interest. I have high credit scores and all my credit card companies jacked up my rates.
The interest you're paying on your past consumption is just eating away at your financial future. It's a really bad habit and also makes you more vulnerable to bankruptcy. Other things can put you over the edge, but people often pile on credit card debt and can't recover from that event because they have this credit card debt hanging over their heads.
CreditCards.com: What else is toxic debt?
Weston: Anything with high or variable rates. Payday loans are a classic example with 400 percent interest rates and above. Also, title loans where you borrow against your car title are toxic. Bounce fees are incredibly corrosive debt. Pawnshop loans are toxic, too.
I'm a person who makes a good income and who has various software to monitor my accounts, and I still manage to overdraw my account once or twice a year.
CreditCards.com: You say that some people "simply can't handle credit cards." Who are they?
Weston: I think they're fairly rare people. They're like alcoholics. These are folks who, if they get a credit card, cannot stop themselves from spending. If they get an increase in their credit limit, they spend it. If you really cannot control your spending, you should not have a credit card.
CreditCards.com: Who can and should use credit cards wisely?
Weston: Anyone can learn how to use a credit card wisely. It's essential that you get in the habit, as quickly as possible, of paying your balance off in full ever month.
When I talk to college groups, I tell them that if you have to eat beans and rice and ramen noodles for the rest of the month, you've got to pay that off in full. Otherwise, they get in the habit of carrying a balance. Things don't change when they get a better income. They just spend more.
CreditCards.com: What is the biggest misunderstanding about credit card debt?
Weston: That most people have it. Federal Reserve statistics show that more than half of U.S. households don't have credit card debt. Twenty-five percent don't have credit cards. Thirty percent pay their balances in full. The median credit card debt was $3,000.
Those numbers change a little bit. but the statistics themselves have stayed remarkable stable over the years, and they have always shown that more than half of U.S. households don't have credit card debt.
There's controversy over those numbers. You hear often that the average American has over $10,000 in credit card debt. I think that there's a small percentage of people -- I figure 10 percent from Fed statistics -- who have more than $10,000 in debt. They are skewing those averages.
It gives false comfort. Credit card debt is not normal. It isn't good. It really should be avoided.
CreditCards.com: Why do we need to be vigilant about our money?
The interest you're paying on your past consumption is just eating away at your financial future.
Weston: Nobody cares about it as much as you do.
It's not a level playing field. I think it's going to get better with better regulation and more people paying attention to the little guy.
There were a lot of incredibly sophisticated forces arrayed against the average Joe. One great example is the whole subprime mess. People were talked into loans that made no sense. Disaster ensued.
Credit cards are another perfect example of a lot of companies were really playing foul instead of playing fair. They were working out ways they could just screw people right and left. That's why Congress had to finally step in. It's the same things with banks. Bounce protection is a classic example of what I think is where a bunch of MBAs and Ph.Ds got in there and said, "Hey, this is a great way to generate revenue." They didn't even consider what they were doing to low-income and elderly people.
They were dramatically increasing the cost for a lapse in attention. These minor lapses were costing people hundreds of dollars. I'm a person who makes a good income and who has various software to monitor my accounts, and I still manage to overdraw my account once or twice a year. It just happens when people are busy or traveling or have irregular incomes. We have to make sure banks are playing fair.
CreditCards.com: What is your top tip for someone who wants to get rid of their toxic debt?
Weston: Get realistic about this debt. I hear from way too many people who have what is essentially unpayable debt. They're trying to figure out what loan they can get to make things better or what payment program they can get on.
If the debt is great enough, it could keep you from meeting any other goals in your life, and the best thing to do would be to file for bankruptcy or negotiate settlements. I don't want to encourage people to keep throwing good money after bad. It's horrible, but sometimes there just is no other option than to file for bankruptcy.
Assuming you can get this debt paid off in five years or less, the best thing to do is to do the method of targeting that highest rate debt first. Try to get all your interest rates down, which could mean transferring balances over to a three-year personal loan. If not, you just start targeting the highest rate debt. Pay the minimum or just a bit more on other accounts because paying minimum only can flag you.
Credit cards are another perfect example of a lot of companies were really playing foul instead of playing fair.
I'm a big believer making this as automatic as possible because if you have to make the decision every payday as to where to put this money, you're less likely to do it.
CreditCards.com: Your sixth commandment is "saving for retirement must come first." Why this over paying down credit card debt?
Weston: This is surprisingly controversial except among financial planners who know how to look at the whole issue.
Retirement is going to be incredibly expensive. For most people, there's just no way to sugarcoat it. If you wait until you're much older than 35 to get started, you are never going to be able to catch up. We need to get the message out you're going to have other goals and other things to worry about, but you really can't put retirement saving off.
Ideally, you'd get started with your first job and put 10 percent to 15 percent of your income away. Then you might have some flexibility when you're older. If you let other goals get in front of this one, you are not going to have a comfortable retirement.
It makes me a little bit of an evangelical on this issue. You need to save for retirement. If that means you need to take longer to pay off your debt, so be it.
Parents want to save for their kids' college education when they're not saving enough for themselves. Your kids can get loans for college, but no one's going to give you loans for retirements.
CreditCards.com: How did you get into writing about money?
Weston: I started by accident. My very first job was at the Seattle Times. I got placed into the business department as an intern. They just started sending me out on money stories. I got interested in it. After a detour -- I did features in Alaska and covered politics for a while -- I realized the stuff that I enjoyed had to do with money.
CreditCards.com: What's surprised you most about how we use our money?
Weston: What surprised me most and still surprises me today is how frightened people are of it. So many people see it as rocket science or something that's beyond them, even perfectly intelligent people.
The basic rules about how to handle your money and how to allocate your assets and how to protect yourself, I think most people can get their minds around it. The next step is to find experts and build a team who can help you out.
CreditCards.com: What is the No. 1 mistake people make with money?
Weston: A couple years ago, I would have answered "not saving or racking up credit card debt" or "not living within their means." All those would be perfectly correct answers. More and more, though, it's just inaction and being too afraid to move. People hear layoffs are coming and they don't do anything -- they don't start cutting expenses or looking for jobs. Or they've got credit card debt and rather than coming up a plan to deal with it, they ignore it and it grows. Or they don't sign up for 401(k).
It doesn't take that much to get educated on the basics. You've got to get started.
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