Old financial rules no longer apply
Tess Vigeland talks to New York Times columnist Ron Lieber about how some of the old rules about investing and managing money don't make sense during the current financial climate.
Saving in a piggy bank (iStockPhoto)
TEXT OF INTERVIEW
TESS VIGELAND: So last weekend in "The New York Times," personal finance columnist Ron Lieber wrote that for some people walking away from a mortgage might actually be the most sensible option. Woah. But you know, on this very program, we've noted that some of the old rules just don't apply anymore. It is a new era. Ron Lieber is with us, and let me ask you, were you surprised by what you wrote?
RON LIEBER: The thing that sort of surprised me about what happened after I wrote the piece was that there was all this hate mail coming in from people who were saying you're encouraging people to break contracts and walk away from their obligations. And, in fact, what I said is that it's almost always a better option to try to renegotiate with your lender. Lenders are in a forgiving mood, and they're getting more so as the government mandates come down. So try to cut a better deal for yourself first and then consider the thermonuclear option.
VIGELAND: And you talk about the fact that, yes, there are some hits you're going to take if you do this. But the fact is, ultimately, for example, your credit score is going to come back.
LIEBER: Well, make no mistake. You will take a severe and lasting hit to your credit. There is pretty much no way around it. You pretty much have to count on not being able to get a credit card for up to seven years. You have to figure if you can get a car loan at all, it'll cost you, prevailing lowest rate is five or six percent now, you might take 10, or 12, or 14 percent. But again, you might be able to keep the credit cards you currently have. Or simply use a debit card. And you can pay cash for a used car. Or keep your car for seven years. You know, if your credit score is 550 or 600, that's not going to keep you from living your life.
VIGELAND: Here are on this show we've even mentioned for some people there may be good reason to tap their 401K for cash. Not something we generally advise. I saw a recent column in one of your competitor publications that actually review the pros and cons of borrowing from credit cards to create an emergency fund of cash. Is our current situation so unique that we can just chuck some of the traditional advise?
LIEBER: Well, I think the thing that you have to remember about retirement accounts is that those are protected in the event of a bankruptcy in general. Creditors are not going to be able to get their hands on those. You know robbing a retirement account that could potentially help you through your golden years, that's a pretty tough choice to have to make. Putting yourself further in debt to create an emergency fund. It seems to me that if you lose your job, you can certainly take those cash advances against your credit card once that happens. Borrowing money at 15 or 20 percent just to create an emergency fund, that seems awfully extreme. These bad things that have happened, this unemployment, this underemployment, it's not going to happen to the majority, maybe even the vast majority of people.
VIGELAND: You know, I wonder if there is also the risk that you are then encouraging the formation of bad habits that could hurt pretty seriously down the road.
LIEBER: Sure. One way to look at this is the way that a lot of landlords are starting to look at this already. And even some credit unions. You know they're looking at the credit reports of people that have already been through foreclosure. And they're saying, you know what, we're in unusual circumstances here, and if this person has a fairly clean record, aside from this kinda terrible foreclosure calamity, or short sale that they've been through, we're going to give them a shot here. In some ways, in fact, going through this may set you straight and cause you to have good habits, conservative habits. When things get better that you won't ever be in a situation where something like this happens to you again. That's what happens to some people who go through bankruptcy, right? I don't necessarily believe that whatever rules we're suspending right now will cause people to want to suspend them forever. We're probably learning some valuable lessons right now.
VIGELAND: Ron Lieber writes for the "Your Money" section of "The New York Times." He's a columnist there. Thanks so much for talking to us today.
LIEBER: It's great to be on. Thank you.
Comments
Comment | Refresh
03/22/2009
Or we could simply do what we have, via the IMF and World Bank, advised Third World countries to do, when those countries claimed they couldn't pay back their loans:
1) balance the goverment budget. No bank bailouts, no loans to car companies, no social programs. Let forign companies come in, and buy American banks, car companies, etc for pennies on the dollar.
2) Get rid of protectionism. Let foriegn companies flood the American market with whatever surplus product is wasting away in their warehouses. Walmart will be happy to distribute.
The list goes on. Hey, if we were telling Third World countries these were great ideas, why don't we dare try them?
I'll bet I can guess why. Old rules, and foriegn influence, indeed. We don't even want what we asked other countries to do.
From HI, 03/22/2009
"
walking away from a mortgage might actually be the most sensible
"
We now have new political party in the process of revving up their PR to buy more votes through changing rules to allow power play from unions. Here is your big opportunity window; gopher it. Unionize the mortgage holders. Mortgage Union can then lobby Congress for relief from oppressive rules, if any, from owner's associations and banks that might otherwise prevent mortgage holder from taking in renters or/& building guest house in backyard for renters. Caveatis -- don't take in shady characters. If you have daughter who plays the harp thus don't take in anyone at all. There are many handicapped veterans who have protected you and the rest of us by drawing combat pay. They should not be forgotten and should be given a place to live. Here is your chance to make lobbyist do something decent for a change.
Good luck.
Alternatively, if and only if it is fully legal in your state at the time that you read this you can think about the following :
Drawing up contract to sell with lease-back from new owner. The beauty of the arrangement is that unlike leasing from landlord this time around you can set your own terms of lease concerning things like new landlord's access to the place for any purpose. Other beauty of this would be relief from falling home prices. With the money of your equity received you can reinvest in housing stocks later when they finally recover. No guarantee's from the management.
You have negative equity? Thus re-read first paragraph.
Grazia,
A
From Indianapolis, IN, 03/21/2009
You can too claw back those taxes from the IRS, if these wealthy people can't figure out how maybe they need to get a smarter tax adviser.
Since I do taxes for a living, I am going to decline giving the answer away for free, thank you very much.
I'm not trying to be mean here, I'm just tired of hearing the question "If you're so smart, why aren't you rich?"
Most of your advice is excellent, by the way.
From Waynesville, OH, 03/21/2009
The financial industry offers a poor quality consumer product to the average american. Foreign influence removed the american value of the personal approach in banking created multiple fees, high penalties, low percentage interest rates, a tough luck banking isn't about customer service philosophy and an at-will credit percentage rate increase policy. Even employers self-served in the how long will my job last focused employee's 401k account not to forget continuous rapidly self multiplying overdraft fees creating debt. I want to know where the return dept is and if I get my money back or a bank credit?
From Waynesville, OH, 03/21/2009
The financial industry offers a poor quality consumer product to the average american. Foreign influence removed the american value of the personal approach in banking created multiple fees, high penalties, low percentage interest rates, a tough luck banking isn't about customer service philosophy and an at-will credit percentage rate increase policy. Even employers self-served in the how long will my job last focused employee's 401k account not to forget continuous rapidly self multiplying overdraft fees creating debt. I want to know where the return dept is and if I get my money back or a bank credit?
Post a Comment: Please be civil, brief and relevant.
Email addresses are never displayed, but they are required to confirm your comments. All comments are moderated. Marketplace reserves the right to edit any comments on this site and to read them on the air if they are extra-interesting. Please read the Comment Guidelines before posting.
You must be 13 or over to submit information to American Public Media. The information entered into this form will not be used to send unsolicited email and will not be sold to a third party. For more information see Terms and Conditions and Privacy Policy.