On today’s Consumerism Commentary Podcast, Tom Dziubek speaks with Carmen Wong Ulrich, author of The Real Cost of Living: Making the Best Choices for You, Your Life, and Your Money.
Carmen’s new book goes focuses on the “personal” aspect of personal finance, showing how the best decisions can be made by considering both the financial cost and the personal cost of a variety of choices. You can find out more about this book and the author at Carmen’s website.
The Real Cost of Living is available for free for a limited time at the Consumerism Commentary Store.
The Real Cost of Living, Carmen Wong Ulrich: S04E14 / 115
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Table of contents
[00:00] Introduction from Flexo
[00:35] Interview with Carmen Wong Ulrich
— [00:52] Carmen’s transition from psychology to personal finance
— [01:50] Personal cost
— [04:30] Walking away from a home
— [07:03] Financial consequences of having children
— [10:30] Boomerang generation and extended adolescence
— [11:49] Is a college education worthwhile?
— [14:14] Private vs. public student loans
— [15:24] Cost of not using a credit card
— [17:37] Low-interest savings accounts
— [20:35] The stock market is your “frenemy”
— [21:51] Personal vs. financial cost
We always welcome feedback from listeners. If you have any comments for this episode or for any other, or if you have suggestions for future episodes, please leave us comments here or email us at podcast at this domain name.
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Flexo: Welcome to the Consumerism Commentary Podcast for Sunday, January 23. I’m Flexo. Our guest today is author Carmen Wong Ulrich.
Tom Dziubek: Welcome to the Consumerism Commentary Podcast. I’m Tom Dziubek. Today, we’re talking to Carmen Wong Ulrich, personal finance expert, former host of CNBC’s “On The Money,” and author of the book, The Real Cost of Living: Making the Best Decisions for You, Your Life, and Your Money.
Carmen, it’s a pleasure to talk to you today.
Carmen Wong Ulrich: Thank you, Tom. Thanks for having me.
Tom: Carmen, I understand that you went to school for psychology and earned your Master’s Degree at Columbia, and I’m curious. How did a planned career in psychology transition to a career in personal finance?
Carmen: Well, the career turn was actually into journalism. Funny enough, I was raised with it with a dad who made me savvy about personal finance from day one. We subscribed to Money Magazine. He had me pick up The Wall Street Journal every morning from the corner store. So, I actually fell into Money Magazine, and I was very glad to be there.
I realized, wow! I know this stuff. I know this environment very well, and then I found that my psychology training helped tremendously. This was before, actually during the same time, when behavioral economics started to happen. So, I felt like that this was a great thing to have. It was a great positive thing to have in your background and turn it to personal finance because the first word is “personal.” So, it’s very personal.
Tom: Now, your book discuses the financial costs of a variety of life decisions and the personal cost. What is personal cost?
Carmen: Well, personal cost is how a decision affects your life personally, whether it was in your relationships, emotionally, mentally, even physically. So, I wanted to look at it because when I talk to real people and they talk about making very big decisions, like a home, or getting married, or taking care of an elderly parent, all of these big decisions do have costs that are not just financial but personal as well.
A lot of folks would actually not like the math. You could say, “Listen. The math doesn’t work. You’re losing money.” And they could say, “Well, I don’t care” or “It’s worth the cost because what’s more important to me is ‘blank,'” whatever it is, security, stability. So, you have to take those factors into account when it comes to big financial decisions because listen. We’re human beings. We have these feelings when it comes to our money.
Anyone who just thinks as an accountant, unfortunately, it’s not the way human beings work. So, I wish we could all just think about math, and then we wouldn’t struggle at all with our decisions. But that’s not the case.
Tom: How would a person measure their own personal financial cost? I’m assuming that there really is no one solution for everybody.
Carmen: No, there definitely isn’t, and it really depends on the decision you’re making. But the things to ask yourself are, first of all, in this decision what is most important to me? What are, let’s say, the top three things, but definitely especially with the number one thing? Is the most important part of this decision saving money, growing your money? Or is it stability, security, family, happiness? What is the most important thing to you?
And then see where are your choices in terms of that decision. If you go here and you decide, “I want to prepay my mortgage even if the math doesn’t work because I want to own my home,” just know what’s driving you towards your decision and take both into account.
Tom: Now, I’m assuming that that should also help you make better decisions in life as well, right?
Carmen: In general, absolutely. I start the book with a funny story about how my husband will be willing to drive through hellacious traffic to exchange a ripped [laughs] bedcover that costs seven bucks whereas I just think that that’s just not worthwhile of my time. It’s also a luxury, but still it’s just the inner decisions we make every day. It can help you to just stop and think for a second, “What’s most important to me?”
And especially if you’re having an argument, say, with a spouse as to a big decision. Well, maybe you don’t feel that the same things are important, and that’s what really behind the argument. So, it’s very, very useful to always think about, what are you really talking about? What’s really important?
Tom: OK. Let’s shift gears here for a second. I want to talk about mortgages. Many homeowners have found themselves in financial trouble over the past few years, unable to afford their own mortgage. Now, some have considered giving up and walking away. What would drive a family facing foreclosure to just walk away from their home?
Carmen: Well, I found that my experience with folks that walk away are usually folks who have an investment property who see that basically… If you’re looking at Nevada, you’re looking at California, Arizona, Florida, places where home values have gone down 65 percent or more, and you don’t see an out.
You don’t see yourself ever, ever being able to make any money on that home or ever owning that home in full because you’re so under water. That can lead someone to decide to walk away or to foreclose.
And the difference being with the foreclosure you’re staying in the home, using the home, and not paying the mortgage, and then they’ll foreclose on you. Walking away, again, they’ll foreclose, but you’re basically leaving the keys there and saying, “I’m done. I am done.” But most…
Tom: Is that legal?
Carmen: [laughs] In some states, in a non-recourse state, basically you pay a little bit more on your mortgage in these states, where they cannot come after you for that mortgage or for walking away from that mortgage. It’s a type of insurance that has to be paid out. So, you have to look and see what state you live in and what are the laws in your state. But, for around half of the states in this country, you can walk away.
Tom: What are the benefits of doing it? I mean does this person have to figure out how much they’re going to lose versus how much they’re going to have to pay sticking around with their mortgage, do you just kind of take all that into consideration?
Carmen: Well, it’s definitely something to take into consideration and it’s not — I’m not advocating or actually condemning it in any way, it’s just if you’re looking at this as a financial decision, and personally I think it can be very devastating for people, but financially if you think about it, you live in a non-recourse state you can do this, they can never come after you for what you owe. It will destroy your credit completely. But, if you, what most folks do, they’ll rent a place before their credit is destroyed and then rebuild.
Because what happens is let’s say they bought a home for four hundred thousand dollars, their home is now valued at a hundred and twenty thousand dollars, they’ll basically be paying on a mortgage that they will never see. They’re losing so much money they just see no way out. They see that their money is not growing at all, it’s actually kind of disappearing and so they just can’t stomach, they can’t stomach the idea of owing that much money on something that’s worth so little.
Tom: OK, now, let’s talk about the financial consequences of having children. Do you think families think about those financial consequences when they have kids?
Carmen: I think a lot of families do. I think that’s why a lot of folks put off having children for awhile and that’s why families are getting smaller. You know of course there’s always going to be, you know some folks, you see the popularity of like you know, “Teen Mom,” on M.T.V. and stuff but, that, who don’t consider that.
But, for the most part, especially with college-educated professionals, they really, really understand just how expensive kids can be, but then again, sometimes the cost is just incredibly worthwhile and you just have to deal with it. You make life adjustments. You downsize, you skimp here and save there because you have another human being. So, it’s a balance for folks and you do have to make it a balance because you know you can always try to plan, but it may end up being too late.
Tom: OK. On a similar subject, should a mother or father who leaves work to stay home with a child, consider going back to work at some point?
Carmen: I will always advocate for a yes, absolutely, whether it’s the mother or the father. Because here’s the thing, you are the family’s safety net, let’s put it that way. And assuming that the family stays together, you are the family safety net.
So, you may not be working but the possibility that you can go to work, and in order to have that possibility that you can go to work, you should try to go back to work at some point to just keep your toes in that water. If you really are determined to be a stay at home person, just always try to be doing things that keep your skills a little bit fresh so that you can pop back in if you need to because what we see, especially in this recession is so many of, usually fathers, you know losing their jobs, then the other spouse has to go to work and that is kind of a safeguard.
I also think that you know, especially if the family were to split up there’s a point where you know you need to go to work and if you can, for the majority of Americans that’s the case except for maybe the super rich, they don’t have to worry about that, but for the majority of Americans, you know you have to really consider the fact that unemployment and extended unemployment has become a tremendous possibility for everyone.
Tom: Right, right. And I can imagine too there might be some benefits to, even going back to work part time if presented with the opportunity, so I guess that some people even if they decide they want to stay home with their kids, they don’t want to give them over to a, you know any kind of childcare system…
Tom: … that you know maybe they, instead of paying for it they’ll decide to go and just do homecare themselves. But, I imagine that even just like you said, keeping your skills fresh, find a part time job, maybe it’ll turn out to be beneficial, and especially if that job has other lucrative opportunities to move onto full time position or even get your foot in somewhere else, I could see that definitely paying off. And you’d still have the time to spend with your kids.
Carmen: Yeah, and you know, listen, we live for a very long time these days and kids you know grow up pretty quickly. I know I have and she grows up, she’s just too fast so you’d be surprised how quickly you end up wanting to get back into the job force even if you’re lucky enough not to have to.
But yeah, working part time gives you some, quite a few advantages, the socialization, your networking skill, you’re getting your skills still out there, you’re bringing in some income so that should you need to go back full time you do have something there, on your resume. But, I know a lot of stay at home moms who do that just normally. They had great careers, they wanted to stay at home but they’re always doing some little something to keep themselves in there, even if it’s a group of former lawyers or something who get together, keep that networking going even if you’re at home because it’s really, really useful if you need it.
Tom: OK. Now, a new term was coined recently, the boomerang generation. More adult children in a rough economy are moving in with their parents in what some people have called extended adolescence. Now, is this a good thing?
Carmen: Talking to the girl who started working when she was twelve, no. I have to say no. Here’s the thing, it’s hard to judge too, you know I also have some siblings who have had to do this a couple of times, it’s really difficult. Times have changed. You know when, all the way up until the late eighties or the early nineties, the job market was hard but there was still room for us, for college grads, recent grads to get some jobs.
Now, college grads are competing with people who have tremendous amounts of years on their resume for the same job so it’s even harder. Their unemployment rate is huge. I would suggest you do everything you can do if you have a boomerang kid at home to at least make them responsible for things like, “You are going to look for a job, as if you had a job,” that sort of thing so like keeping them on some sort of schedule. Making sure that they report to you about, “Hey, this is where I’ve gone today, this is what I’ve done,” and helping them with this process. Because the sooner you get back, you get into the workforce after college, the better your odds of making that college degree work and pay off and not cost as much.
Tom: Now, in the past few years, more experts are saying that a college education with soaring costs may no longer be worthwhile. And this could be particularly for those graduates who have low-paying careers who with the cost of tuition and student loans, might not result in increased salary. But, what about the personal non-financial benefits of an education?
Carmen: Oh, there are a ton of them. There’s been quite a bit of research as to the advantages, the behavioral advantages, and the personal advantages to having that college education which are tremendous, including things like just being happier. College grads tend to be happier. Their marriages tend to last longer. We’ve seen a lot of reports lately about the correlation between the college degree and the success of marriage.
Your interpersonal relationships get better, there’s a lot of training that goes on. Especially, if you go away for the first time to college, where you learn how to be on your own. You learn how to navigate.
There’s a lot of discipline involved as well. It’s something that’s communicated to employers. I think that’s a big part of the college degree when it comes to employers is, hey, this person had the discipline to get that degree.
Tom: Now, why are college costs skyrocketing?
Carmen: Oh, they’re enormous. It’s tremendous, these costs are. It’s a mix of a lot of things. If you think about the demand for all the new jobs that are coming in terms of just supply and demand, over 65 percent of all the new jobs being created require a college degree. So, more and more people are going to college and need to go to college.
I can’t speak individually for a lot of private institutions that have billions of dollars of endowments and their tuition is still $50,000. In general, this is one of those consumer costs that have been rising tremendously, much more quickly than any other consumer costs.
I think we need to be prepared for the fact that I don’t think that’s going to change very much. We have to be much more strategic about going to college and paying for it for our kids.
For example, maybe it’s two years at the community college before you go to another school. Maybe you need to work for a year to make sure that you’re serious before you go to college. The truth of the matter is, 60 percent of college students, don’t finish in six years or less. In terms of how many actually finish in four years or less is only 40 percent and 20 percent of that 60, never even finish.
The key is you’ve got to finish and get that degree. If you can do it in four years or less, college will cost you a lot less.
Tom: Now, you talk about student loans. You mention that private student loans should be avoided. What’s the difference between a private and a public student loan?
Carmen: Well, public student loans, and when I’m speaking of it, are federally backed loans. These loans are backed by the federal government. They have much, much lower interest rates.
But, really key here is the tremendous flexibility that these loans have. For example, you can file for forbearance, which is a holding off on paying the loan; for deferment, if you don’t have any income and you just can’t pay it, they will hold off. It’s not going to affect your credit so badly as if you were basically foreclosed on the loan, not paying it at all.
You can also apply for income contingent plan. So, basically, monthly payments are never going to exceed more than 10 percent of your discretionary income. All these plans that you can apply for, which is especially important those first few years out of school.
Private loans, very little to no flexibility whatsoever. Higher interest rates and they’re just very, very dangerous. We’ve seen a lot of that with the for-profit colleges just how expensive those private loans can be. So, really try to avoid them as much as possible.
Tom: OK. We often talked about the dangers and costs of credit card misuse and abuse. You mention in your book, The Real Cost of Living, the cost of not using a credit card. How can not owning a credit card be a disadvantage?
Carmen: You don’t build credit. [laughs] It’s that simple. The thing is that when I have, and a lot of times it’s young people, will come to me and say I’m so proud. I don’t have a credit card. I’m like; well, go apply for one tomorrow.
The key here is understanding that credit cards are not evil or bad, they’re tools. They’re financial tools that businesses use to judge us and then we use to show our responsibility.
If you look at it as a tool that helps you build credit so that you can buy a home for a very low or the lowest interest rate possible. So, you can get that auto loan. So, you can rent that apartment that you want and your parents don’t have to cosign.
It’s really important to realize that credit cards have a good use which is building your credit. And the more and more we shop online, the more and more we travel, credit cards give you a tremendous amount of freedom as long as you’re responsible with them.
You can rent a car, you can book international travel, and you can be anywhere without cash as long as you pay them off in full every month. Credit cards can be used to really help you a lot through life.
Don’t forget about purchase protection and shopping online. That should all be credit cards, not debit cards.
Tom: Yeah, that does seem kind of unfair though. But, it’s true, it’s a responsibility test. It’s making sure that people are responsible enough with their money once given the opportunity to have a line of credit.
Carmen: Yeah, and not everybody is. But thankfully, all of the research shows that the majority of Americans are. Over 80 percent of Americans don’t have a credit card problem. They pay off their bills in full. But, for those who can’t, it’s an incredibly expensive tool. [laughs] Basically, it’s a tool that they turn on themselves and it does a tremendous amount of damage.
Even if you are in a lot of credit card debt, and I know I had to be in my life in the past, once you realize that you are in control of it, and it is a tool to show your responsibility, it gives you that power to pay it off and to use it in a responsible way. Especially, once you enjoy the benefits of incredibly low interest rates on a mortgage or an auto loan.
Tom: Right. Now, let’s talk about savings accounts. Is it bad to have a savings account when the interest that you can earn is only around one percent right now?
Carmen: Not at all. Actually, a savings account is probably the most important thing you should have financially in your life. [laughs] Number one! And then the thing is that when you talk about what’s the real cost of saving money right now, it’s about one to two percent a year it costs you to save that cash. And even more if you consider what it could do for you if you invested it.
But, here’s the thing, it’s a cost that’s worthwhile, because it saves you from getting into worse trouble, and spending even more money. If you were to lose your job, what would you do if you had no cash savings? You’d probably have to take out another loan, and at incredibly high interest rate. Certainly a lot higher than one percent.
So, if you think about it that way, that this money is there to protect me, and to protect me from having to get into a substantial amount of debt, that really can help you swallow, and it helped me swallow the fact that my money’s sitting there, earning 1.3 [percent]. [laughs]
Tom: Right, right. And I’m assuming the liquidity of it too is really beneficial. Because I mean there are other better options, other places that you can invest your money that have a higher earnings on it. But…
Carmen: Oh my gosh, yes! But no. No, you definitely… I mean that’s the number one point of it. When I mean access to it in an emergency. What would you do? How would you pay your bill? You don’t want to put it in something– And then this is what I thought too much of, at the beginning of the recession. Folks would put their savings in something that would yield more, and they couldn’t get access to it. Or had lost so much value. They went from having a year’s worth of cash savings to two months’ worth, if that.
So, the key here is, it’s liquid. It’s not volatile, you know it’s not going anywhere, you know it’s not growing. But, at least, you know it’s there and you’ve access to it instantly. Not something that you’d have to wait to get your hands on.
Tom: Now, if you do have a bunch of money saved up, would you recommend– I understand liquidity is important, but then again, so is interest rates. I mean is there a decent ratio you could say, like, “Put 40 percent of your money in a savings account and stash the other 60 percent away in something that yields more money for you in the long run.”
Carmen: Well, the thing is, it’s all about timing. How many months of living expenses do you have saved up? If you have a year’s worth, you could consider, for example, laddering CDs. And there’s some CDs now that are even more attractive because they don’t penalize you if you pull the money out. And some CDs now… Because banks are realizing that we all want more return on our cash, that they are paying a little bit more interest the longer you stay in.
So, you could ladder something, even put the money that you need at the end of the year in, say, a six-month CD, and then some in a four-month CD. It’s a short amount of time, it’s a little bit of interest. But, at least should you need that money down the road, you know you’re OK for the first month, the second month and such and such. You want access to that money when you need it.
So, do the calculation as to when would you need that money if income disappeared tomorrow.
Tom: Now, in the book you say to consider the stock market your “frenemy.” Now, what do you mean by that?
Carmen: [laughs] Frenemy? Well, that’s a friend and an enemy as… Because what a friend and an enemy does, what a frenemy is, is someone you need to keep close to you, but not too close; and someone who can hurt you badly, but someone who also can give you a lot of help.
Tom: Is that “The Godfather?” Corleone said, “Keep your friends close…”
Carmen: Yeah, and your enemies even closer. So, it’s a frenemy. It’s really something, that because of its volatility, you need it to grow your money, but the same time you also have to always be wary. And wary intelligently, meaning not “fear,” but a very knowledgeable, “OK. What and where should my money be. Where should it not be?”
I have a good friend who’s a financial planner and she’s got a great saying, “You shouldn’t invest in anything that will make you a killing, or that will kill you.” So, that’s to deter you from putting too much money in one sector, or one stock, or one this. You have to be very careful, because it could really bite your hand off. But, at the same time, it’s something we need. We need that market to build our money for retirement.
There really is no better vehicle. But, again, diversification, and be a little wary.
Tom: Now, when making decisions, how strong should the financial considerations be, weighed against the personal considerations?
Carmen: I believe that’s up to you. That’s really, really up to you. You have to decide, because for some decisions, finance is more important for me, for other decisions, the personal costs are more important. And that’s something you have to decide.
There’ll be some folks that will always, always err on the side of math. And say, “I always want to save money. I don’t care if it bothers me, or if it bothers people around me, or my family, or whatever.” But, for the most part, many of us are a little more complicated than that, and we’d like to think, “You know what? I know it doesn’t make sense to pre-pay my mortgage financially if my money would better serve me in the stock market and a diversified portfolio. But, I’m going to do it because my mother always said, or because I saw something happen to my mother.”
Carmen: All these decisions are very personal. So, the key is to know what’s most important to you, and know the cost, so you make the decision with that knowledge.
Tom: All right. Well, Carmen, I’m going to wrap up on that. Now, I want to thank you once again for joining us today.
Carmen: Great! Thank you so much, Tom, I appreciate. Thanks for having me.
Tom: That was Carmen Wong Ulrich, personal finance expert, former host of CNBC’s “On the Money,” and author of the book, The Real Cost of Living: Making the Best Decisions for You, Your Life and Your Money. You can find The Real Cost of Living at most major online and offline book-sellers. You can also learn more about Carmen, by visiting CarmenWongUlrich.com.
This is Tom Dziubek and thanks for listening to the Consumerism Commentary Podcast.
Transcription by CastingWords