"Zero Balance"

Labor Day Special Program
September 4, 2000

WOMAN ON THE STREET: Most of the time, I live sort of paycheck by paycheck, which is terrible.

WOMAN ON THE STREET: I'm spending it a lot faster I think than I'm making it.

GERSH: We've been told again and again to save for ourselves. There's no golden watch waiting for us, anymore.

WOMAN ON THE STREET: And once you start spending, it's really hard to save.

GERSH: It is the best economy in a generation.

WOMAN ON THE STREET: I'm sure we'll be better off in the future if we would save more money.

GERSH: So why have so many of us, saved so little.

Good evening, I'm Darren Gersh. We all know we should spend less and save more. Same thing with eating and exercise. But except for those very disciplined souls, most of us seem to talk more about doing the right thing, than actually do it. Tonight in this Special Edition of NIGHTLY BUSINESS REPORT, we hope to help you, if not save more, then at least understand how to think about saving. We'll talk with three of the nation's most respected personal finance experts about their ideas to avoid ending every month with a zero balance. As we'll soon see, it all begins with the right frame of mind. Savings, it turns out, is a habit that many of us have simply lost.

GARY FOREMAN, "THE DOLLAR STRETCHER": Dear Gary, do you know of a method to teach a 60-year-old man how to learn how to save? …

GERSH: Gary Foreman is the "Dear Abby" of savings advice. Foreman runs a web site, called, the "DollarStretcher." The e-mails pour in.

FOREMAN: Hi Gary. I have trouble budgeting my money. The sad thing is, I study international business and accounting in school.

GERSH: Foreman says many people he hears from don't even know where to begin.

FOREMAN: If you take people in their 20's today, so many of them - they can't go to their parents for the answers on how to stretch a dollar, because their parents are my age and really don't know how to do it. We've been raised with credit cards, and for us, really, the question has always been, not so much, "how do I stretch what I have?" but, "who will loan me money so I can go buy what I want?"

GERSH: Too many of us, Foreman says, have forgotten how to save.

FOREMAN: It's like we've lost mom's recipe book. So we don't know how to make meatloaf anymore.

GERSH: The statistics bear out Foreman's e-mail. According to the Federal Reserve, 44 percent of Americans say they are not saving at all. Subtract out consumer debt, and the typical American family has net financial assets of less than $1,000.

Even in the midst of the best economy in a generation, we are, to a surprising degree, a nation of zero balances. Treasury secretary, Lawrence Summers says the savings issue is greatest for middle-income Americans. He worries that half of the nation's families don't have pensions; don't have access to a 401(k) plan; and have few assets, other than their homes.

LAWRENCE SUMMERS, TREASURE SECRETARY: So they're in a very difficult position if there's a rainy day. They're in a very difficult position as they face retirement. They're very much left behind in the process of wealth accumulation, in our country, and I think that that needs to be something that we all focus on.

GERSH: To economists, the fact that so many save so little is something of a puzzle. Economic theory says people rationally calculate their needs over a lifetime, and plan for retirement accordingly. It's called, the "life cycle theory of savings," and that theory has helped define the nation's savings' policies. But economist, Richard Thaler has been fighting that model over the course of his career.

RICHARD THALER, UNIV. OF CHICAGO BUSINESS SCHOOL: The standard economic model of savings is as bad as the standard economic model of dieting. Economic model of dieting would say, people eat just the right amount. And an economic model would say, we don't need companies like Weight Watchers, because people are already eating the right amount. What do they Weight Watchers for?

GERSH: The basic life cycle idea is right: people do save money for retirement. But in practice, it's not that simple. For example, half of all families on the brink of retirement have financial assets of less than $45,600.

JAMES POTERBA, ECONOMIC PROFESSOR, MIT: Discovering that close to half the population is not doing much private saving, not doing much personal saving to get ready for retirement, I think is just a – it's a kind of gross inconsistency, with a modeling description that says people are building up assets for retirement as the primary mode.

GERSH: So economists are reaching for new explanations, using psychology; and they're focusing on issues like, self-control.

THALER: No model of saving that leaves out self-control can hope to capture what's going on.

GERSH: Many economists now realize things that weren't supposed to matter under the classical theory - simplicity, automatic savings, and education - matter a great deal in crafting successful savings' policies.

SUMMERS: I think what all the research on savings now really shows, is that: savings is sold, not bought; that it is a behavior that is learned, like any other behavior.

GERSH: So if savings is something you learn, and not something we are all born knowing, how do you pick up the habit? Here to tell us that is syndicated columnist and author of "Personal Finance for Dummies", Eric Tyson.

Eric, Treasury secretary, Larry Summers says "savings is sold, not bought," but it looks like many people aren't buying. Why do you think that is?

ERIC TYSON, AUTHOR, "PERSONAL FINANCE FOR DUMMIES": Well, that is absolutely the case: many people aren't buying. The bulk of the savings that is done in this country is done by a small minority of people. Many Americans still live on a month-to-month basis, for the simple reason that we're great consumers. We're great at spending all the money we earn. Most people have not learned good financial habits. They didn't learn it growing up. They didn't learn it in our school systems. High school, college, even graduate school. So, it's something that most people simply need to learn.

GERSH: Now you say in your book that the place that people should start is by creating their own definition of "wealth." What do you mean by that?

TYSON: Well I think, you know, balance is really important here. You need to think through what it is that you're trying to accomplish, because the pursuit of money and simply saving a lot of money isn't necessarily going to make you happy or satisfy your financial and personal goals. Some people actually save too much money. So what I recommend to people is that they begin by thinking about: for what purposes would they like to save money? Maybe someday you want to buy a home; perhaps you want to send your kids to college; maybe someday you want to start a small business. And think in those terms, to motivate you to think about saving money.

GERSH: I'm sure there are some people who save too much, but I think probably most people who are starting out thinking about savings, think, this is really painful, this is going to hurt.

TYSON: Yes. Yes.

GERSH: How do you get people to do something that they think is going to be painful?

TYSON: Well, you know, thinking about their goals is an important thing to get the motivation. People also need to understand where they're currently spending their money. I find that when people sit down with their checkbook register, their credit card statement, last year's tax return, and they actually take a hard look at where they're spending their money, they begin to get some ideas about where the waste and the fat is in their personal budget, and they start to get a little bit excited about the potential for actually saving some money.

GERSH: Well, Eric, you know, we get a lot of messages from society, from the media, that say, "spend money, you'll be happy." How do you tune out those messages?

TYSON: Well, you really have to take a hard look at how you're spending your time; who you're spending time with. Your peer group can cause you to spend money. Things that you read; the advertising that you are exposing yourself to on a daily basis. And people need to rethink how you know they're exposed to all the different messages in our society, which reinforce spending money, and not saving it.

GERSH: Now you also focus in your book - which I thought was an interesting point. You tell people: don't think too much about money. That's not what I expected to read in your book.

TYSON: Yes.

GERSH: Why do you make a point of that?

TYSON: Well, you know, money is a means to an end, and I think it's very important for people to strike a balance between saving an appropriate amount of money, but also paying very high attention to the other more important priorities that they surely have in their lives. Whether it's personal or family relationships or their own health. I think most people would agree that those are far higher priorities.

GERSH: All right. So, money isn't everything?

TYSON: That's right.

GERSH: All right. Eric Tyson, author of "Personal Finance for Dummies." Thank you.

TYSON: Thank you.

GERSH: In many ways, it is a quiet crisis. Half of all Americans don't have access to a pension plan at work. And of those that do, one-third don't even bother to sign up. So what can be done? Some employers are deciding to sign up their workers, whether they ask for it or not.

Five years ago, the company that invented the Big Gulp was worried. Almost half of its 28,000 employees were passing up a chance to join the company 401(k) plan. Margaret Fuller manages 7-Eleven's (SE) profit sharing plan.

MARGARET FULLER, PROFIT SHARING MANAGER, 7-ELEVEN: I was really concerned for our employees. I knew that they were leaving money on the table.

GERSH: Because 7-Eleven contributes 10 percent of its net profit to the 401(k) plan, the workers who didn't sign up were losing millions of dollars. Some, simply because they put off making a decision.

FULLER: And you get the packet a month ahead of time, and you go, "well, I'll wait till I'm eligible," and then it never gets done.

GERSH: Then Fuller heard that some companies had found a simple solution: they automatically enrolled new employees in the 401(k) plan. Unless the employee asked to be taken out, he or she was in.

FULLER: And I thought "automatic enrollment" was the perfect way to solve this problem.

GERSH: And it's working. Participation rates have jumped 29 percent in three years, and it's still growing. Sonya Del Cid was automatically enrolled in the plan just two weeks ago.

SONYA DEL CID, EMPLOYEE, 7-ELEVEN: I've got three kids, and I have to pay my rent, a car, and I spend all my money! But now, with this program, it's, it's good for me, because that way I can save money.

GERSH: Recently, Treasury secretary, Lawrence Summers announced the IRS was expanding automatic enrollment, making it possible for schools, universities and charities, as well as state and local governments, to automatically enroll their employees in retirement plans. Summers says he'll be pushing the idea with business leaders in coming months.

SUMMERS: I very much encourage employers to take advantage of this new option; and some of the wisest and most enlightened employers in the country are doing that, and over time, their workers are thanking them.

GERSH: Once employees are enrolled, economist, Richard Thaler says, companies can do even more. Employers could ask their workers to agree, in advance, to set aside a portion of their next raise. Thaler's research shows that should work, because it's easier to save money you don't already have.

THALER: You know, we all have more self-control next month than next year; and we think, next summer, we're going to exercise and diet. So, the same is true for saving.

GERSH: But convincing more employees to sign up and save more could cost, a lot more. For companies that match employee contributions, automatic enrollment could increase annual 401(k) costs, $15 billion. That's why pension expert, Sylvester Schieber expects automatic enrollment will appeal to companies that already have high participation rates.

SYLVESTER SCHIEBER, VP, WATSON WYATT WORLDWIDE: I think the less likely companies to do it are the ones where participation rates are 20 percent, because they're going from a relatively minimal cost in their current system to something that could be very substantial.

GERSH: But for companies like 7-Eleven, a high participation rate is a source of pride.

FULLER: I wanted all of our employees to take advantage of this. They helped create these profits, and I thought they should share in it.

GERSH: So, once you've signed up, how can you best benefit from a company 401(k) plan? Here to tell us is the editor-in-chief for the "Journal of Retirement Planning", Deena Katz. Deena, this thing came in the mail. It says, I'm signed up. Now what do I do?

DEENA KATZ, EDITOR-IN-CHIEF, JOURNAL OF RETIREMENT PLANNING: Now, you need to spend a little time learning about that 401(k). Most people spend more time buying a refrigerator than they do learning about their 401(k).

GERSH: Right.

KATZ: So you want to max out your contributions; particularly, if your employer is matching. Because that's like, free money.

GERSH: Right. So - now you said that most people, though, when they get into the 401(k), they're too conservative. I think when we hear about day traders and stuff like that, we think that people are too radical, they're throwing their money around. But you say, they are making a mistake; they're too conservative. What are they doing wrong? Why?

KATZ: Truthfully, this is probably their first investment. And so they tend to be a lot more conservative. They're a little afraid of the volatility. They tend to stay with fixed income; and, money markets. Often they just stay with the default. Whatever that is; and it's usually, money market.

GERSH: OK, so why would they want to take on stocks, and take on what seems like more risk?

KATZ: The truth is: you're going to be a long time in retirement; and, you're probably going to be a long time investing in that 401(k), prior to retirement. So, you want to stay in equities because that's really the only thing that is going to stay ahead of inflation.

GERSH: So you want to get that growth. But, when you get closer to retirement, should you start shifting back a little bit; maybe go away from stocks? How do you decide that, and when do you start doing it?

KATZ: People tend to do that too quickly, too soon. They get within a short period of time of their retirement, and they put everything in fixed income. The truth is, you probably should - about five years out - think about what you're going to need the first year, take that, and start putting it into some fixed income.

GERSH: So, gradually?

KATZ: Right.

GERSH: Now this is a question we get a lot, especially from people who are just starting out: "Should I go for the 401(k) plan with the company, or do this Roth IRA?" What do you recommend there?

KATZ: Truthfully, the Roth IRA is a great benefit. The 401(k), particularly with matching, is a good way to go. So I recommend that you fund that first; and then if you have any money left over, you put it into the Roth.

GERSH: Now, with the Roth, though, you can take the money out, tax-free, right? That sounds appealing because when the 401(k) money comes out of retirement, it's taxed, right? So, why isn't the Roth better though?

KATZ: Well, the truth is, the Roth gives you some flexibility. The 401(k) probably will allow you to invest for a lot more money because your employer's participating in your own program.

GERSH: OK, good point. Now, we also get the question a lot about: "Should I borrow from my 401(k)?" Because you can do that, and it sounds like a good deal - you're borrowing from yourself; you're your own bank; what better bank could you have? You don't like that idea - why?

KATZ: Well, the truth is, you give up your tax-free compounding, on whatever money you withdraw. And that's a problem. The second thing is, you're going to pay it back, and when you do, you're paying with after-tax dollars. So, you've taken the money out, pre-tax money - and you're paying back with after-tax money. Not a good choice.

GERSH: OK. Deena Katz, thank you very much.

All right. So you're with us so far: savings is important; it makes sense to make the most of your retirement count. But there is that nagging thought: I really can't do this. That's what JoAnn Young thought, too.

JOANN YOUNG: This is the family room. This is the back of the house.

GERSH: Welcome to JoAnn Young's house.

YOUNG: This is the dining area. And that's the living area.

GERSH: That's great.

YOUNG: Isn't that nice!

GERSH: JoAnn has a contract to buy this house, in hopes to move in this fall. A few years ago, if you'd told her she could save enough money to buy a home, or save any money at all, she wouldn't have believed you.

JOANN YOUNG: When I saw the big picture, it was scary. How am I going to do that? You know that - I can't do that. I barely have enough to put gas in the car.

GERSH: But then, JoAnn found out about a class to teach low-income families how to buy a home. As part of the program, JoAnn opened, what's called, an "individual development account," or IDA. For families meeting certain income requirements, the federal government matches every dollar they save with up to $3. JoAnn says the IDA worked for her. She put away $1500 in six months, sometimes by saving just $5 at a time.

YOUNG: And the first month that I saved - I couldn't believe that I did that; you know. And then it comes natural. Once you start, you can't stop.

GERSH: JoAnn now says, she is a confirmed saver; and if she can do it, anyone can.

YOUNG: Don't keep talking about it and don't try it. You have to take that chance and try it, because once you do it, it'll feel so comfortable it's a natural thing.

GERSH: The key, she says, is to set priorities.

YOUNG: And some days at work, you know, it's like, oh, and once I get here, it's just like a dream come true. Not only is it an investment, it's my home. And it's new! Like I said, I'll be the first one to flush the toilet.

GERSH: So anyone can save - but, where should you start? Here to tell us is fee-only certified financial planner, Tom Grzymala, with some ideas on managing money over the course of your life. Tom, let's start with the question we get a lot: "I'm 20-something; just out of college; maybe I'm about to get married – I want to know where to start saving?" What's you advice?

TOM GRZYMALA, CERTIFIED FINANCIAL PLANNER, ALEXANDRIA FINANCIAL ASSOC.: I think the first thing that has to be done, Darren, is for people to understand where their income is going right now. Many people do not know how their money is being spent. I've had clients come in who earn on the order of $125,000, and can only account for some $95,000. Well, where did the other $30,000 go? Well, you know, $5 here, $10 for a soda, and so forth and so on; it was all gone. So the first thing people should do is to determine where their money is being spent. These days, particularly for the computer-literate people - and we have many of those people - you can pick up a piece of software, perhaps from Quicken or some other manufacturer, and keep track of where your money is being spent, and how it's being spent.

GERSH: So once you do that - you know where the money is going or where it shouldn't be going - what do you do next?

GRZYMALA: Well, from there, you determine how much you can comfortably save, per month. No matter how small it is, you should determine how many dollars per month you can save. And let's just say, for example, you can save some $300 a month, out of the joint take-home pay that husband and wife bring in. Well, what we recommend for young people especially, is to take that $300 a month, and divide it into six equal parts. Let's say, the majority of the money, three-sixths, into that which is going to come first - probably buying a house. So three-sixths, or $150 a month, goes into: house savings. The next thing that's going to happen is children are going to come along, and then college was going to come along. And college can be very, very expensive. On the order of six figures these days, for four years of college. So two-sixths of that $300 should go into: college savings. And finally, the last thing that one should save for, as far as large expenses are concerned, is, of course, retirement - enjoying the great American dream. One-sixth, or $50, should go into: retirement savings.

GERSH: OK. Now let's say you're someone - like me - you're a soccer mom or dad, and you've got someone, your two kids, you've got a house, you can see college starring you in the face down the road. What do you do?

GRZYMALA: Well, first of all, you should ensure that you have between three and six months of monthly living expenses in a safe place for an emergency. That does not necessarily mean that you have to have cash in a savings bank to cover that emergency; particularly if you are eligible to be a member of a credit union, through an association, an alumni group, a trade union, or what have you. Many of these credit unions offer signature loans where you can take out a loan, based (ph) with your own signature. So that's the first place to look for for emergency savings. However, with that taken care of, you should be using the maximum amount you can save toward college, because that's the next thing that is going to be shinning in your eyes: the college expenses. You might have to back off a little bit on retirement savings. But –

GERSH: Can you (ph) split the difference between retirement and education?

GRZYMALA: Yes, splitting the difference, perhaps might be advisable. As college becomes right there on the doorstep, meanwhile, you've had a lot money you've been putting into the house. You've got equity in that house.

GERSH: Right.

GRZYMALA: Take out a home equity loan. Not only will it give you some money to help fund the college expenses; but as well, you've got a tax savings. It's one of the few remaining tax write-offs is a home equity loan.

GERSH: OK. Now let's say that you're a little closer, you're ready to quit, or, as you like to say, you're ready to enjoy; you're close to retirement, 55 to 65. What should you do?

GRZYMALA: Those years, Darren, are your prime earnings years, and you should be maxing out your savings. Put as much as you can into your savings environment. Starting with, of course, with the tax deferred vehicle, such as 401(k)s and IRAs.

GERSH: What about insurance?

GRZYMALA: We've seen many people - 55- 60-years-old - still spending quite a bit of money every year on insurance premiums. Hopefully, by the time you've reached this age, you've got a sizable portfolio, sizable to the extent where you can become self-insuring. You don't need to pay 4 or $5,000 a year for an insurance policy. This may be the case, and you should look into this.

GERSH: The way you describe it, it seems pretty straightforward. Why is it so overwhelming to people? I hear that all the time, that it seems so difficult. Why is it so overwhelming?

GRZYMALA: I think many people find it overwhelming because they'll get on the Internet and use one of the many, many retirement pieces of software out there, and they'll plug in a few numbers, and they'll find out, my goodness, here I am 25 years of age, and I'm going to need $2.3 million - gadzooks! I'll take care of that tomorrow; and they go away. They must remember that discipline savings, works! The power of compounding is - tremendous.

GERSH: And also, if you break that down into a smaller number, it's not so scary.

GRZYMALA: Absolutely.

GERSH: In the amount you have to save each year.

GRZYMALA: A little bit at a time happens. Today, is the tomorrow, you were talking about, yesterday.

GERSH: All right, Tom. Thank you very much.

For more details on savings and tips from Tom Grzymala and our other guests, you can go to our web site, nbr.com, or on America Online (AOL), keyword, "NBR.” We'll be back with our regular program tomorrow evening, but we leave you with this last thought: coffee. Yes, I need my daily cup, or cups. But if you cut out one of those $3 foamy creations each week, and invest that money, in 10 years, you will have saved $2,681.53. Now that is something to wake up to.

I'm Darren Gersh. Good night.

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