I recently had both the honor and pleasure of interviewing Liz Pulliam Weston, known to be the most read personal finance columnist on the internet. Ms Weston was also the financial adviser for the FNBO Pay Yourself First Challenge in which five challengers learned to get financially fit. (The Money Life Network’s own Phil from Prime Time Money was one of the contestants though he was beat out by Kristen).
First off, thank you so much for doing Free From Broke the honor of an interview!
What is the most common challenge a family faces these days with their personal finances?
That’s a tough one to answer, since family circumstances can be so different. But there’s a lot of fear and uncertainty across the economic spectrum. In the past few weeks, I’ve given speeches to college-age women, CEOs and retirees, and the running theme of all the questions has been “what the heck do I do now?”
I think the important thing to remember is that this is an economic cycle. We’ve had them before, we’ll have them again, but the people who will ride it out the best are the ones who don’t panic, who stay prepared and who look for the opportunities others are too scared to seize.
I’m still invested in stocks, for example, and will be adding to my portfolio over the summer, because I know the long-term potential for superior returns. If you’ve been waiting to buy a house, there may never be a better time as long as you can stay put for awhile. If you’ve been itching to start a business, everything you need is on sale, from leased space to truly talented employees who’ve been foolishly dumped by their short-sighted employers. We’ll see some amazing business founded in this period by those who have guts and an entrepreneurial bent.
I‘ve kidded with friends that a FICO score is more important than a social security number these days. How close to truth is this?
You’re pretty close. I really get frustrated when I hear people saying that credit scores aren’t important, or that if you handle your finances well your FICO will take care of itself. Neither is true. The credit scoring system was built for lenders, not consumers, and it doesn’t necessarily reward the “right” behavior from a personal finance point of view. One of the most responsible things you can do is pay cash for everything, and yet if you do that, it will take a toll on your credit scores. (You don’t have to carry debt to have a good score, but you do have to have and use credit.)
Meanwhile, credit scores have gone from important to critical. Credit information affects insurance premiums, your employment prospects, whether you can rent a decent apartment. And now that the credit crunch has hit, lenders are fleeing risk. That means folks with mediocre or poor scores are being cut off from mortgages and other loans, while people with good scores are locking in phenomenally low interest rates. It’s really become a world of credit haves and credit have-nots.
I received a letter from one of my credit card companies and they are cutting my credit limit almost in half. I don’t have a balance with them. Will this affect my credit score? When I called the credit card company they made it sound as though it wouldn’t have an effect (my credit is really good).
If you ask the same question of the FICO score creators, they’ll say something helpful like “yes, no or maybe.” How a credit limit cut affects your score depends on all the other information in your file. It’s generally not a good thing, but if you have plenty of other available credit and good scores, it shouldn’t be a disaster.
You were the Financial Advisor of the FNBO Direct Pay Yourself First challenge. Did you learn anything new in working with the contestants? (And why didn’t Phil from Prime Time Money win?!? Just kidding).
I wish they all could have won (and in a touchy feely sense, they all did, because they saved money, right?). One of the things that really impressed me was how flexible they were. They looked at all areas of their spending and were willing to try new approaches. One of the married couples shared an apartment with a roommate, for example.
I don’t think I uncovered any new frugal-living tips, but I did really enjoy getting to know the challengers. And Kristen’s passion for helping the Dominican Republic has made me want to schedule a trip there (and see her clinic when she gets it built!).
How many month’s expenses should I have put away for an emergency? What should be my guideline? There’s been a lot of speculation on this lately.
Financial planners will tell you that this is an area that varies enormously by household. I like to emphasize financial flexibility, rather than dictate a set dollar amount. I think you should look at all your available resources, including cash in the bank, available credit and your “Plan B” options. Is there another earner in your household? How secure are his/her job prospects? Do you have friends or family who could help you out if your back was really up against the wall?
You also need to look at your overhead and how easily you could cut back if necessary. If you’ve got huge mortgage and car payments, for example, you have less flexibility than if you would if your “must have” expenses-shelter, food, utilities, insurance, child care, minimum loan payments-total 50% or less of your after tax income.
The people who are most vulnerable right now are the ones who spend every dime they make on their overhead and who really don’t have a Plan B. There’s just no wiggle room. If you’re a dual-income household and both work in the same troubled industry, or for the same firm, heaven forbid, you’re really on the edge unless you have a fat wad of cash in the bank.
Personally, I’m most comfortable when I have access to cash and credit that equals at least a year’s worth of must-have expenses. I think most people should try to shoot for at least three months’ expenses in cash alone, but unless you’ve already lost your job I wouldn’t stop saving for retirement or paying down credit card debt just to boost that emergency fund.
Thank you again for the interview!
No, thank you for your time and insightful answers!