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From Wall $treet Week with FORTUNE:
Saving a financial life GEOFF COLVIN: Last year more than a million Americans filed for bankruptcy, a figure that has been rising fast. Every year it seems more and more of us are facing financial ruin. How to avoid it? Well, there's nobody better to ask than Ben Stein: Actor, Financial Expert, author of many books, including How to Ruin Your Financial Life. At our request, Ben recently visited a family that is in deep financial trouble. (Video segment begins) BEN STEIN: Hi, how are you? I'm Ben Stein. MIKE DEFENSOR: Hi Ben Stein. How are you? Michael Defensor. BEN: Nice to meet you Michael... STEIN VOICEOVER: Meet the Defensors. A nice couple who are doing pretty well for themselves. Graphic --
Michael's Salary: $74,000 They've even started a retirement plan. Graphic -- Retirement Plan: $33,000 Yet somehow, they've screwed up their financial lives. BEN: How much savings do you have by way of liquid savings, like if some emergency came up you could draw upon? MIKE: So not including the... BEN: Retirement? No. MIKE: Uh, zero. VOICEOVER: And when it comes to debt, it gets even worse. Graphic -- Their Debt: $340,000 BEN: Oh my gosh! (coughs) VOICEOVER: The Defensors are in financial ruin. VOICEOVER: How did bad things happen to such nice people? Let's start from the beginning. MIKE: We actually met at the first annual outdoor film festival in Baltimore's Little Italy. And the movie was Cinema Paradiso. JEN DEFENSOR: I was just really compelled to reach out and touch him. MIKE: It was like love at first sight, I don't know, some kind of thing that passed between us.
MIKE: It just happened.
MIKE: We just clicked.
VOICEOVER: Everyone brings baggage to a relationship. Michael brought forty grand in credit card debt. MIKE: It was scary for me. I just wanted to say, 'look this is what I'm bringing to this relationship financially.'
MIKE: And I told her I was going to go bankrup ...file for bankruptcy so that we could have a new start. VOICEOVER: With a clean slate, Michael asked for her hand and promised to change his ways forever. MIKE: All these credit card companies would send me zero percent for a year, nine point nine for a lifetime, cash back ...
MIKE: And I've gotta admit, I like to buy things. I like to find a good deal.
MIKE: I did hurt my Jennifer and I did hurt myself.
BEN: You promised her you weren't going to overspend. So when you promise some who you love very much that you're not going to do something and you keep doing it, it shows that it's a pretty serious compulsion. MIKE: When we postponed the wedding, I actually went to Debtors Anonymous. BEN: So how did you like Debtors Anonymous? MIKE: It was actually amazing. It was helpful. VOICEOVER: A little Debtors Anonymous, some couples' therapy and everything was back in order. Or was it? VOICEOVER: Now they had a new house that they had to fill up. Time to go shopping. BEN: That is a range oven like none I have ever seen before in my life. MIKE: That actually was $600. We had to put a ventilation system in, which actually doubled the price.
MIKE: In terms of gas, it doesn't use a lot of gas. BEN: But it uses a hell of a lot of money.
MIKE: Oh for example, this shirt that I'm wearing. This is an $80 shirt regularly. I got it for $10. VOICEOVER: And that my friends is the problem. Michael can't resist a bargain. BEN: Let me ask you a question. Do you drink a lot of coffee? MIKE: It retailed for $1,200. It was new.
BEN: Wait a minute, a line of credit for a mattress?
MIKE: $3,000. BEN: $3,000 for the mattress? (lies down on the bed) My God, it's fabulous. Actually it doesn't seem that different from most beds. BEN: You have the kitchen of a rich person even though you're not a rich person. By the way, my eye is suddenly caught by this incredible dishwasher too... MIKE: Well this is a titanium bike frame.
MIKE: It retailed for $3,500. BEN: Would you buy a yacht? If someone showed you a 90-foot yacht, if it was a super bargain would you buy that? How about a Citation jet? MIKE: (shakes head) No. BEN: Let me ask you a question. When you buy these things, like this incredible range or a coffee maker. Does it make you just feel fabulous? MIKE: Yeah, actually. BEN: It makes you feel great. MIKE: It does. BEN: It makes you feel wonderful? It's almost like being high? MIKE: It's almost like a drug. BEN: You don't get a high, buzz from buying things...
BEN: You get nauseous. You (Mike) get high from buying things and you (Jen) get nauseous from buying things. VOICEOVER: And here's something that's making Jen even more nauseous. BEN: Wow, wow, this is amazing. VOICEOVER:Unexpectedly, she's pregnant. BEN: Wow. VOICEOVER: Oh and did I mention? It's twins. BEN: Oh my goodness. This is frightening me.
VOICEOVER: The Defensors have three months until the babies come. With no financial solution in sight.
MIKE: Ben, thank you very much for coming. BEN: Thank you very, very much. You're a wonderful young couple.
BEN: I think we're going be able to help you a lot. And I must say you already have a lot of good things going for you. You have retirement plans, you have this beautiful house and mostly you're young and in love. That's the main thing. MIKE: Well, thanks.
BEN: Well now we've just seen how two very wonderful, young people can ruin their financial life. And in a moment we're going to see how they can save it. (Video segment ends) COLVIN: We have collected the Defensors' financial data. Ben Stein joins us from Washington, D.C., Phil DeMuth from Los Angeles. They have crunched the numbers. First off, Phil, you are not just an investment advisor. You're a psychologist also, and that seems to be a good thing in this case particularly. Now you've counseled a lot of families about money. Are the psychological issues typically as important as they are in this case? PHIL DeMUTH: They're extremely important. Where you have cases of reckless spending, you typically have somebody who has a sense of entitlement whereby they think anything that they want they somehow deserve to have. That's a very dangerous assumption to make. STEIN: To get in real financial trouble, you have to have a disconnect between cause and effect. If you really follow cause and effect, you're following arithmetic. The Defensor's, or Mr. Defensor has simply denied the reality of arithmetic. He is simply spending as if he had an unlimited amount of money to spend. He doesn't. He's got to get that through his head. I think Debtors Anonymous like many 12-step programs is incredibly powerful in getting across the basic idea of cause and effect. And Phil counsels people, and I think he would agree with me that psychological counseling takes months, years to take effect. Debtors Anonymous says something very simple. Stop spending, stop over spending, especially on unsecured debt, right now and we'll figure out the psychological whys and wherefores later. COLVIN: It's a disastrous dynamic potentially, and in fact Jen in this case explained a little about where her feelings come from. JEN DEFENSOR: Money issues have always been really a sensitive subject for me. And I really believe a lot of it has to do with watching my parents fight so badly about it growing up. I don't want to end up fighting and angry and possibly divorced and to have the kids see ...see that it was money that was the undoing. DeMUTH: Every person who's married knows that there is some kind of tractor beam from the death star that inexorably pulls us to, no matter what our intentions, recreate our own parents' marriage. And it may be that there is something like this happening here. Now I'm not recommending 50 years of psychoanalysis to try to get to the bottom of this, but I think that a course of short-term therapy where they could at least hammer out some kind of contract about how they're going to deal with finances that puts basically Jen in control and puts Michael on an allowance, but does it in a loving way, not in a scolding parent — naughty child way, would be a vital first step. COLVIN: Let's talk about solutions, and let's start with that house. Ultimately are they going to have to get rid of that house which they love? STEIN: They do not have to get rid of that house. They can make it without getting rid of that house. And in fact I would say they have to hold on to that house. That house is their anchor to windward. That house is going to go up and up and up in value. I've been in that house. It's a lovely house. With that house and with their other spending under control, they will eventually have so much equity in the house that they can move to another house and still have equity that they can take and put into their savings. They can then move up to another bigger house. COLVIN: Keep the house. Well, they're going to love to hear that, because they love this house. I mean this was a labor of love. They put huge effort of their own into renovating it. But they have enormous interest payments. They are paying $3,300 a month in interest on the mortgage and their non-mortgage debt. STEIN: I think they have a great future in that house is a big part of it, but they've got to get themselves under control and they've got to get themselves in a position where they realize that their love for each other and for protecting each other from worry and anxiety is greater than the value of a titanium bicycle frame. That shouldn't be that hard to do. COLVIN: Phil, do you think they need a very specific program, and have you got any suggestions for them? DeMUTH: Yes. Their personal computer at home has a software program called Quicken, and I think Microsoft makes one called Microsoft Money, is a potential godsend to people like this. They can put in all their finances. It can generate a budget for them. The question is do they have the will to do it? If they do, it will help a lot. COLVIN: Do they have any chance of accumulating any savings? They admitted they have zero savings, and this is a big problem. STEIN: Everyone has a chance of accumulating savings. They just have to want to do it. You know a very rich person I know when I once said to him, how did you do this? He said, it's not about how, it's about why, and if you really want to do it you can do it. Even if they just start saving $10 a day, they'll be saving roughly $300 a month. With proper allocation of that investment, it will grow. COLVIN: Well, and of course they do have this new mega-factor about to come into their lives, which is the twins, which were not expected, as Jen explained. JEN DEFENSOR: Immediately in my head I'm thinking, "Oh my god!" You know, the plan was to wait two years to have children. And the money was there at the time but all of a sudden bringing two kids into the world the money has to go somewhere else. STEIN: He's got to raise his human capital. He's got to learn more about his homeland security subject. He's got to learn more about honing his skills so that he can move to a higher GS grade and raise his income. She's got to learn more about some higher paid job than working in a nursing home, although she's apparently very good at it, and she's got to raise her income, too. But they are going to face a wealth of expenses with new children. I mean children are incredibly, unbelievably expensive. Just ask Phil and me. They're unbelievably expensive. COLVIN: Yes, they are. And Phil, the couple is about to lose one third of their income because Jen is not going to be working when those kids are born. DeMUTH: But it's actually much less than that, because remember that if Jen were to keep working, she'd be having to spend a fortune on childcare for twins. That ain't cheap. So after taxes, after these expenses, the difference only comes to maybe $5,000 a year that is added by her working versus her not working. COLVIN: Now let's think long term finally about this couple, because they're young and yet they do need to think about retirement, just like everybody else. And in fact they have done so. Jen has thought about her ideal retirement. JEN DEFENSOR: My ideal retirement is having enough money to live possibly in a retirement community like the one I work in. Um, it's having enough money to not have to work at all. I want enough money there so that if one of us got sick or something happened it wouldn't be an issue. DeMUTH: As of right now, they're not well situated for retirement. They have, the good thing is they have started a program, they have started their savings, but they need to save a lot more going forward, and they need to also reallocate the accounts that they do have, each of which is a perfect reflection of their personality. Her account is 100 percent in fixed income, in bonds, his account is 90 percent in stocks. I mean it's a perfect mirror of what's going on. They should be in a more sort of normal, long-term growth portfolio of about 60 percent stocks and 40 percent bonds. STEIN: I think if they're a young age, it could be even more stocks than bonds. DeMUTH: They could. STEIN: The iron rule is diversification. As Phil so aptly says, one wants to own a little piece of everything. And they should be changing that right away because if they can add a couple of percentage points of growth a year starting at their young age, it will make an enormous difference by the time they are in their sixties. You know, people think, "Oh, what's the difference between 3 percent and 6 percent? It's only 3 percent." No, it's not. It's 100 percent. I would up the equity portion to at least 70 percent. I think they should make sure that they have mostly stocks and very diversified and lots of foreign stocks. The real action it seems to me in the next 30 years is going to be in the developing markets in the countries like Korea, Turkey, Pakistan, the Soviet Union, South Africa, Brazil, and I think they should have plenty of exposure to those areas. DeMUTH: Ben has houses in all those countries, by the way. COLVIN: Ben, what would be a specific point-by-point program for the Defensor's right now? STEIN: One, go to Debtors Anonymous at least three times a week for Mr. Defensor. Two, make an actual budget of how much they have to spend every day and stick to it. Three, rationalize their retirement plan along the lines that Phil discussed and maybe a little bit of what I discussed too. Four, make a solemn commitment to each other that their goal is to make each other happy and to keep the marriage alive. They have got to be committed to keeping that marriage alive, to keeping the marriage alive and well, especially for the sake of the kids, is a lot more important than any mattress or any titanium bicycle frame or any custom made coffeemaker. Keep the marriage alive, save your financial lives, but make a commitment to it right now and do it with numbers. DeMUTH: Well, I agree with everything that Ben said. They should hammer out a contract, probably with the aid of a therapist, for how finances will be handled going forward. I think it will be by Jennifer, by the way. Then they should use Quicken on their computer to set up a budget and stick to that budget religiously. They should sell one of their cars and use that to establish a short-term emergency fund, preferably in Jen's control, and then pay off some of their short-term debt. They need to reallocate their retirement accounts to maximize the long-term growth there. And they both need to think about how they can maximize their human capital by expanding their marketability in the workplace. COLVIN: Phil DeMuth, Ben Stein, thank you very much. STEIN: We are honored. DeMUTH: Thank you very much.
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