Get debt free: "Drain your savings account, empty your checking account, and sell any stocks or bonds," Warren writes in All Your Worth. "Cash out the bar mitzvah money, crack open Mr. Piggy, and shake out the cushions from the couch…It's time to focus some laser-beam intensity on paying off your debt." What about credit cards? "Okay, we're not fanatics (although we're close). One credit card may be okay for emergencies."
Warren has followed her own advice—she has essentially no debt: no mortgage debt, no credit card debt. She is paying off a $15,000 student loan, but—get this—it has a zero percent interest rate. "Wouldn't everybody love to have that?" says Chris Farrell, the economics editor of American Public Media's Marketplace. When you're worth millions, he says, "That's more of a rounding error rather than a liability!" Other senators' financial disclosures list hundreds of thousands of dollars of credit card and mortgage debt.
Don't buy a sailboat if you work at Wendy's (or are a journalist): Fifty percent of your income should go to Must Haves, Warren says—that is, things like food and housing. Thirty percent should go to Wants. Examples from Warren's book include: light beer, dinner at Olive Garden, a hamster, a Madonna CD, and a pot of begonias. The remaining 20 percent should go to savings. If this formula means you have to sell your car, so be it, Warren argues.
Pay off your mortgage if you have one: Once you're out of debt, take 5 percent of your monthly savings and use it to pay extra on your mortgage. "You may think that paying a couple hundred dollars extra every month is like trying to bail out the ocean with a teaspoon. But you may surprised just how far that little extra can go."
HERE'S HOW TO INVEST
Visualize: "Take a moment to savor your dream. Picture the sunlight reflecting on the lake while your husband proudly holds up a string of trout. Imagine Katie, all grown up in her robe and cap, proudly accepting her diploma."
Create a retirement fund: Now, steer 10 percent of your monthly savings into an individual retirement account (IRA) or 401(k). "If you have a retirement account and you are putting money in it, then you have just made it into the upper half (financially speaking) of all adults in the US. Hot dog!"
According to Warren's financial disclosure forms, she has between $96,000 and $265,000 invested in various retirement funds through the Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF), a financial services organization that is also the leading retirement provider for people in academic fields. She also has between $15,000 and $50,000 of her retirement savings invested in a Vanguard mutual fund. Farrell approves of the amount Warren has tucked away for her golden years and the companies she has chosen to invest with, which he says are "low-fee and transparent." Warren "is going to have pretty good retirement income," he says.
This page in Warren's financial disclosure shows a few of her retirement funds:
Invest prudently in the stock market: Take the remaining 5 percent (or 10 if you've paid off your mortgage) of your monthly savings and invest it in the stock market."Picking an investment is not so different from picking a car. There are people who love nothing more than searching for an exotic car," Warren writes. "They dedicate their days and nights to studying muscle cars and antique cars, and maybe after all those hours, they drive something really cool. It is even possible that some of them make a little money when they happen upon something really special that they can buy for a good price. Then again, most of them lose their shirts at the repair shop." It's probably a better idea to "buy something safe and reliable with good gas mileage and enough room for the groceries."
Warren recommends investing in an indexed mutual fund, which buys stocks from hundreds or thousands of different companies, so that even though individual stocks fluctuate, over the long-run you're probably safe. "The index fund is essentially the Honda Civic of the investment world."
Warren has a total of between $1,517,000 and $6,180,000 invested in several accounts through TIAA-CREF. She has the largest share invested in an annuity, which is a payment to a life insurance company that then is distributed back in fixed payments to the buyer later in life. And she has money in various mutual funds and variable annuities, which work a lot like mutual funds. Sean O'Shaughnessey, a private investor and author of the book The Confident Investor, says the way Warren has invested her money is a little too conservative for him, but calls it a "prudent investment strategy." Farrell says Warren has a "low-worry" portfolio. "She has pretty much set it up so that she doesn't have to worry," he says. "I like it." Here's a list of Warren's biggest investments:
$1-$5 million in a traditional annuity account in which TIAA-CREF assumes the risk for the performance of the underlying stocks, and pays out a guaranteed amount per month later on.
$250,000-$500,000 in a variable annuity that invests mostly in common stocks of a diversified set of companies, such as Apple, Exxon, PepsiCo, and Wells Fargo. Variable annuities are annuities in which the investor, not the insurance company (in this case TIAA-CREF), takes on most of the risk for the performance of the underlying stocks. That is, their value rises and falls with the market, like a mutual fund.
$100,000-$250,000 in a variable annuity that invests in stocks of foreign and domestic companies, with a focus on companies that are "shareholder-oriented." Some examples: Nestle, BNP Paribas, Royal Dutch Shell, Johnson & Johnson, and Toyota.
Here is the page of Warren's financial disclosure forms showing her investments in annuities and mutual funds:
Not everyone can expect their portfolio to look like Warren's. The senator has been able to pack away a significant amount of money because she has made a pretty penny teaching and writing books. At Harvard, her annual salary was $430,000; in 2012, she took in $9,000 from the school as an emeritus professor. Last year, Warren got about $64,000 in royalties and salary from Aspen Publishers, which has published many of her academic books. In 2011, she took in around $700,000 total from Harvard, book royalties and consulting fees. As a senator, she earns $174,000 a year.
Oh, and avoid investing in these:
Collectibles such as "Franklin Mint medals, autographed footballs, [or] rare stamps."
AND IF YOU GET NERVOUS ABOUT ANY OF THIS
Here are some ways to avoid "negative-thinking traps":
It's a metaphor for the lopsided economic recovery: Data out from the Census bureau Tuesday shows that new single-family homes are getting bigger, while new rental apartments are shrinking.
Construction of new homes plummeted as the 2007 financial crisis hit. Residential housing construction is barely coming back to life, but as the New York Times' Economix blog reports in a post titled "The Return of the McMansions," the new homes being built are ballooning in size. Think the 90,000 square foot manse timeshare billionaire David Seagal and his wife Jackie designed pre-crisis, with 30 bathrooms, ten kitchens, and an ice rink. Ok, they're not all that big. The average size of new single-family homes climbed to 2,306 square feet last year, the largest average home size since the government started keeping track in 1973. The Times has this graph:
The average number of bedrooms and bathrooms per home is also at record levels. Last year, 41 percent of new homes had at least four bedrooms, and 30 percent had at least three bathrooms.
When it comes to new rental units, the opposite is true. The average square footage of new units in multi-family buildings decreased between 2011 and 2012. In 2011, 62 percent of new rental units were under 1,200 square feet, and 17 percent were 1,400 square feet or larger. In 2012, those numbers had changed to 64 percent under 1,200 square feet, and 16 percent above 1,400 square feet. (The percentage of apartments in the mid-range, remained steady.) See here:
The divergence in square footage aligns with the nature of the economic recovery. A new report released by the Federal Reserve earlier this week shows that most of the wealth recovered since the recession has gone to well-off white people. The Fed says that about 62 percent of the wealth Americans have regained since the economy bottomed out has been through the recovery of the stock market. And 80 percent of stock wealth is held by the rich—people with income in the top 10 percent.
On Monday night, Sen. Elizabeth Warren held a briefing on student debt with the progressive policy group MoveOn.org, taking calls from students, parents, and graduates struggling with student loan debt. Warren discussed the the current fight in Congress over student loan interest rates, and what kinds of fixes would work best for the 37 million Americans with student loan debt. And she called on Americans to take matters into their own hands.
Over the past decade, student loan debt has nearly quadrupled, and now stands close to $1 trillion. On July 1, rates for federal need-based student loans are set to double from 3.4 percent to 6.8 percent. The deadline has lawmakers scrambling for a fix. There are a bunch of proposals out there, including Warren's call for students to be allowed to pay the low, low rate that big banks pay the Federal Reserve for their short-term borrowing; a plan President Barack Obama laid out in his budget in April; and the GOP plan that recently passed the House, which Warren and Obama hate.
The GOP bill would allow interest rates on student loans to rise or fall from year to year with the government's cost of borrowing, ending the current system under which rates are fixed by law. Because market rates are low right now, the initial rate for the loans envisioned by the Republican bill would be about 4.4 percent, but the legislation would allow them to rise to as much as 8.5 percent. Warren says the plan would turn students into "a profit center": "Already the government is scheduled to make $51 billion in profits in loans it makes next year. That's 36 cents in profit for every dollar they lend out. And the House bill would make even more money off students," Warren said at the briefing.
She touted her own plan, the Bank on Students Loan Fairness Act, which would act as a one-year patch, cutting student loan rates to the same rock-bottom interest rate that banks pay to the Federal Reserve for short-term loans. "If a big bank wants to take out a loan from the Fed, it can get .75 interest rate. These are the same banks that cost millions of Americans their jobs and nearly broke the economy. But next year, a student would have to pay nine times as much on her debt," Warren said, referring to the scheduled jump in interest rates to 6.8 percent. "It isn't right. It isn't fair. And it isn't good economic policy."
The ultimate solution, Warren said, is not her one-year fix. It's Americans demanding a fair student loan system. "You can't do this by having a few people stand up in the US Senate and the House and say 'this is important,'" she said. "This is test of whether we can organize something at the grass roots and move it forward. It will take us... and a whole lot more people to show [Congress]... that it does matter and they have got to respond."
On Monday night, Sen. Elizabeth Warren will hold an "emergency briefing" on student debt with the progressive policy group MoveOn.org. The senator will take calls from students, parents, and graduates struggling with student loan debt to discuss "the student loan fight, [and] understand some potential solutions," MoveOn said in an email blast Monday.
Since 2004, student loan debt has tripled, and now stands close to $1 trillion. On July 1, rates for Stafford loans are set to double from 3.4 percent to 6.8 percent. The deadline has lawmakers scrambling for a fix. There are a bunch of proposals out there, including Warren's call for students to be allowed to pay the low, low rate that big banks pay the Federal Reserve for their short-term borrowing; a plan President Barack Obama laid out in his budget in April; and the GOP plan that just passed the House, which Warren and Obama hate.
The GOP bill would allow interest rates on student loans to rise or fall from year to year with the government's cost of borrowing, ending the current system under which rates are fixed by law. Because market rates are low right now, the initial rate for the loans envisioned by the Republican bill would be about 4.4 percent, but the legislation would allow them to rise to as much as 8.5 percent. Warren says the plan would turn students into "a profit center."
Under Obama's plan, the interest rate at which student loans are issued would vary depending on the economy, but once the student has borrowed the money, the interest rate would be fixed for the life of the loan, allowing students to plan for consistent payments. Obama's plan would also aid low-income borrowers by letting them cap their monthly loan payments to 10 percent of their income after graduation.
Warren's proposal, the Bank on Students Loan Fairness Act, would act as a one-year patch, cutting student loan rates to the same low .75 percent interest rate that banks pay to the Fed for short-term loans. After a year, a longer-term student loan solution would be drawn up. (Here is a round-up of all the plans, plus some nice charts.) Warren's bill has drawn praise from students and advocates around the country. MoveOn said in an email blast that more than 434,000 of their members have voiced support for the legislation.
But MoveOn wants more students, graduates, and parents to get involved in influencing the outcome of legislation that will determine how much money they spend on education debt over a lifetime. The Monday briefing is part of that effort. "We can win this fight and show that Congress needs to respond to an agenda that works for us," MoveOn said in a statement, "But only if we organize together in our communities, on college campuses, and everywhere our representatives can see us."
If you're one of the 37 million Americans with student loan debt, you're in for a real treat come July 1. That's when interest rates on federal student loans are set to rise to 6.8 percent—double the current rate of 3.4 percent. That deadline has lawmakers scrambling for a fix. There are a bunch of proposals out there, including Massachusetts Sen. Elizabeth Warren's call for students to be allowed to pay the low, low rate that big banks pay for short-term borrowing; a plan President Barack Obama laid out in his budget in April; and the GOP plan that just passed the House—a plan Obama hates.
Whatever lawmakers and the president ultimately decide matters a lot. Over the past 25 years, the cost of going to college has spiked 440 percent. Since 2004, student loan debt in this country has tripled, and now stands close to $1 trillion. Check it out:
Some 60 percent of students have to take out loans to finance their education, and they're borrowing more than ever before. In 2012, more than half of borrowers took out over $10,000 in loans. The next chart shows how the amounts students borrowed climbed between 2005 and 2012:
Although mortgage debt is still the largest category of debt in the United States, the amount of debt held by students recently surpassed both credit card and auto loan debt. And unlike car and credit card debt, which has stayed fairly flat, student loan debt is on a clear upward trajectory:
One more thing. Delinquency rates for student loans have risen over the past two years, while delinquency rates on other types of debt have fallen:
We took a look at politicians' proposals for remedying this gloomy state of affairs, both the long-term solutions and the short-term band-aids. Here's a round up:
LONG-TERM FIXES Obama's plan: Under the plan Obama laid out in his budget, the interest rate at which student loans are issued would vary depending on the economy. Rates would be pegged to the rate at which the government borrows money over the long term (currently at around 2 percent). The president's plan would add 0.93 percent to that rate for loans to financially needy undergrads, and 2.93 percent to undergrad loans that are not need-based. The Congressional Budget Office says that this would mean that in the next school year interest rates would be 3.43 percent and 5.43 percent, respectively.
One drawback of this plan is that there is no limit on how high initial interest rates can be set year to year. But once the student has borrowed the money, the interest rate would be fixed for the life of the loan. Experts say this is a good thing. "Students have a great fear of uncertainty around college," says Beth Akers, an education policy fellow at the Brookings Institution. "A fixed interest rate simplifies this question of going to college and not knowing what will be my payments in the future."
Obama's plan is also the only one out there that would aid low-income borrowers once they graduate by letting them cap their monthly loan payments to 10 percent of their income.
House Republicans' plan: Last week, Warren slammed the plan put forward by Reps. John Kline (R-Minn.) and Virginia Foxx (R-N.C.) that recently passed the House, saying it would turn students into a "profit center." Under the House GOP plan, student loan interest rates are also tied to the market rate, but the plan would add 2.5 percent to both need-based and non-need-based undergrad loans, rather than continuing the current reduced rate for needier students.
The plan would also allow interest rates to fluctuate over the life of the loan, up to a cap of 8.5 percent. That means you could take out a loan at a super-low rate, and end up paying a 8.5 percent a few years down the line. "That's a bit of a bait and switch that I'm not very comfortable with," says Michelle Cooper, president of Institute for Higher Education Policy (IHEP). Akers has calculated that a swing in interest rates—from 3.4 percent to 6.8 percent on a 10-year, $25,000 loan, for example—would cost students about $40 a month. That could be a week of groceries or a gas bill. Last week, Obama slammed the GOP measure, saying it would create more uncertainty for students, and vowed to veto the bill.
The GOP plan also includes no provision capping monthly payments according to income level, as Obama's does.
Senate Republicans' plan: Sens. Tom Coburn (R-Okla.) and Richard Burr (R-N.C.) have a proposal that adds 3 percent to the government's borrowing rate for both needy and non-needy undergrad borrowers, except that once the student takes out the loan, the interest rate remains fixed over the life of the loan, as under Obama's plan. In that sense, it's sort of a compromise between Obama's proposal and House Republicans' bill.
Senate Democrats' plan: Sens. Jack Reed (D-R.I.) and Dick Durbin's (D-Ill.) plan would peg student loan interest rates to the short-term government borrowing rate, as opposed to the long-term rate that the above plans use. (This week it's 0.045 percent.) The plan would then add a percentage determined by the Department of Education to cover administrative costs, and would include rate caps at 6.8 percent and 8.25 percent for need-based and non-need-based undergrad loans, respectively. The New America Foundation, a nonpartisan public policy shop, says the proposal would result in a significant drop in interest rates for students.
SHORT-TERM FIXES Courtney's plan: Rep. Joe Courtney's (D-Conn.) plan would keep need-based borrowing rates at the current 3.4 percent for two years so that Congress has time to come up with a better solution.
The Reed-Reid-Harkin plan: Sens. Jack Reed (D-R.I.), Harry Reid (D-Nev.), and Tom Harkin (D-Iowa) introduced a plan that would do the same thing.
Warren's plan: Warren's yearlong fix proposal would lower rates the most. It would cut need-based undergrad loan interest rates to the same low 0.75 percent interest rate that banks pay to the Federal Reserve for short-term loans. Rep. John Tierney (D-Mass.) introduced companion legislation in the House.
Here's a look at what a few of the above plans would do to interest rates on loans for needy undergrads over time:
So how will it all shake out? Akers says she thinks the final plan will be something of a compromise between Obama's plan and the House Republican proposal.
But the main piece of legislation governing higher education in the United States will expire next year, so there's good reason to think that lawmakers may opt for a short-term fix this year and wait until next year to come up with a permanent solution. "I hope a short-term fix is not the outcome we get," says Akers. "It would be good to get this done so we can get on with different fights." Any long-term fix will affect a lot of Americans, and a lot of money, and Congress hasn't made itself famous for getting things done. As IHEP's Cooper says, "I'm more concerned with doing this right than doing it quickly."