Creating Financial Health Now with Teresa Ghilarducci

29 Minutes
Teresa Ghilarducci

Life looks different right now and concerns over money and future financial stability are high. But that doesn’t make you powerless.

This episode features economist and author Teresa Ghilarducci, who offers invaluable and actionable ways you can take control of your finances in the short-term and create long-term financial health. Learn sustainable daily habits to maximize your paycheck and savings, help you budget in crisis-mode, manage debt, and continue planning for retirement.

 


This Month’s Guest:

TERESA GHILARDUCCI is an expert on retirement, pensions and personal savings. She is the Bernard L. and Irene Schwartz chair in economic policy analysis at The New School for Social Research. She has a Ph.D. in economics from the University of California, Berkeley, and taught previously at the University of Notre Dame. Her book, When I’m Sixty-Four: The Plot Against Pensions and the Plan to Save Them, was recognized for containing the best economic idea of 2008 by The New York Times. Her book Labor’s Capital: The Politics and Economics of Private Pensions won The Association of American Publishers award for the best business book of 1992. She has written for and been featured in The New York Times, Money, Kiplinger’s, Businessweek, U.S. News & World Report, Parade and more. @tghilarducci

Our Host:

Celeste Headlee CELESTE HEADLEE is a communication and human nature expert, and an award-winning journalist. She is a professional speaker, and also the author of Do Nothing: How to Break Away from Overworking, Overdoing, and Underliving, Heard Mentality and We Need to Talk. In her twenty-year career in public radio, she has been the executive producer of On Second Thought at Georgia Public Radio, and anchored programs including Tell Me More, Talk of the Nation, All Things Considered, and Weekend Edition. She also served as cohost of the national morning news show The Takeaway from PRI and WNYC, and anchored presidential coverage in 2012 for PBS World Channel. Headlee’s TEDx talk sharing ten ways to have a better conversation has over twenty million total views to date. @celesteheadlee


NOW AVAILABLE:

Do Nothing. How to break away from overworking, overdoing, and and underliving

View Transcript

Teresa Ghilarducci:
My name is Teresa Ghilarducci and I’m a professor of economics at the New School for Social Research.

Celeste Headlee:
I think that the place we have to start is with fear. There are people right now who are unemployed. We saw unemployed numbers basically rise to a straight line on the charts. We now have people who are being warned not to look at their 401ks because the losses have been so great. What do you say to people who at this point are just maybe gripped by fear and anxiety about what will happen, not only during this crisis, but after it?

Teresa Ghilarducci:
I really want to go to people’s brains right now. Everyone’s going to be in different situations, but everybody’s going to have fear to some degree. What’s happening in your brain is adrenaline and other brain chemicals that come from your amygdala, from the base of your brainstem, and it’s sending out signals and the signals are saying, “Do something, do something, do something.” And I want you to talk to that amygdala and say, “This is time to do some things but not others.” So, we’re going to talk to the brainstem and we’re going to say, “The danger is real. Let’s write it down on paper.” But it’s very important not to have that brainstem tell you to do something with your money. It is not the time to sell your assets that are very low in value now, the market has suppressed the value.

Teresa Ghilarducci:
I don’t know if it’s permanent, it probably won’t be permanent. And after the 2008 recession, we saw asset values fall quite not like this, but really deeply. And the people who stayed in the market and people who actually even saved even more and bought more stocks did a lot better. I’ve done research on this, did a lot better than the people who sold. So, if we just look 12 years ago, you can learn from the winners and losers, and the losers sold at this point in the market. And many of them because they were panicked.

Celeste Headlee:
So, then is it better to just not look at your retirement account?

Teresa Ghilarducci:
Well, it depends on who you are. So, if you are a someone who understands that you’re afraid, but look anyway, I’m in favor of having more information. You’re going to look at your account and you’re going to see that you’ve lost 30, 40% of your value, and you’re going to think, oh, my whole dreams and plans have been suppressed at 30 and 40%, you wouldn’t be wrong. Temporarily, if you sold now, you would permanently put yourself on a path of lower consumption, a lower standard of living. But right now you’re going to look at your accounts and say, “Oh, they’re low. I better save more.” A lot of people’s response to a wealth loss is to say, “I got to stay on target.” And so they save a little bit more. We call those target savers, and I’m hoping I’m talking to a lot of target savers out there.

Teresa Ghilarducci:
So, looking at your account without your brain stem, but with a frontal cortex, with the front part of your brain, could be a very good thing to do. So, take you and your frontal cortex to your 401k. Take a look and say, “Hey, now maybe is a time that I re-balance, that I actually buy a little more stocks and get myself to a 60/40 or a 40/60 split, no matter what your target was, and put some of that stimulus check that you might be getting towards more savings.

Celeste Headlee:
So, there’s also this sense of being out of control, right? That there’s so much happening, especially financially, that we simply don’t have control over. There may be some who have had their hours or their pay reduced. There may be some who’ve actually lost their jobs. There could be small business owners like me, where my business is entirely event based, my income went from very high to zero, suddenly. How do we regain some measure of control?

Teresa Ghilarducci:
Yeah. Okay, so I’m going to talk to you because a minority of people lost their jobs, right? I mean, even at the worst, it’s going to only be one out of five. But I’m talking to you, who basically did. You’re a 1099, you’re kind of a gig worker. You’ve lost your income and you’re not alone, as you know, that should actually help, a feeling that you are not alone and it wasn’t your fault, gives you some freedom from shame, but it certainly doesn’t give you freedom from the fear. So, I’m going to talk to you right now. Right now, the Federal Government in both the Congress and the president and the Federal Reserve are doing more than they did in 12 years ago, in the financial crisis. We economists are stunned. You could push us over with a feather for the size of this fiscal stimulus that came out of Congress, just a couple of days ago.

Teresa Ghilarducci:
And the speed and boldness at which the Federal Reserve is acting, to provide you as a small business with a line of credit. So, you may be thinking, you might have to borrow, and the government is actually going to help you, Celeste, with sending you a check. So, what I wanted to say to you is that we aren’t sure how long this recession will happen, but it has the contours of a recession that will create a lot of pent up demand, unlike the last one. So, yes you are event based, but a lot of your clients are postponing their events, not canceling them. But right now you’ve lost income. So, maybe I can give you some tips about how to handle the $1,500 check, which is kind of puny given what you might have to spend and also how to handle your debt.

Teresa Ghilarducci:
So, let me just talk to you as a proxy to talk it to other people. You’ve lost your income. Let’s say you have some savings, you are going to spend that down, but you’re going to spend it down a lot more slowly because you’ve probably cut down on a lot of your expenses. And we have a lot of incidental walking around expenses. That cup of coffee, that overpriced cup of coffee, you’re now making at home. It’s now one 20th of the price. That’s such a small scale. Really, food at home is a lot cheaper than food out, so you’re saving money there. Our hair looks terrible, right?

Celeste Headlee:
That’s fair.

Teresa Ghilarducci:
Yep. Right. Got it. Everybody knows what I’m talking about. Everybody’s showing their roots on a FaceTime call. That’s great for us, we’re learning to actually spend less on what we call personal care products and indiscretionary spending. Now, let’s go to your core spending, your mortgage and the debt, and your credit card debt. Now, what I did to prepare for this call is to really help everybody handle their credit card debt. One of the first things that happened when I turned on my computer a couple of weeks ago was I got a pop-up from my credit card company saying that I could borrow more money. So, credit card companies are wanting to lend more money because they live or breathe on two things. First, your debt, and second, that you can pay it back and they’re now conflicted between the two. So, you can take advantage of that. I would call any credit card companies that people who have lost their jobs might owe money to and say, “Can you suspend me having to make a payment without extra interest for the next two months? And while you’re at it, lower my interest rate.”

Teresa Ghilarducci:
So, I’m going to repeat that. Try to get your credit card company to suspend you having to pay them for two months, without extra interest and have them permanently reduce your interest rate. That means the recession’s working for you and you’re making the bank take the hit on lost interest from you, and you’re making the bank taking a hint of reducing the interest rate permanently for you. So, since you’re at home with a phone, do that. Everybody should do that if you owe debt. So, that’s one tip.

Teresa Ghilarducci:
The other tip is to figure out what your finances are since you’re home alone and locked up, and see if your current way of living can be made more permanent, that you could really find out where those discretionary spending was and get control over it. I’m a big believer in looking at your money every month. I’m a big believer in not doing anything with your investments except once a year. So, look, record, this is the time to get a budget going, but try to restructure your debt so it’s cheaper. Beware, that’s my second tip. Beware of credit card companies and everybody else trying to sell you more debt. You don’t want to buy that.

Celeste Headlee:
What about mortgages? What can people do about mortgages that they perhaps can’t pay?

Teresa Ghilarducci:
Yeah, well, right now-

Celeste Headlee:
Sorry, oh wait, hold on. Okay.

Teresa Ghilarducci:
All right. Right now mortgage companies have gotten a lifeline from the Federal Reserve, so they know that a lot of people will be at the risk of default and they don’t want that to happen. So, if you have a mortgage company, do the same thing, call them up and ask them to let you suspend paying them for a couple of months, without extra interest. If they say, “Oh sure you can pay us in July, but interest is going to accrue on your debt.” Then just say, “No thank you. I’ll go ahead and pay.” Because right now the mortgage companies are going to accept delayed payment, but they’re just going to add more months to your term of your loan and get more interest out of you. So, when you call your mortgage company to delay, ask them also to not accrue more interest, and then you’re shifting some of that cost onto them and you don’t bear it.

Celeste Headlee:
So, for reductions in pay, I actually saw someone on Twitter saying, “Hey, don’t use up your cash. That’s the number one tip. Don’t let go of your cash. So, put everything on your credit cards.” It sounds like you’re saying do not get in deeper debt.

Teresa Ghilarducci:
Yeah. You can’t really believe everything you hear on Twitter and maybe you should be suspicious of professors. But I do have a degree and I also in my research, look at people, thousands and thousands of people, and I can follow them over their life course. I followed them after the recession. I can follow them from when they’re 20 all the way to when they die and retire. And I’m telling you, the people that avoid debt have much more stable lives. And if I were a psychologist and I hooked up what their serotonin levels were, there’s enough research to show that if you’re out of debt, then you are much more resilient to downturns. So, that Twitter advice-

Celeste Headlee:
I should mention here, serotonin is the happy hormone. It’s the neurotransmitter that lifts your mood and makes you feel better. Keep going.

Teresa Ghilarducci:
Thank you. Yeah, yeah, there’s … So, let me just finish that thought, that Twitter post is wrong. Don’t take on more debt because that’s transfers income from you to the banks. Now let’s talk about hormones and we’ll go back to what you talked about with fear. I’m not a brain surgeon, but behavioral economists have been spending lots of times on these hormones. And I’m also teach consumer spending and happiness, whether or not buying stuff makes you happy. And what we’ve learned is that there’s two hormones, let’s just make it really simple, that give you a boost. One is serotonin and one is dopamine. Well, there’s a third one that’s oxycodone, okay, or the hormone that’s produced by that.

Celeste Headlee:
Oxytocin.

Teresa Ghilarducci:
Yeah. Oxytocin. Yeah.

Celeste Headlee:
Don’t take oxycodone.

Teresa Ghilarducci:
Yeah. Yeah. The oxytocin. That comes about when you’re holding your baby or you’re having sex, it kind of numbs you out and blisses you out. That’s kind of the calming, narcotizing feeling. Dopamine is the feeling you have when you first fall in love with a handbag or a person. You want it and it drives you, and you’re focused, and you want that more than anything. Serotonin is satisfaction. So, we have, dopamine is desire, serotonin is satisfaction. People who are in a lot of debt tend to have a lot of dopamine. They’ll take that credit card, they’ll buy that dinner out with that love object, or they’ll buy that handbag hoping that that will provide satisfaction. But mainly what’s driving them is desire. Satisfaction comes about with having a long-term plan, having mastery every day and people with stable lives and no debt have a lot more satisfaction, but probably haven’t had big doses of dopamine. So, I don’t know if that’s what your listeners wanted to hear, but let’s really distinguish between happiness that comes from desire and happiness that comes from satisfaction.

Celeste Headlee:
I want to stay with this theme for just a moment because most people at this point are dopamine addicts. Dopamine is the addiction hormone. It’s the same one stimulated by slot machines, for example, and it’s possible that a person could be addicted to dopamine, in which case I wonder what you think about this particular time. Obviously understanding that this is difficult and for some people this is going to be a tragic, terrible time, but also is there a possibility this could be a way to break that dopamine addiction and create some new habits?

Teresa Ghilarducci:
I am really looking at the academic literature on just this point, but I’d like to ask your listeners if they’ve had a moment to say, “Hey, I haven’t been able to satisfy my fix. I went online, I went on eBay, I went on Amazon and they told me they couldn’t ship.” What did that feel like? And if they got over that moment, it’s really like an addict not getting their hit. Oh, I’m an alcoholic, I’m looking for bourbon, I’m out of bourbon. I can’t get it. Did you go over that hump and say, “Hey, I actually didn’t need that blouse or that thing that I was going to buy on eBay.” And if you have gone over that lump, pay attention, be mindful to that. And that is what people who break habits do.

Teresa Ghilarducci:
So, I am quite interested in the fact that this is my moment, my experimental moment when all of a sudden people had artificial suppression of demand. And I’m wondering if that’s going to be permanent. It might be permanent with flight travel, to take a weekend jaunt to Florida, people can’t do that, that costs thousands of dollars, and then other kinds of little consumer purchases. So, it’s a great question. I think the answer to your question is, yes, this could be a moment that people break their habits.

Celeste Headlee:
What other-

Teresa Ghilarducci:
It’s cold turkey, it’s cold turkey.

Celeste Headlee:
It sure is, especially if you’re addicted to your Starbucks run every morning, right? Or stopping by the store. Are there other habits, do you think, new habits that might be healthy for people to create during this?

Teresa Ghilarducci:
Well, one is, is plane travel, that we may be learning ways to connect with people. First with loved ones, because we’re a big country and we spread out, our children move away or we’ve moved away from our parents and our family. We may have learned ways to stay connected without getting on an airplane, so that that might help a lot. I’m really hoping that my boards will learn how to do Zoom and that we could cut our board meetings, maybe by a third or so. I know, I’m kind of looking at the stocks and the companies that are doing well, and these are little greener companies, Zoom, that we’re talking on, is doing really well, and that’s more green than Delta, who’s not doing well. So, I hope those habits change. But I think you went to the root of my interest, is whether or not this forced reduction in spending is going to add to this kind of mindfulness movement that we’ve seen, that bucks up against this kind of consumer spending, driven by dopamine in search for serotonin. And of course, it never works.

Teresa Ghilarducci:
The dopamine spending usually just creates more disappointment and that feeds more desire. So, plane travel, consumer purchases. We did see people hanging onto their cars after the last recession. There was a permanent decrease in car buying, and I think this might reinforce that, those consumer durables. I’m really curious about what this will happen to house buying, about whether or not people will permanently stop wanting to kind of expand their house footprint, in terms of expense and remodeling their kitchens. When you remodel perfectly good kitchens, perhaps that kind of pressure will stop. That certainly will slow down, but I won’t see any of those kinds of, what we call consumer durables, being spent this year and I suspect next year. So, I hope those are permanent.

Celeste Headlee:
How has this affected our view of the strength of the economy? I wonder if this crisis has revealed weaknesses, cracks in the system. There’s been plenty of been plenty of economists that have warned about some of these weaknesses, but I want to especially talk about the gig economy that we’re in, that we have ended up with so many people either whose wages are so low because average wages have not risen anywhere close to the way that executive pay has. So, we have these problem of fairly low growth in wages, but also this gig economy where people are not protected by, often times, unemployment, but also not by health care.

Teresa Ghilarducci:
Oh, yeah. I couldn’t agree with you more. What has been exposed is that more and more people working as independent contractors really makes the economy a lot weaker. Because, let’s take the example of someone who works in a nonunion airline, and a person who works for a unionized auto company. The auto company workers begged Ford and Chrysler and GM to shut down their plants three weeks ago, to protect the workers from COVID because they knew that they would get supplemental unemployment benefits, they would get unemployment insurance, their health care would still be paid by the employer with some assists from the Federal Government. And the Federal Government would help their companies and their relationship. So, they had all of the institutions set in place to weather a recession. They had social and private insurance. The worker who worked as a contractor for a nonunion airline, they were first to be fired and they had no connection with their employer.

Teresa Ghilarducci:
They didn’t get supplemental unemployment. They may have not been counted as a real employee to get unemployment insurance. They might’ve just been hired, so they weren’t eligible, and they don’t have healthcare coverage except for the government. So, one, we are finding that if we don’t have an employer or employer relationship, recessions are a lot worse. And two, we have found out, this is more permanent, that the government is a much more important partner of capitalism than we ever imagined. That capitalism as we know it would be flat on its face if it wasn’t for the Federal Reserve and Congress, and international governmental organizations coming to its rescue.

Teresa Ghilarducci:
So, we’re going to see this big shift from private activity to government activity and we’re going to see the capitalists embrace the government. So, I’ve seen a permanent shift in our attitudes towards government because Republicans now are sounding like Democrats. So, run the printing presses, sell the government debt, do whatever it takes to give people income. I’m seeing an amazing amount of bipartisanship, but lurking behind that is more attention needed to the structure of the workforce, where we cannot live on 30% of our workers being in the shadows on the margins, and not counted. We’re going to have to make those sectors much more formal.

Celeste Headlee:
Which ironically enough, is capitalists, which is an economic principle, are embracing more of the political principles of socialism is what we’re seeing right.

Teresa Ghilarducci:
Yeah, exactly. Well, it’s like authoritarian socialism in a way. Like 500 billion of that big stimulus is now in the discretion of the president and the treasury secretary. So, Trump and Mnuchin now have control over what kinds of subsidies they’re going to give to what companies, and that’s where the one party has probably won over the other. I’m not really a partisan here. I’m really an economist, but we don’t need socialism to restructure our workforce and to make them more permanent. We could just look to Germany. They have a system, I’m not going to mispronounce the German word for it, but it’s work sharing. So, they already have in the system telling them, first of all, it’s really hard to be an independent contractor. Almost everybody is [inaudible 00:24:55] a worker and is-

Celeste Headlee:
And heavily unionized.

Teresa Ghilarducci:
Yeah. Well, that’s not unrelated, right?

Celeste Headlee:
Right.

Teresa Ghilarducci:
Yeah, yeah. That they’ve been able to lobby for government policies to make sure that the people who work have a formal relationship with their employer. But what they have is a work sharing program, where if a company is going to lay off 10% of their employees, they just go to a fund and say, “Oh, instead of laying them off, because I don’t have any sales, I’m in a recession. I’m just going to draw from this fund to pay their wages.” So, now in Germany everybody is still an employee, but their wages are coming from this fund, partly funded by government, partly funded by past contributions.

Teresa Ghilarducci:
And I’m not disconnected from my pension plan or disconnected from my health insurance, or disconnected from my skill, and disconnected from my employer and we still have an ongoing relationship. We’re going to wait it out and then life resumes smoothly back to normal. So, we don’t even have to be socialists. We can just be a different kind of capitalism. And I’m looking forward to the next conversation being, how do we have these programs that are permanent? Because it’s not good to send out checks, that’s a panic kind of response and it’s not permanent, nobody can really count on it. It doesn’t make the recession … It doesn’t make the economy more stable in the future. [crosstalk 00:26:30].

Celeste Headlee:
Yeah. It doesn’t pay rent in New York.

Teresa Ghilarducci:
Yeah, it doesn’t pay any rent. It really is not enough. Some Democrats wanted $8,000 check, there’s some Republicans that wanted $1,000 check. Well, we don’t want an economy that depends upon Congress coming out in the middle of the night and having to pass of sending out checks for everybody. I was never in favor of universal basic income. I was in favor of creating better jobs and an ongoing employer/employee relationship where companies had an incentive to have profits and companies had an incentive to share the profits.

Celeste Headlee:
Can we bring this back down to the micro level for people who are listening, again, because these are all things that we all have to think about as a nation. And I think it’s good that your average person that doesn’t generally think about the way our economy is structured, or think too much about the power balance between employee and employer. I think it’s good that those topics are coming up and being discussed. On the other hand, the timeline belongs to the virus at this point.

Teresa Ghilarducci:
Yeah. Right, right.

Celeste Headlee:
And, yeah.

Teresa Ghilarducci:
Right. Let’s talk about a person being at home, who lost 50% of their household income and may lose the other 50% because their partner, their economic partner, their spouse, their partner will lose a job. It’s really important for you not to be financially predated on. That’s a real concern I have of elders, and I’m going to put credit card companies that are trying to sell you more debt in that category of predation. It’s not illegal, but it’s going to offer your brainstem, your fear, your fear amygdala, some short-term relief. Try not to go into debt. Use your cash. Be mindful of your dopamine driven consumer expenditure. At the same time think about your collective self. I think that thinking about how this will affect the whole economy gives content, sorry, to our life that is really consumed by the latest case numbers in our area.

Teresa Ghilarducci:
So, my tips right now is to, if you can quell your fear, look at your financial accounts, monitor your financial accounts. This is a time where credit card companies or your magazine subscription are going to want to automatically renew and automatically renew quickly. So, follow your accounts very closely. If you can, look at your 401k accounts, and make sure you know how much more you have to save to get on target. Know that your asset values will probably come back in a year and a half, be patient. The other tips are to try to reduce, it’s going to be hard to increase your income, to get a second job or any of that, but try to reduce your spending on a permanent basis.

Celeste Headlee:
Should one keep one’s cash to the extent of not paying a bill.

Teresa Ghilarducci:
Yeah. And then the other tip was what I said before, was to try to restructure your bill paying with your mortgage company and with your credit card company. With maybe even your landlord, without incurring more debt.

Celeste Headlee:
But if you can’t, do you go into arrears?

Teresa Ghilarducci:
You try not to spend your money. Oh, into arrears in your debt?

Celeste Headlee:
Yes.

Teresa Ghilarducci:
No, no, no, no. Do preserve your credit score. I get it. I see your question. No, try to preserve your credit score. You should be on the phone with very nice negotiations with all of your debtors, so that if you do go into arrears, it doesn’t affect your credit score. Make it all formal. Don’t just avoid or withdraw.

Celeste Headlee:
Last question for you. I mean, as a behavioral economist-

Teresa Ghilarducci:
Economist.

Celeste Headlee:
… do you have any tips for how to handle the fear? I mean, other than deep breathing, what does one do?

Teresa Ghilarducci:
No, no. You have to do something, but you have to do something for your medium-term and your longer self. So, you have to empathize with your future self, even if it’s for the next three months or when you’re retired. So, empathize with your future self, be an adult, and be a good manager. So, this is the time to create a good budget. If you don’t have it already on your Excel file or you don’t have Quicken, this is the time to set all that up. And then, also be a good manager of your wealth budget, which is to make sure you know your target wealth that you need when you do retire, and make sure that you’re acting to meet your goals. So, action is important, even if it’s motivated by fear, but make sure it’s adult action and it’s taking care of your medium and your future self, not your current, scared, child self.