New Rules for Your Money

When Jane Bryant Quinn wrote the first edition of Making the Most of Your Money, her bestselling personal-finance tome, in 1991, Americans were getting rich off their skyrocketing stock portfolios and rising home prices. Low interest rates encouraged consumers to charge life's luxuries to credit cards, and people lived by the unwritten credo that the good financial times would continue indefinitely. In 2010 the national unemployment rate is hanging on at 10 percent and the housing market is still low. This sad state of financial affairs prompted Quinn to release Making the Most of Your Money Now, the third edition of her book. She recently spoke with NEWSWEEK's Nancy Cook about the way Americans should save and invest their money as the economy rebounds, and the ideal way to prepare for retirement. Excerpts:

Cook: How has the world of personal finance changed since you wrote the first edition of your book?
Quinn: In 1991 there were fewer products that people had to worry about. We had not seen such a raft of abuses: mortgage abuses and credit-card abuses. There hadn't been as much financial deregulation, so people were more protected by government regulations from high interest rates and deceptive products. Now there's much more of a need to watch out for yourself, and that's much harder to do. The fine print has gotten thicker and longer, while the regulators have looked away.

As the country emerges from the recession, how can people take control of their money?
The first thing people have to do is stop looking back. The losses from 401(k)s can be devastating, particularly in stocks, and the collapse of the big financial banks devastated people's portfolios. At this point, people have to ask, "What have I got, and how am I moving forward?" Look at the income that you have. Look at the savings rate, and tell yourself that to get rid of the debt, you have to save more. I'm a huge advocate of automatic savings. If you have 5 percent of your salary taken out of your paycheck automatically, you'll never see it, and you won't spend it. It's the only magic in personal finance. When you retire and your paycheck stops, you'll have to live on what you've got, so you've got save more, and you have to spend less. You've got to hold your nose and take the plunge, because when retirement comes, that's all you have. A lot of people in their 60s are carrying consumer debt and mortgage debt into retirement. If they lose their jobs early, they're going to be spending their savings much more rapidly. Younger people should take that as an example. Carrying consumer debt is just stupid. Bank [lenders] are ever-raising the interest rates, and people are paying 20 to 25 percent interest. That's an extraordinary amount of money that you're feeding to the squirrels.

Do you still advise people to sock money away for retirement even though the stock market has been so volatile over the past year?
Everyone is afraid of the stock market based on what happened, but a portfolio of well-diversified mutual funds will do just fine over a long-term horizon. You just need to get one and keep it. I'm dead set against buying individual stocks. You can never know what's going on with a company. Look at AIG. In January 2000 Microsoft was a wonderful company, but it wasn't a wonderful stock. I'm also strongly in favor of the automatic IRA; it's something that many companies don't provide [for] people, but the company doesn't have to contribute anything. They just deduct the money automatically and deal with it as the same payroll deduction as Social Security. This helps more people save for retirement.

President Obama recently proposed tax increases for families that earn more than $250,000. How will that affect people's finances?
It'll mean that people will pay higher taxes, but that's something we've always been expecting. The first President Bush raised taxes. So did President Clinton. With tax increases and with spending-reduction agreements, both presidents contributed to the country winding up with a surplus. They're taxing the right people. They're going after the people with the money.

Are you optimistic about the future of people's finances? You seem upbeat.
If people can realize that there are simple products in the marketplace and simple ways of investing target-date funds—if they can shed the whole myth of Wall Street as something that is complicated—I think they can see the simple way through, and they will do really well. A lot of people are catching on that you can do it yourself, if you chose simple products.