How to Get Your Finances Ready for a Crisis and Tackle Debt Smarter

Summary

NerdWallet's Smart Money Podcast: Episode Summary Episode Title: How to Get Your Finances Ready for a Crisis and Tackle Debt Smarter
Release Date: March 3, 2025
Hosts: Sean Pyles, CFP® & Elizabeth Ayola
Guest: Mikayla, a 24-year-old listener from New Jersey

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1. Introduction: Navigating Financial Uncertainty

In this episode of NerdWallet's Smart Money Podcast, hosts Sean Pyles and Elizabeth Ayola address the growing concerns among listeners about financial instability and unforeseen crises. They aim to equip listeners with strategies to enhance their financial resilience and manage debts more effectively during uncertain times.

2. Preparing for Financial Crises

a. Personal Preparedness

The discussion kicks off with the importance of personal preparedness, emphasizing the necessity of having cash on hand. Elizabeth shares a personal anecdote:

Elizabeth Ayola [03:35]: "During Hurricane Beryl, I experienced a power outage and couldn't use my credit or debit cards. It was a nightmare finding places that accepted cash."

Sean concurs, highlighting his own steps towards preparedness:

Sean Pyles [04:19]: "I decided to get over my inertia and took out some cash from the ATM. I felt pretty proud of myself."

Key Takeaways:

• Cash Reserve: Aim to keep a few hundred dollars accessible for emergencies. Sean mentions, “I took out $500. That felt like a safe number for me and my partner and our pets” [04:19].
• Emergency Supplies: Stock up on essentials like food, water, and a battery-powered radio to stay informed during outages.

b. Building Community

Building a supportive community is another pillar of financial resilience. Sean and Elizabeth discuss the benefits of having a strong network:

Sean Pyles [07:56]: "Joining mutual aid groups or community organizations can provide essential support during crises."

Elizabeth shares her experience with community-building:

Elizabeth Ayola [07:53]: "Within six months in Houston, I received multiple invites to gatherings, which helped me build a solid support network."

Key Takeaways:

• Immediate Community: Friends and neighbors can offer practical support in emergencies.
• Broader Networks: Engaging with mutual aid groups and affinity communities can expand your support system.

c. Taking Control: Empowering Actions

The hosts emphasize proactive steps individuals can take to regain a sense of control amidst instability:

Sean Pyles [10:38]: "Using tools like the Five Calls app allows you to easily contact elected officials and advocate for issues that matter to you."

Elizabeth adds alternative ways to make an impact:

Elizabeth Ayola [11:21]: "If phone calls aren't your thing, consider donating to causes or local organizations that need support."

Key Takeaways:

• Advocacy: Engage with policymakers to influence changes that affect your financial well-being.
• Donations and Volunteering: Support local initiatives to strengthen community resilience.

3. Money Question Segment: Balancing Debt Payoff and Savings

In the Money Question segment, the hosts interview Mikayla, a 24-year-old listener from New Jersey, seeking advice on balancing debt repayment with saving for the future.

a. Mikayla’s Financial Background

Mikayla provides an overview of her current financial status:

Mikayla [15:03]: "I have a stable job as a paralegal, making $55k a year, and I'm living with a roommate to manage rent costs."

She employs a zero-based budgeting method:

Mikayla [15:21]: "I practice a zero-based budget, allocating every dollar to a specific purpose."

b. Current Debt

Mikayla outlines her debt obligations:

• Chase Credit Card: $1,000 remaining, with plans to eliminate it by the end of the first quarter.

  Mikayla [17:49]: "I have about $1,000 left on my Chase credit card, aiming for zero by the end of Q1."

• Car Note: $20,000 at a 9% interest rate.

  Mikayla [18:01]: "I have a $20k car note with a 9% interest rate."

• Personal Loan: $13,000 at an 11% APR.

  Mikayla [19:03]: "My personal loan balance is $13k with an 11% APR."

c. Savings and Retirement Accounts

Mikayla has initiated savings and retirement planning:

• Emergency Fund: Currently funds one month’s expenses.

  Mikayla [20:14]: "My emergency fund is funded for one month."

• Retirement Accounts:

  • Simple IRA: ~$3k
  • 401(k): ~$5-6k
  • Roth IRA: ~$200

  Mikayla [20:35]: "I have close to $10k in retirement accounts."

d. Budgeting Methods

While committed to a zero-based budget, Mikayla feels constrained:

Mikayla [28:53]: "I feel very limited because everything is allocated. If something unexpected happens, I deprive myself of it."

Elizabeth suggests alternative budgeting strategies:

Elizabeth Ayola [21:21]: "The 50, 30, 20 budget allocates 50% to needs, 30% to wants, and 20% to debt and savings."

e. Investing Advice

Sean provides insights on optimizing retirement savings:

Sean Pyles [23:55]: "Triple check your retirement accounts to ensure you're invested, not just saving."

He highlights the benefits of starting early:

Sean Pyles [26:01]: "At 24, contributing $500 monthly at a 6% return could grow to over $1.6 million by age 67."

Elizabeth reinforces the importance of Roth accounts for tax diversification:

Elizabeth Ayola [27:42]: "Roth accounts are beneficial early in your career due to lower current tax rates."

f. Future Steps and Mindset

The conversation shifts towards balancing debt repayment with savings and investing:

Sean Pyles [31:00]: "You might consider splitting the $1,000 freed from debt repayment into savings and investments."

Mikayla gains clarity on her financial strategy:

Mikayla [32:35]: "I feel more confident and secure in my financial decisions and know there's room for growth."

4. Conclusion: Building a Strong Financial Foundation

The episode wraps up with encouragement for listeners to take proactive steps in managing their finances. The hosts reiterate the importance of balancing debt repayment with saving and investing, and they invite listeners to reach out with their own financial questions.

Sean Pyles [33:20]: "Remember, listener, we are here to answer your money questions. Turn to the Nerds and call or text us."

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Notable Quotes with Timestamps

• Elizabeth Ayola [03:35]: "During Hurricane Beryl, I experienced a power outage and couldn't use my credit or debit cards. It was a nightmare finding places that accepted cash."

• Sean Pyles [04:19]: "I decided to get over my inertia and took out some cash from the ATM. I felt pretty proud of myself."

• Sean Pyles [10:38]: "Using tools like the Five Calls app allows you to easily contact elected officials and advocate for issues that matter to you."

• Elizabeth Ayola [07:53]: "Within six months in Houston, I received multiple invites to gatherings, which helped me build a solid support network."

• Sean Pyles [26:01]: "At 24, contributing $500 monthly at a 6% return could grow to over $1.6 million by age 67."

• Elizabeth Ayola [21:21]: "The 50, 30, 20 budget allocates 50% to needs, 30% to wants, and 20% to debt and savings."

---

Key Takeaways

1. Emergency Preparedness: Maintain a cash reserve and essential supplies to navigate unexpected crises.
2. Community Building: Foster strong relationships and engage with mutual aid groups for support during tough times.
3. Proactive Financial Actions: Utilize tools and advocate for your financial interests to regain control.
4. Debt Management: Employ strategies like the debt snowball or avalanche method to effectively eliminate debt.
5. Balanced Budgeting: Explore different budgeting techniques to find one that aligns with your financial goals and lifestyle.
6. Early Investing: Take advantage of compound interest by starting retirement savings early, and diversify with Roth accounts.

By implementing these strategies, listeners can enhance their financial resilience, optimize debt repayment, and build a secure foundation for future financial prosperity.

Transcript

[Sponsor]

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[Elizabeth Ayola]

Smartmoney hey Sean, have things felt a little, shall we say, shaky as of late?

[Sean Pyles]

Yes, and I live in an earthquake zone, so I'm making sure my go bag is ready in case I got to get out of town.

[Elizabeth Ayola]

Well, this episode we're going to help our listeners feel more prepared for what may feel like an unprecedented amount of shake shakiness.

[Sean Pyles]

Welcome to NerdWallet's Smart Money podcast, where you send us your money questions and we answer them with the help of our genius nerds. I'm Sean Pyles.

[Elizabeth Ayola]

And I'm Elizabeth Ayola. On this episode, we talk with a listener who's wondering how to balance paying off their debt while building up their savings.

[Sean Pyles]

But first, we're going to talk about a few ways that you can prepare for uncertain, unprecedented, possibly unstable times. Whatever unword you want to use, it can feel like we're facing it right now. And we've been hearing from listeners with concerns about how they can prepare for any unforeseen unpleasantness.

[Elizabeth Ayola]

I see what you did there, Sean. You get a gold star for the wordplay.

[Sean Pyles]

Thank you. In addition to being a money nerd, I'm also a word nerd. But this is a really important topic to address right now. There are myriad events happening simultaneously that might lead some folks to feeling like they're Vulnerable, either personally or financially, or both. So we're going to talk about a range of ways that you can shore up your own resilience and take action when you might feel powerless.

[Elizabeth Ayola]

All right, Sean, so tell us, where do you think people should start?

[Sean Pyles]

There are three main areas that I think people can look into. I mean, there are more than three, certainly, but we're going to talk about three in this segment. One is their own personal preparedness. This includes improving your financial resilience and taking other steps to weather a literal or metaphorical storm. Next is building out your community. And finally, focus on what you can control and the actions that you can take. Today.

[Elizabeth Ayola]

I like these three tips, and I think they're good pillars for people to use, myself included. Now, let's break it down and start with personal preparedness, which can come in a lot of different forms. Financially, one area to focus on is cash on hand. So if you are unable to use your credit or your debit card, say, because networks are down or the power is out, how would you pay for things? Now, this tip in particular reminds me of my first week in Houston when Hurricane Beryl hit and we experienced a power outage. It was horrible. So I drove around for hours looking for cooked food and didn't have any cash on me. Honestly, it was a nightmare. And the few restaurants that were open only took cash. So it reminded me to keep cash beyond what my son has in his piggy bank and dollars in the house.

[Sean Pyles]

That is smart. And wow, I'm sorry you went through that. That sounds pretty scary. I've been thinking about this a lot recently, too, and I've heard advice that it's a good idea to keep maybe a few hundred dollars in cash in the house in case of an emergency. But this was always one of those tasks where I thought, oh, I'll just do it some other time. And I never got around to it, in part because I rarely use cash or have it on me. But recently I decided to get over my inertia and I went to the ATM and took out some cash. I felt pretty proud of myself.

[Elizabeth Ayola]

I'd love that for you, Sean. So now tell us, is there a guideline for how much cash people should have just in case?

[Sean Pyles]

You know, it really varies in part based on how much cash you can comfortably pull out and not need to use for the foreseeable future? Personally, think about how much cash or how much money you might need to get through a few days of an emergency until payment systems are hopefully back online, you might need a hotel room or to fill up your gas tank or get a few meals out. I took out $500. That felt like a safe number for me and my partner and our pets. Other people might want more than that, especially if they have kids. And for some, pulling out that much cash might not be possible financially. But having some amount of cash is better than having none at all, as you experience, Elizabeth.

[Elizabeth Ayola]

Exactly. And like you said, that number probably looks different for everyone. My son eats a lot of snacks and just eats a lot generally, so I might need more than 500. Another thought, instead of pulling out all of this money at once, you can take a more gradual approach to building up your cash reserve. So maybe each week you pull out $20 and put it in a safe place. And I also will put. My mom has experienced taking out cash and then forgetting where she put it. So maybe also have a clue of where you're putting the cash. People can think of this as basically like a physical emergency fund that you're keeping in a secure location in your house, possibly even in a go bag like you have, Sean, that you have filled with stuff that you might need in time of a crisis. But beyond cash, there are other things that folks should have to prepare for some unforeseen emergency too, right?

[Sean Pyles]

Yeah, of course. And we've talked before about the importance of keeping some extra cans of food and maybe some water bottles around. I like to have enough food and water for at least a week, even if I'm just left eating cans of beans and rice for every meal. But something that folks might want to pick up is a battery powered radio. This can help you stay up to date on news or honestly just listen to some music to keep yourself entertained if the power goes out. I have a pretty small radio that has a solar panel and a flashlight on it. And let me tell you, it is super handy.

[Elizabeth Ayola]

It sounds really fancy too, Sean.

[Sean Pyles]

It is honestly not. It was like 20 bucks on the Internet, but it has all sorts of features and gizmos on it. So just look around and get one online.

[Elizabeth Ayola]

All right. So having lived in Nigeria where we didn't have constant electricity, power banks are something I tend to keep in the house to charge items, so that's something people can consider as well. Sean, you also mentioned building community, which is very relevant to my life right now and I think as a whole. So I think this is something we hear about a lot. But what does it actually mean to do this? And how can community help people get through a difficult time?

[Sean Pyles]

The idea of building community can Sound kind of corny or like a cliche at this point, but it is really important. Even beyond preparing for an emergency. We have an epidemic of loneliness in this country, and community is part of the cure there. But when I think about what community means for me, I'm focused on two things. One is my immediate community, like my friends and my neighbors, and also a broader support network that I can be a part of. I'm lucky to have some really wonderful friends and lovely neighbors that I know I can rely on. Like, if the power goes out at one of our houses, we can just huddle together to stay warm. On the other hand, joining a bigger network can take time and research. Elizabeth, I know that you recently moved to a new state. I'm wondering, how have you been able to build community so far?

[Elizabeth Ayola]

Well, if you want an indication of how I've been doing the past Thanksgiving, I got three invites, and on Christmas, I also got three invites, and I mean to people's home. And I've only been in Houston for six months.

[Mikayla]

Wow.

[Sean Pyles]

Okay. So you're a social butterfly.

[Elizabeth Ayola]

Well, what can I say? I'm trying. I'm trying. But no, but honestly, it's a testament to how much better I've gotten at building community, and that's by doing two things. So the first thing is being intentional, and the second thing is not making excuses. So for me, the intentional piece is me using Facebook groups and also bumble friends to find people. And then the second thing is to not make excuses by actually making an effort to hang out with them. So I'm proud to say that I've slowly started to build a solid tribe. I will also add that during Hurricane Beryl, the Facebook groups were a beautiful resource because all the moms in there, in particular I'm in mom groups were sharing resources for places offering free food. Some people were even offering their homes. And they also just shared a lot of information on aid. But with that said, I want to go back to that idea of the broader community that you mentioned, though. What does that look like, Sean?

[Sean Pyles]

Well, it can take a lot of different forms, but common ones are mutual aid groups. And it sounds like you, in a way, are part of one with that mom group that you mentioned. But a lot of mutual aid groups have popped up in cities in recent years. Some of these organizations are built at a local level and work to provide aid and resources to those in need, whether they're unhoused or recovering from a crisis or just a mom who needs a meal for their kids. You can volunteer to help at a lot of these mutual aid groups, or you can just reach out to one if you need assistance. At a more casual level. Building community can look like joining an affinity group of some sort, which, Elizabeth, it sounds like you're doing on Facebook. Me? I'm not on Facebook, but I recently started meeting up with an LGBTQ run group in the Portland area because I wanted to expand my queer community. And I'm not gonna lie, joining an established community can feel a little awkward at first. Kind of like you're the new kid at school and you don't know where to sit during l. But the more you see people, the easier it is to talk and to build relationships. And hopefully you'll meet some people that you click with, and over time, they can become part of that more immediate network that you can turn to in a crisis. Or maybe if you just want to go out dancing with some friends on a Saturday night, they'll be there for you.

[Elizabeth Ayola]

I love that you have all these resources and little community, Sean. It can be so helpful, honestly. I used to be a very isolated person, and I can say that my life is richer because of the communities that I'm now engaged in.

[Sean Pyles]

And community is a form of wealth that goes well beyond dollars.

[Elizabeth Ayola]

Absolutely.

[Sean Pyles]

All right, well, the third area that I want to talk about are the actions that you can take when you feel powerless. We've been hearing from listeners about concerns they have around changes to the Department of Education and what it might mean for their student loans, or about whether changes to the Consumer Financial Protection Bureau might leave them more at risk of being taken advantage of by a company. No matter where you fall on the political spectrum, it's just good to know how you can make your voice heard.

[Elizabeth Ayola]

And there's a lot more people can do beyond voting, which, of course is always important.

[Sean Pyles]

Definitely. And one of the most effective tools that you have is probably within arm's reach right now. Might even be in your hand. And I'm, of course, talking about your phone. I recently learned about an app called five Calls, which makes it very easy to find the phone numbers of your elected officials. This app also has a number of prompts that you can talk with them about, most of which are fairly left leaning. But if that's not your jam, you can still use the tool to easily find phone numbers to call to advocate for what you want your representatives to do about the issues you care about most.

[Elizabeth Ayola]

So I do like the idea of five Calls. But, Sean, what if I hate talking to people on the phone and it makes me feel anxious.

[Sean Pyles]

Well, here's a shortcut pro tip, Elizabeth. Call during off hours and leave a voicemail. Easy peasy.

[Elizabeth Ayola]

You get another gold star for that.

[Sean Pyles]

Smart. Thank you.

[Elizabeth Ayola]

Beyond making calls, you can also donate to causes you care about or local organizations that need help. The goal here is really just to focus on the actions you can take that make a real difference and prevent you from feeling powerless. Because honestly, you're not.

[Sean Pyles]

And I find that when I do take action, like contacting my representative or donating, I am much less likely to doom scroll or even worse, doom spend to cope.

[Elizabeth Ayola]

Wait, what's doom spending? Sean? Never heard that before.

[Sean Pyles]

Oh, you know, it's just when you buy stuff online to make yourself feel better about the state of the world. And it's certainly a form of self soothing, but I'm going to say not a healthy one. And it is one that I'm occasionally guilty of.

[Elizabeth Ayola]

I will say the three tips that you shared may definitely be less expensive ways of coping than doom spending. For sure.

[Sean Pyles]

Well folks, I hope this has helped you think about a few ways that you can build up your personal resilience and feel more capable during unprecedented or uncertain times. And if you're looking for more resources, check out the link in the show Notes about Preparing for emergencies.

[Elizabeth Ayola]

We're about to turn to this episode's Money Question segment, where we talk with a listener about how they can pay off their debt while building up their emergency savings. But before we get into that, we're at one of my favorite parts of the show, the part where we ask you to take a second and think about where you need some guidance with your money.

[Sean Pyles]

Maybe you're feeling a little lost, like you don't even know what your financial goal should be, or you're trying to break yourself out of a bad financial habit but just can't seem to do it. Whatever your money question, we nerds are here to help. Leave us a voicemail or text us on the Nerd hotline at 901-730-6373. That's 901-730-N E R D and a.

[Elizabeth Ayola]

Reminder that one of our goals on Smart Money this year is to talk with more of you live on the podcast to help you with your money questions. If you want to hang out with Sean and me for a bit and get some nerdy wisdom, let us know one more time. Leave us a voicemail or text us on the Nerd hotline at 901-730-6373. That's a 901-730-Nerd.

[Sean Pyles]

Alright, let's get to this episode's money question segment. That's up next. Stay with us.

[Sponsor]

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[Sean Pyles]

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[Sponsor]

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[Sean Pyles]

We'Re back and answering your money questions to help you make smarter financial decisions. This episode we're joined by Mikayla, a listener who is 24, lives in New Jersey and has some questions about how to balance debt payoff with saving and investing for retirement.

[Elizabeth Ayola]

Mikayla, welcome to Smart Money.

[Mikayla]

Hi. Thank you.

[Sean Pyles]

Mikayla, can you start by talking with us about your financial life? How do you feel you're doing? How do you manage your money, all of that?

[Mikayla]

Honestly, I think I'm doing pretty well compared to how I was doing a couple of years ago. I feel like now I finally have a stable job, so that definitely helps a lot.

[Sean Pyles]

What do you do for work? I'm a paralegal, so that definitely will help with income, I imagine.

[Mikayla]

Yes, it definitely does.

[Sean Pyles]

And how much are you making?

[Mikayla]

If I can ask, 55k a year.

[Sean Pyles]

For 24, that's pretty solid. And what's your living situation like and your expenses right now?

[Mikayla]

I do have a roommate, so rent is split in half, which I absolutely love because paying full rent in Jersey is just insane. So rent is split in half, but everything else is solely on me.

[Sean Pyles]

And how do you feel like you are managing your finances at the end of the month? Do you find that you still have cash left over or are you kind of scraping the bottom of your paycheck there?

[Mikayla]

I do Practice a zero based budget right now. So I don't really have quote unquote fund money. Everything is allocated to something. If I do have plans with friends, then it would have to be allocated at the beginning of the month. If it's not, then I probably won't go.

[Sean Pyles]

And you hold pretty strict to that budget that you make.

[Mikayla]

I do 100%.

[Elizabeth Ayola]

So when you think about where you're going to be in five years, tell us about what you picture.

[Mikayla]

I would very much hope to be out of debt. I think realistically I would still have my student loans because I do plan to return back to school this year. So everything else though I would like to believe that would be paid off.

[Sean Pyles]

And do you think you'll still have roommates? Do you think you'll still be in Jersey? What do you imagine your life to be?

[Mikayla]

I love Jersey, but I also am interested in going to maybe D.C. or Maryland. I know that's also equally expensive so I know for sure my rent would be more.

[Sean Pyles]

But that's not everything, you know, sometimes it's worth moving to a new place even if it's a little more expensive so you can get different life experiences and see what opportunities there are.

[Mikayla]

That's true. Yeah. I 100% agree.

[Elizabeth Ayola]

So you're also just at the beginning of your financial life, Mikayla, which I think is exciting personally. So where do you think you have the most room for growth with your finances?

[Mikayla]

Definitely want to focus a lot on paying off my debt. I feel like once that's paid off it's going to be a great help and a sigh of relief because then I can put more into my retirement and investing. I don't really see the point of investing when I still have a lot of debt left over.

[Sean Pyles]

Well, you wrote to us about your debt and how you're trying to balance your payoff of your debt with your emergency savings and maybe investing. So talk with us about the debts that you have currently.

[Mikayla]

So I do currently have a Chase credit card debt, but I'm not really too stressed about that because I have like maybe a thousand left and I should be at zero at the end of the first quarter.

[Sean Pyles]

That's exciting.

[Mikayla]

Yes. I do have a car note and that's like 20k.

[Sean Pyles]

Cars are so expensive.

[Mikayla]

Yes.

[Sean Pyles]

What's your interest rate on that?

[Mikayla]

That I believe it's 9% and I messed up because I didn't know anything about cars. So when I went to get my car I actually got a loan. That's where the personal loan debt comes in. Thinking That I was going to use that money to pay for the car, but the car dealership made me go through their process, so I ended up going through them. So that's how I got the car note and the personal loan.

[Sean Pyles]

So you took out a personal loan separately in anticipation of buying this car, and then the dealer said, no, no, no, you have to take our financing.

[Mikayla]

Exactly.

[Sean Pyles]

In the future, I might walk out of that car dealership because they should be able to take a different loan than the one that they offer. This is a lesson you learn when you're early in your financial life.

[Mikayla]

Absolutely.

[Sean Pyles]

And what's the APR on that personal loan?

[Mikayla]

I think the APR is 11%.

[Sean Pyles]

And the balance on it?

[Mikayla]

The balance? It's 13,000.

[Sean Pyles]

All right. So how are you currently approaching your debt payoff? Do you have a strategy that you're employing?

[Mikayla]

I believe maybe it would be the snowball method. I've started aggressively paying off the Chase credit card.

[Sean Pyles]

With the debt snowball method, you begin by paying off your smallest debt first, focusing as much money as you can into that while making minimum payments on your other debt. And then once that first debt is paid off, you put the amount you're putting into that into your next biggest debt and so on.

[Mikayla]

Yes.

[Sponsor]

And that's been working for you?

[Mikayla]

It has.

[Sean Pyles]

That's good. A lot of people debate between whether they want to use the debt snowball or another option, the debt avalanche method. Some people like the debt avalanche method because with that, you're focusing on paying off your debts with the highest interest rate first, and it can save you money in the long run. But for many people, snowball can be better because you are getting the wins of paying off smaller debts first, which gives you some positive reinforcement. You feel good about what you're doing with your finances, and you're more inclined to aggressively pay off your debt over the long run when you have multiple different debts that you're paying off.

[Mikayla]

Yes, exactly.

[Elizabeth Ayola]

So, Michaela, now can you tell us a little bit about your savings? So what do you have saved at the moment?

[Mikayla]

I do have an emergency fund, but it's only funded for one month currently.

[Sean Pyles]

For 24 years old. That's not bad. At 24, I don't think I had an emergency fund for any months.

[Elizabeth Ayola]

So, $00.

[Sean Pyles]

Be proud of that.

[Mikayla]

Thank you. I do have a 401k and a simple IRA and a Roth IRA.

[Sean Pyles]

Do you know how much you have in each of those retirement accounts?

[Mikayla]

The simple IRA, I believe around 3K. The 401K, I believe, is around 5 or 6K. The Roth IRA I believe is just 200.

[Sean Pyles]

So you have close to $10,000 in a retirement account at an early age. So that's great to hear. I want to talk a little bit more about your emergency savings. You mentioned that you're using the zero based budgeting method. How are you allocating savings as you budget right now?

[Mikayla]

Honestly, I haven't been aggressively saving because I'm aggressively paying off the debt. But I do put aside, I think it's 10% out of my paycheck automatically goes into a savings account. I won't lie, sometimes I do touch it.

[Sean Pyles]

I mean that can be hard when you just have one savings account. Something I talk about all the time is having different savings accounts for different goals. The emergency account, you really don't want to touch it unless it's a true emergency. So you could have maybe 8% going into your emergency fund and then 2% going into a like rainy day, semi emergency, oops, I went out with my friends and spent too much money type fund. That's a little bit more flexible.

[Elizabeth Ayola]

And I will say as well, Mikayla, I empathize with wanting to pay down your debt fast. I absolutely hate having debt and sometimes it feels like something hanging over your head. But in general it can be best to build your savings while you're paying down your debt at the same time. And one of the reasons for that is that so you can easily cover an emergency without going deeper into debt. And I don't know about you, but sometimes when people say that, I'm like, well how? Because I get maybe sometimes lost in the numbers. And I think there are different ways that you can approach that. So at NerdWallet we love the 50, 30, 20 budget. So that's where 50% of your income goes to needs, 30% goes to wants, and 20% goes to debt and savings. For example, out of that 20% you could allocate some towards paying down the debt. Since you said you're doing the snowball method, you know you would focus on the smallest debt first and pay the minimum balance on the rest. And out of that 20% you could also put some money towards emergency savings as well. So it doesn't have to be either or Gotcha.

[Mikayla]

Thank you so much, that is really good advice.

[Sean Pyles]

Just one last note. On your emergency fund in general, it's best practice for folks who are on a single family income. Kind of like you are, is what people would consider that it's best practice to have six months of emergency savings that Obviously can take a long, long time to build up. So it can be an aspirational goal, but one that you can gradually work toward, but that will give you the cushion to cover things. If your car breaks down, you need a repair, that's a couple thousand dollars you can dip into that fund and it won't end up going onto a credit card, which is what we want to avoid because credit card interest rates can be quite high, as I'm sure you know. What is your APR in your credit card, by the way?

[Mikayla]

It's really high. It's like 29.

[Sean Pyles]

That is not uncommon, which is why we really do advocate for folks paying off their debt as quickly as possible, their high interest debt before going on to steps like investing more seriously. It's great to multitask. But we talked a little bit earlier about your investing or maybe lack thereof. How are you thinking about investing right now? Is it just through your retirement accounts or what's your general philosophy at the moment?

[Mikayla]

Honestly, I'm not too versed on the whole investing category. I'm kind of just picking up tips as I go, just guessing. I do just randomly pick stocks or whatever I tend to use. I just buy one share, but I'm not really sure as to what to do with that.

[Sean Pyles]

Well, you are investing in your retirement accounts, so that's good. One thing I would add to your to do list is to just triple check in those retirement accounts that you are actually invested. Because sometimes people set up these accounts, whether it's their 401k or a Roth, and they put money into it and then they don't select the investments. And so then it's basically just a savings account that's earning you no interest. So I would recommend doing that sooner than later just for your own peace of mind. And that also can give you exposure into different types of investments that are available to you in a retirement account. Many people like to opt for what's called a target date fund, which is a way where you can say, okay, I'm going to retire in, in your case might be 40 something years. So for now, while you have all of these years of growth ahead of you, it's common that people will invest in more aggressive stocks and then as you get closer to retirement, they automatically are reallocated into less aggressive stocks so you can have some sense of security as you get ready to retire. And you often won't have to do that work yourself. So that's helpful.

[Elizabeth Ayola]

And Mikayla, I also wanted to ask, are you getting an employer match at Your job?

[Mikayla]

I am, yes.

[Elizabeth Ayola]

And are you contributing enough to get the match?

[Mikayla]

Yes, I am.

[Elizabeth Ayola]

Okay, awesome.

[Sean Pyles]

So, Mikayla, you are investing or you have multiple different retirement accounts. How are you balancing maybe your 401k with your IRA and figuring out how much to put into each account? Or is that something that you're considering?

[Mikayla]

So everything is in fidelity, which makes it a lot easier to track everything. In terms of allocating money, I really haven't allocated anything towards my Roth IRA or my simple IRA. In terms of the 401k, I think I've been doing 8%. I'm not sure if that's what I should be doing for my age, but that's what I've been doing.

[Sean Pyles]

8% is great for your age because you are so young. Your money will go a lot further. And I want to spell out how much further your money goes at an earlier age with an example. So you're 24 years old. You have, let's say, $10,000 in a retirement account. And just for the sake of this example, let's say that you contribute $500 a month into a retirement account with a 6% annual rate of return, which is pretty conservative. You would have a little over 1.6 million saved by the age of 67. Now, if you're 34 years old, a decade older, and in the same situation, by the time you hit retirement at 67, you would have about half. You would have $806,000 saved for retirement. So by starting as early as you are, you could have twice as much as someone who starts a decade later.

[Mikayla]

Wow. Okay.

[Sean Pyles]

Pat yourself on the back. You're doing great.

[Elizabeth Ayola]

Exactly. And I think this is also a good time to unpin your comment earlier about whether it's worth saving for retirement while you have so much debt. So I think a lot of people face that conundrum and they're like, well, it's not worthwhile to do. But I know the average rate of return on the stock market obviously ebbs and flows is around 10%. So depending on, again, the rate of your debt and how much debt you have, it definitely can be worthwhile to simultaneously pay down your debt and save for retirement. So that compound interest and time can both work in your favor for your retirement savings.

[Mikayla]

Okay, yeah, that makes a lot of sense.

[Sean Pyles]

And I want to talk a little more about your Roth IRA account. How are you using that to save? Or is it just sort of in the background right now?

[Mikayla]

It's sort of just in the background. I'm not really sure what to do with it.

[Sean Pyles]

Honestly, a lot of people like to contribute to Roth accounts. You could possibly contribute to a Roth 401k if that's an option from your employer. But people like to have Roths in their mix for retirement accounts because it gives them tax diversification. Basically you would have a pot of money that is tax free in retirement. We have an article about how to invest in a Roth IRA on NerdWallet that I recommend you look into. We'll have a link to that in the show notes. But Roths can be especially useful when you're early in your career like you are right now, because you are likely to be at a lower tax bracket than you would be when you're further along in your career. The way Roths work is that you are putting after tax contributions into these accounts. So right now you're making 50 something thousand dollars. The tax rate's lower than you would have after you finish law school and you are a high powered wealthy attorney. So right now is a great time to think about Roth contributions.

[Mikayla]

Okay.

[Elizabeth Ayola]

All right, Mikayla, so let's double back to the budgeting topic. You did say that you are doing a zero based budget. Are you happy with that budget or do you have any doubts or think maybe you should be trying a different one?

[Mikayla]

I would love to try a different one because I do feel very limited because everything is allocated for and like I said, if something was to happen or I want to go somewhere in the middle of the month, I kind of deprive myself of it because it was not allocated prior.

[Elizabeth Ayola]

Well, first of all I want to commend you because at 24 I did not have that discipline to do that kind of budget. I think when people think of the word budget it sounds very limiting and restrictive. But there are so many different types of budgets out there and luckily you can choose one based on your personality type and your expenses. So while the zero based budget I think works for people who do like to track every single dollar and maybe have a better idea of where all their money is going, there are other methods to try. I personally am a pay yourself first type of budgeter and essentially what that means is quite self explanatory is you pay yourself first, you do your savings, you cover your main expenses and the rest goes on, whatever it goes on. But that is I think ideal for people who are maybe not impulse spenders or have a good handle on their spending. But I will say budgets also don't have to be set in stone. They can change according to where your Life is. So last year I had a lot of changes in my finances, so I shifted to more of a 50, 30, 20 budget. So there are different type of budgeting systems. Aside from that, there's also the envelope or cash stuffing method and that can be good for people who need to rein in their spending as well.

[Sean Pyles]

Although, Mikayla, I'll say it seems like you don't need to rein in your spending. If anything, I kind of get the impression that you want to loosen up your budget a bit.

[Mikayla]

I do want to, but at the same time, my debt.

[Sean Pyles]

You have the reality of your finances. So in a way, zero based budgeting can be really beneficial for you maybe in the short term while you're focused on paying off your debt. The good news is that like you said, you should have your really high interest credit card paid off pretty soon. And then having the amount that you're putting on that credit card monthly back in your budget might give you some more wiggle room. How much are you paying monthly on that?

[Mikayla]

It's about $900.

[Sean Pyles]

That's a lot of your budget going to this credit card.

[Mikayla]

It is.

[Sean Pyles]

Have you thought about what you might do with that money once it's not going to this credit card?

[Mikayla]

That was actually a question I had for you guys. Should I put it into savings or should I put that, say, in my $100 into my car note or the personal loan?

[Sean Pyles]

Well, we're not here to tell you what to do with your money. We're here to give you information so you can make informed decisions. But it depends on your priorities. It seems like you want to save and invest. And the good news is that you could do Both with nearly $1,000. You could even split it three ways. You could maybe put $300 a month toward a fun account or a vacation account. You could put 300amonth into your savings to build that out too. And then you could put $300 a month into a different type of investment. You could look into opening a brokerage account, for example. You have a lot of options.

[Mikayla]

I think I just need to get out of the mindset that it's either or and realize that I can do all at the same time.

[Sean Pyles]

And that is so important with managing your money too, is getting yourself out of this scarcity mindset. Yes, money is not infinite for most of us, and you can only do so much with what you have coming in based on what's going out each month. But you have a lot more control and a lot more opportunity with your money than you might imagine.

[Elizabeth Ayola]

And also be proud of yourself because you seem to have the foundation and you have clear goals in terms of what you're trying to do. So just give yourself time as well, you know?

[Mikayla]

Yes. Thank you.

[Sean Pyles]

Okay, Mikaela, we've run through so many different aspects of your finances. How are you feeling right now and what decisions do you think you might make based on what we've talked about?

[Mikayla]

I feel a lot better, more confident and secure in the decisions I've been making. I feel like I'm definitely going to think a little bit harder and longer about my budgeting method, my retirement, and what I want to do in terms of the Roth IRA and the 401k and just overall being okay with where I at right now and knowing that there's room for growth and I'm on the right path.

[Sean Pyles]

There's always room for growth. But you have done a great job for how early on you are in your financial life.

[Mikayla]

Thank you.

[Elizabeth Ayola]

You have. I did not start saving for retirement until I was 32, I think. So you're doing awesome.

[Mikayla]

Thank you. That means a lot.

[Sean Pyles]

Well, Mikayla, thank you so much for taking the time to share your story with us.

[Mikayla]

Thank you for having me.

[Sean Pyles]

That's all we have for this episode. Remember, listener, that we are here to answer your money questions. So turn to the Nerds and call or text us your questions at 901-730-6373. That's 901-730 N E R D. You can also email us at podcastardwallet.com follow Smart Money on your favorite podcast app, including Spotify, Apple Podcasts and iHeartRadio to automatically download new episodes.

[Elizabeth Ayola]

This episode was produced by Sean and Tess Viglund. Hilary Georgie helped with editing. Megan Marrow mixed our audio. And a big thank you to NerdWallet's editors for all their help. And here's our brief disclaimer. We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and it may not apply to your specific circumstances.

[Sean Pyles]

And with that said, until next time, turn to the Nerds.