S1: So would you actually advise me to take 13 grand out of my savings like right now and just pay off my car so that we don’t have that anymore?
S2: Yep, I would do it tonight. OK.
S3: Welcome to How to two, I’m Charles Duhigg. This week, we’re looking at something that we use every day, but which weirdly, most people don’t like to talk about money. The truth is, most of us have debts, whether it’s student loans or car payments, mortgages or credit card bills. And because of the pandemic, it’s safe to say that a lot of people’s wallets are a little bit lighter this year. But creating a budget that’s realistic and and actually sticking to it, that can be a real challenge, particularly for our listener this week.
S4: My name is Arena and I’m an editor and freelance writer based in Florida. I am also a new mom. I had a baby on March 30th during the pandemic.
S3: Oh, my gosh. Congratulations. Thank you. Irene and her husband met nearly five years ago and they both came into the relationship already carrying debt.
S4: He had moved to Florida a few years before in another marriage, and he had some debt coming out of the move still and coming out of that marriage. I had a little bit of debt because I had actually gone through rehab and gotten sober just before we met. And my husband actually has about 100k in student debt that he brought into our relationship. So, you know, we both kind of struggled with that. And, you know, now in the pandemic, you know, my hours were reduced. Plus we had a baby. And we’re also looking into moving to another state. So there’s just like a lot of things up in the air sometimes for Irene and her husband, it feels like their money is being pulled in a dozen different directions between the credit card bills and student loans and car payments and figuring out how much to save and, you know, baby’s first Christmas and wanting to make sure that we do it right, just like looking ahead to the new year because it feels like our expenses are going up and our income isn’t on today’s show.
S5: How to balance your budget.
S6: We’ll hear from a personal finance expert who’s budgeting skills run in the family, and she’ll show Irina how to create monthly money goals to finally get her and her husband out of debt. Stay with us.
S2: All right, now I’ll say this, you’re very normal. OK, so like a lot of the things that you say, I’m like, yes, this is how majority of America is.
S7: This is Rachel Kroos, author of the book No Yourself Know Your Money and host of her own podcast. She’s also the daughter of financial guru Dave Ramsey, which means she learned some financial lessons the hard way.
S2: Well, it’s funny because I’m the spender. I mean, I’m a free spirit. So my natural instinct is to do everything opposite. So, yeah, I’m sure having I got a checking account when I was 15 and I bounced three checks like the second month I had it. So like I, I was a mess. But Mom and dad did a great job. You know, I think people assume that we had like a mutual fund birthday parties and budget caps and stuff as Ramsey kids. And that’s not the case. Mom and dad, they taught us about money really in the ebb and flow of life, which I appreciate.
S7: And Rachel uses the lessons she learned to now help people like.
S2: So I hate debts. I hate debt with a passion, because what dad does is it basically is a thief. It steals your income from you and it steals your peace of mind. It steals your sleep at night. It steals the option of changing jobs if you want. It really keeps us in this level of bondage financially. Getting out of debt is going to be one of my top priorities for you. So couple of questions. Right. So your husband has around one hundred thousand dollars in student loan debt. How much you owe on your car?
S4: I owe, I think, like thirteen or fourteen grand on my car.
S2: How much do you have in savings?
S4: So we have about twenty two grand in savings right now.
S2: The first thing I would do is to create a budget. So you mentioned that you guys have looked and make goals every year, which is amazing. There’s so many married couples out there that I try to coach to get them to even have this conversations. And the fact that you guys are already talking about money I’m not kidding is a huge first step.
S7: Rachel says couples should be communicating about their budget every single month, not not once a year. And the most effective way to balance your bank account is what she calls a zero based budget.
S2: And this is going to be your income minus all your expenses, including some giving and saving equals zero. So every dollar coming in is assigned to the category. And you’re going to do this before the month begins. So look at the next following month and say, OK, here’s the money coming in and then I want you to go list out all of your expenses, saving first and then food, shelter, utilities, transportation that include the car payment, gas, insurance, cell phone bill, clothes. I mean, anything that you guys spend money on. I want you to list it out and then I want you to put numbers next to each of these categories. And then the goal here is for your income, minus all of the categories equals zero. So every dollar coming in is already assigned. And I’ll tell you, the first month that you do this, it’s going to be terrible, OK? Not fun. It’s going to be tough. So you’re going to have to go throughout the month and re-evaluate and maybe lower some categories to others. It’s just going to be hard. The second month, February, it’ll get a little bit easier, a little bit more consistent. And by March, by after three months, 90 days, that budget is going to start working.
S7: Have have you guys done that before? And have you ever had a month to month budget?
S1: So we did actually. I think the problem that we came up against is that we had kind of like an ideal budget. And what I found is that we’re spending a lot more in certain categories than I anticipated. And we also have a lot of like random extras that will cover a big one. Actually, this year that we didn’t expect is that I wasn’t able to breastfeed. So we had to buy formula. And that’s obviously very expensive.
S2: You always have to have a miscellaneous category, OK? You know, it can be around 10 percent. Whatever you feel like is is sufficient because things come up. I mean, I get I have I have three kids. And you know what? I did Formula two with all three, my baby.
S7: And if you get towards the end of the month and the miscellaneous category is already spent, you’ve already used up everything that’s in the budget for the kids and the school pictures come up. What should you do?
S2: It depends on what it is. So if it’s more of a necessity, if something that you really do need, then I would find other categories in the budget that you just lower and up maybe the miscellaneous category for the month.
S5: But the thing about the budget, too, is you’re going to have to tell yourself no, you’re going to have to tell yourself no, that’s a hard thing to do. But that’s why we create a budget so that we know when to say no, when to say I really, really want that thing, but I can’t afford it this month. The only way to get on firm financial footing is to make sure you don’t spend more than you earn. And the only way to do that is to have a budget so that you know when to say no, because the budgets tapped out once. You know what you can and you can’t afford. There’s a kind of freedom that it offers.
S2: I have. For me, a budget doesn’t limit my freedom. It actually gives me freedom, it gives me this peace of mind that I know, OK, I can go on Amazon and get some stuff because it’s in the budget. It’s right there. And when it’s not, I just say, OK, I’ll wait till next month or again, if you can find money from other categories, you can do that. And when you do this or anyone listening, the level of control that you will have over your money is, oh gosh, unlike anything else.
S1: That’s the part I think I struggle with the most because my husband is a very, very logical person. So if I gave him a budget, he’d be like, great, I will not spend a dime over this. Whereas I just like but I want this thing and I don’t want to wait another three weeks because I want to right now, because it fulfills whatever need I think I have in the moment. And I just have a really hard time saying no to myself.
S2: I’m so glad you said that because that is such a huge part of money. We use money in a sense to cope with what’s going on in life. And during the pandemic, I mean, I cut myself literally is like my weakness because I can get anything I want on it, you know? And I’m sitting there on Amazon and I ask myself during the pandemic in bed as I’m on my app and I’m like, Rachael, why are you buying this? And it’s like this pair of earrings that was eight dollars. I mean, it was nothing. But I was like, why? I don’t need more earrings, why am I buying this? And I thought, because I’m bored. And I’m like, OK, well, why am I not OK just being bored? And I’m like, because I don’t want to be alone with my thoughts. I just I need something to do. And so I realized that in a moment like, gosh, I am using this to cope.
S4: Yeah, yeah, yeah. It’s just so much easier said than done, right.
S2: Oh absolutely. Absolutely. It takes discipline. It really, really does.
S6: When we come back, Rachel will tell us how to rearrange our priorities so we can get out of debt faster. Stick around.
S7: We’re back with our listener arena and our financial expert, Rachel Kroos. Rachel says, before you do anything else, the first and most important step for those of us who are dealing with a sizable amount of debt is to cut up our credit cards even if they earn reward points or airline miles.
S2: Are there people that pay off credit cards every month? Absolutely. But there’s also the average sixteen thousand dollar credit card balance for Americans on average, sixteen thousand, which is just crazy. So people play this game for the rewards of the airline, Miles, and they end up into this mess because studies have shown that you actually spend less when you spend with cash or a debit card because, you know, it’s your actual money. There’s something emotional that is attached to it, knowing it’s going to come right out of my account versus the banks. And so for me, again, do people pay it off every month? Do you guys pay it off every month? Oh, I’m sure. I’m sure you do. I really do. But for me, I don’t like playing the game because people are getting the rewards in the airline, Miles, because other people are struggling financially to pay their credit cards off. So the bank doesn’t just have all this free money to give you. They’re making money off of people that are mismanaging their own money. That’s a really good point. I honestly, I just cut up the credit cards and try to live on a debit card, because once you start to do that, you’ll start to see, oh, wow, it feels different. But yet I still have all the same conveniences as a credit card, but it’s just a debit card and said so.
S7: So let’s say that we’ve written out the budget. We’ve done it for three months. So we’re finally sort of at that place where our budget reflects reality and a reality reflects our budget. We’ve cut up our credit cards. We’re only using a debit card. What do we do next?
S2: We have a plan called the Baby Steps. And what’s great as you are, you’re far along, a little bit on these steps already. So the first step would be to get a thousand dollar starter emergency fund. So you have twenty two thousand dollars saved, which is awesome. So you have that thousand dollars and then I want you to start working your way out of debt is the way to do this is what Rachel calls the debt snowball. You list out all of your debts, smallest to largest, regardless of the interest rates, pay minimum payments on everything and an attack that smallest debt first. And what’s great is you’re going to be budgeting alongside this. And so there may be months that you say, you know what, we’re not going to go out to eat. You know, we’re not going to go shopping. We’re going to cut things out of our budget, live like scorched earth, live on nothing, and throw as much of our income to this debt and get out and get out of it. So with your thirteen thousand dollar car loan, I mean, you literally could pay off your car with what you have in savings tonight if you wanted to. So that that’s that is over. And so your hundred thousand dollar debt, your husband’s student loan debt, is it multiple loans or is it just one large loan?
S1: It’s one reconsolidated. So it’s one loan.
S2: Perfect. Can I ask how much you guys make a year?
S1: That is I think it’s like 120 together.
S2: Awesome. Well, that’s a great income. I mean, that’s that you have a you have a big shovel. You have a big hole of that hundred thousand dollars student loan debt, but you also have a big shovel. So you guys within I mean, if you really went scorched earth, I mean, you could have this paid off in 18 to 24 months.
S1: If that sounds impossible, I don’t know why. It just it’s funny because we when we first got together, we paid off like 14 grand in credit card debt. But somehow when we both look at the student loan debt, we’re just like, this is going to take us forever to pay off. And it’s just like I’d never know if we should be putting more into savings in case of an emergency. For instance, my husband also contributes more to his like four one K, like he contributes like 10 percent. And so like and that’s something that we have argued about in the past because the company only matches up to six. So, you know, sometimes I’m like, maybe I should contribute less so we could have more cash on hand. And I just don’t know what the answers are.
S2: So what I would say is, is the more focused, singular focus you can have with your money, the greater impact you’re going to see. So meaning we all try to do 18 different things with our money, right? You’re trying to pay off some debt here, put some short term savings. You know, invest some here with your with the 401k and you’re just you’re dabbling all over the place. But if you actually have one singular focus and the only thing the only thing you’re working towards is paying off that student loan, that’s when you’re going to see momentum. So I actually tell people which people cringe, but pause all retirements, pause everything, pause everything, even the match, pause at all and put all your income, everything you can squeeze out of that budget at the student loan debt. Because once you have that paid off, then I’m going to have you bump up that thousand dollar starter emergency fund to three to six months worth of expenses. So that’s going to be a fully funded emergency fund after that.
S6: To reiterate, if you pause everything you can and really focus on paying off those debts, you’re setting yourself on a really solid foundation, in part because if you’re just focused on one thing, you’re much more likely to be disciplined about achieving it. Then once the debt is gone, you can start saving again and investing for retirement.
S2: And then I would invest. 15 only 15 percent of your income and two retirements, so I would look to see what your income is together, one combined income as a household and then see 15 percent of that is what I would put at retirement. So I would start with the match that, for one, can match up to that six percent. And then from there I would look into a Roth IRA is there are some great options for retirement that’s out there. But yeah, I would pause everything and focus on getting that student loan debt paid off.
S7: And the truth is that that debt is is charging interest rate. It’s under the debt sits with you. The more expensive it is. Are you in a place where you guys have twenty two thousand dollars in savings and and you could take some of that and devoted to paying down the student loan and saying, look, that’s our top priority, even if it means we have less savings right now. Are you in a place where where you think your jobs are so uncertain that that feels scary?
S1: If I told him, like you said, to pause, you know, the four one K, he would be like F? No, absolutely not. You know, he’s done a lot of a lot of reading about the earlier you contribute to your retirement account, the more that you have in the long run. But I think when I look at this paying off 100k in loans, that’s very appealing to not have that student loan over our heads. But I think if I told him, you know, please pause for one K until then, I think he would have a really, really difficult time.
S2: Yes. No, well, I would say this. You’re going to be one hundred percent fine at retirement. You guys are young, pausing for two to three years in retirement is not going to make or break you guys. I think it would be scary if I told you to do that forever. And I’m not I’m just telling you to pause for two to three years.
S6: And I’ve said and the thing is, if something big and unexpected comes up, maybe you lose your job or you have another kid, you can always slow down your debt payments and trim back and what you’ve been spending. But when you’re carrying a lot of debt, it’s always there growing every day, limiting your flexibility down the road. That’s why it’s so dangerous.
S1: When you were talking about, you know, future like things that come up, it made me think about the fact that we are currently talking about moving to another state where, you know, my husband would ideally get to get a job and we would, you know, if everything works out the way we hope, like we would get moving costs covered at least. But it would also involve buying a house because we you know, we own our house now and we would really like to be able to do that in the future. Should we be saving money for that instead of paying down debt or is there a way to do both?
S2: Well, I would not buy a house right now with the debt that you guys have, OK? I would be completely debt free and have that fully funded emergency fund and then save 10 to 20 percent for a down payment. So that would mean renting when you guys move. And I think even when you move states and move areas, I think it’s wise to rent even just for a year, just to get the lay of the land, kind of figure out, OK, what part of the city do you want to live in? I mean, buying a home, it’s the largest investment financial purchase investment that majority of people make in their lifetime. And it’s a it is a big deal. And so taking your time is OK.
S7: OK, so getting back to the baby steps after you have a monthly budget and your debt is paid off and your rainy day fund is restored with three to six months of expenses in reserve, then take the next baby step. Go back to investing in your retirement.
S2: So you take that 15 percent again for a Roth IRA and then you’re going to start saving for kids college so you can do this. An essay and educational savings account is a great option or a 529 plan. There’s some options out there for college investing. And you can just do a little bit at the beginning because, again, it’ll be invested. So that means it’ll make money, which is great. And then you’re going to invest in retirement, save for kids college and the baby step six is pay off the home early.
S5: So you’re going to do all three of those kind of at the same time, at this point, most people will have bought a home. And so any extra income you have, Rachel says you should think about using it to boost your mortgage payments.
S2: So I find that people that do all of this and we just talked about all six baby steps in this order, they’re doing it all within seven years, meaning that they are debt free and seven years.
S1: Wow, that’s that sounds crazy. Like that sounds and possibly amazing.
S2: Yeah, it’s a lot. And in the last baby step is baby step seven there. There’s seven of them and that is just to build wealth and be generous and great vacations. Pay for someone else’s vacation. I don’t care. You get to just, you know, enjoy and live.
S1: You mentioned vacation. And, you know, that’s something that’s been really important to me and important in our relationship is traveling. And, you know, we’ve always been good about saving money for travel and not traveling to expensively like we’re pretty thrifty when it comes to travel. But when I think about let’s say we do your plan and our debt free in seven years, does that actually mean, though, that we can’t travel for seven years? I mean, because that sounds pretty.
S2: Yeah, no, no. Yeah, I know I would I would say you can start kind of having a more relaxed lifestyle, traveling, buying a new car, all of that after baby step three. OK, so I do want you out of debt with that fully funded emergency fund and then you can kind of take your your foot off the gas a little bit and breathe. I think what you realize is the deeper you’re willing to sacrifice in the short term, the the faster you’re going to get these goals done.
S7: Right. And I’ll be honest, you know, you had said it sounds incredible. It sounds almost like too easy. And when it is laid out like this, it does sound easy. But you know, that that just being able to explain what we ought to do doesn’t mean that doing it is so easy. And it does mean that you guys are going to have to have a couple of years where instead of flying to see family, you drive to see them. And I think that you guys can be on this path to being really economically secure. But but it means that in the short term that you do have to you do have to make the slightly harder but smarter choice, knowing that down the road it’ll let you relax. And one of the things you said, Erina, that you had gotten sober. Hmm. And I know that that that process, like when you talk to someone who’s in the grip of of alcohol or drug addiction and you say to them, like, one day you’re going to be clean and they say you make it sound so easy. And I can’t possibly believe that it’s true. Like, it just seems so far away. But you’ve done it. I think you could do it with this, too.
S4: Yeah. Can you’re going to make me cry. I mean, that is that is truly it was it was very hard to get sober, and I didn’t know that I was going to be able to do it. And, you know, even even now, there are days that are better and worse. But, you know, you’re right that I am on the other side of that journey and stronger for it.
S2: Yeah, absolutely. And I would say this to your story, and it’s so home with me because my parents actually filed for bankruptcy the year I was born. Wow. And so I was born April. They filed in September and it was all real estate related. Yeah. My dad just borrowed too much money in real estate and couldn’t pay back. And out of that is when they completely changed the way they handled money. If you had money. And because of that, I mean, my legacy is now changed, like because of the choices and sacrifices my parents made. I have the tools day in and day out to handle my money and actually control it’s versus that controlling me. And I think that you guys have this opportunity. You have the strength that Charles just pointed out in. Walking through that sobriety, I mean, you’re an incredible, incredible woman and you guys can do incredible things.
S4: Yeah, yeah. I mean, when you put it like that, it definitely does make me realize that we’re much better off than I thought we were financially and that we can do this.
S7: Rachel, can I ask you something for folks who are listening who who are in in a harder situation than everyday folks who are living paycheck to paycheck, who have been hit by the pandemic, who might be out of work right now? How does your advice shift for them when there’s less certainty and there’s less income and there’s all these anxieties right now?
S2: I mean, it’s a stressful thing for so many Americans. And I would say, honestly, my advice doesn’t change that much. Money really flows two ways. It flows in with income and it flows out with expenses. And so looking at those two ends of the spectrum is really important. So if you are someone who has been laid off or has been furloughed or your income has been cut down way beyond anything and you haven’t been able to replace it, I would say pause everything. Don’t start the debt, snowball. Don’t do anything. Just save what you can because you’re in crisis mode at that point, your necessities. And so what you’re going to focus on are just four things food, shelter, utilities and transportation. That is it’s and then I do think it’s a ton of these little miscellaneous things. You want to be careful with subscriptions. I’ve told people even to unsubscribe from store emails because every time there’s a sale, you’ll get an email and it just triggers, oh, there’s something I might need. Unsubscribe from emails.
S1: I wish I had the unsubscribe to emails advice last week because I definitely bought a few things on Black Friday sales. That was just like, well I guess my my baby needs more PJ, so I should just go.
S2: Yes, that’s right. That’s right. It’s tempting.
S4: It’s so tempting. And this has been really helpful. I really feel like for the first time I have an actual plan as well as like just advice on how to tackle debt, which has been definitely the biggest scary thing out there.
S7: And how do you think that that conversation with your husband is going to go about changing a little bit savings versus paying down debt priorities?
S4: Honestly, I think my husband is going to probably struggle with it for a few days. But, you know, I think that if I really tell him, like, hey, in seven years, we’re going to be in this, like, amazing place. And if we’re looking at in seven years, our baby is going to be seven. That’s really when we’re going to be able to, like, travel and start putting into his college savings and all of that. Like, that’s really when our baby is going to remember, you know, all the things that we do. And I think that just like looking ahead to all the things that we will be able to do as a family in the foreseeable future, I think that’ll really help motivate both of us.
S6: Thanks to Irina for sharing her story with us and original crews, for all of her fantastic advice, you should definitely look for her book, Know Yourself, Know Your Money in her podcast, The Rachel Cruise Show. And we actually heard back from Irina.
S8: I was very nervous about talking to my husband about Rachel’s advice, but and we discussed everything. As I predicted, he was pretty shocked to hear that he should pause for one contributions. But after we did the math and realized that it would actually mean getting about seven hundred extra dollars a month and that we would be able to double our student loan payment and paid off in a maximum of five years, he got really excited. So we’re taking the plunge. And although it’s a little scary, I think that this Christmas season will definitely be a happier one. Thanks.
S3: Fantastic to hear. Irene, have a great Christmas. Do you have something that you’re struggling with?
S6: If so, you should definitely send us a note at how to insulate dotcom or leave us a voicemail at six four six four nine five four zero zero one. And if you like what you heard today, please, please, as a Christmas present, give us a rating and a review and tell a friend about the show, which in twenty will help us help out a lot more people. How TOS executive producer is Derrick, John, Rachel, Allan and Rosemarie Bellson produce a show. And Mayor Jacob is our engineer. Our theme music is by Hannis Brown. June Thomas is senior managing producer and Alicia Montgomery is executive producer of Slate podcasts.
S3: Gabriel Roth is Slate’s editorial director of audio special. Thanks to Son Park. I’m Charles Duhigg. Thanks for listening.