5 Things You’ve Always Wanted to Know About Money – Budgeting & Debt Edition

On this week’s episode of the podcast, we answered a few of the most popular questions around budgeting, paying off debt, and a special reader question on saving for your child’s education.

If you missed our first episode, be sure to check it out here, as we covered investing and credit – two important topics that most people are afraid to learn about, or don’t think are important enough.

The truth is, when it comes to your money, just about everything matters. There’s no such thing as knowing too much. Educating yourself is the first best step you can take, as any of us can attest to.

That’s why we wanted to take some time to address these questions. We hope they help you!

Want to learn about saving for your child's education, budgeting, and debt payoff? Learn the best methods for each (they may not be what you're expecting!).

1. How Can You Budget?

“Budgeting” is a really broad term, and there’s not much use in trying to wrap it up nicely with a bow on top.

At its core, a budget is a tool that will allow you to achieve your financial goals. You should be aware of how much is coming in, and how much is coming out.

It doesn’t necessarily  need to involve a spreadsheet, fifty-million different categories, an app, or a pen and paper. It can take whatever form you need it to so you can make it work.

One example we spoke about was the 50/30/20 budget, where you spend 50% of your money on necessities, 30% on discretionary expenses, and use 20% to save or pay off debt. This doesn’t involve detailed line-items, so it’s an easier way to manage things.

Bottom line: there are a ton of ways to budget, and none are fundamentally right or wrong. Experiment, and find what works for you.

2. How Do You Stop Living Paycheck-to-Paycheck?

Budgeting definitely comes into play here. As we said, you need to know what’s coming in and what’s going out. If you don’t, then you could be spending more than you earn, which immediately places you in the red.

If your money isn’t lasting you all month, then you need to do something about it. Try a combination of:

  • Cutting your expenses
  • Earning more
  • Tracking your spending
  • Paying yourself first

Cutting back helps you in the present, as you should be able to find expenses to reduce to put more money in your pocket. If you can’t, then it’s time to focus on earning more money.

Tracking your spending helps you become aware of any leaks your budget might have. You might find you’re spending more on food or clothing than you originally thought.

Finally, paying yourself first ensures that some of your money makes it to savings, so you’re getting out of the paycheck-to-paycheck cycle. It’s best not to leave it till the end of the month if you’re finding yourself with nothing left.

3. What’s the Best Way to Pay Off Debt?

As we spoke about in our debt payoff episode, and similar to budgeting, there’s no one best way to pay off debt. It’s whatever method that works best for you.

For example, some of us prefer the debt avalanche method, which focuses on paying off the debt with the highest interest rate first. This will save you more money in the long run.

On the other hand, some of us find it easier to follow the debt snowball method, which tackles the smallest debts first for quicker wins.

Or you can combine the two! As long as you’re paying your debt off month by month, you’re moving in the right direction. You simply need to prioritize it and commit to paying more than the minimum payment.

4. How Should You Save For Your Child’s Education?

Listener Tiffany sent us this question, and we were super excited to answer it! Unfortunately, the “moms” of the podcast weren’t able to make this episode, so we did the best we could. We may end up dedicating an entire episode to this down the road.

Long story short, 529 plans are likely to be your best bet. They’re the most popular for a reason. We wouldn’t recommend stashing the money away in a savings account, money market account, or CD, because those won’t earn you nearly enough interest to keep up with inflation.

As we all know, the price of tuition is only increasing, so that’s important to keep in mind. 529 plans usually involve mutual funds or ETFs which should keep pace with inflation, and depending on the plan and the state in which you reside in, may also provide you with tax benefits.

However, keep in mind that state-sponsored 529 savings plans are better to go with than pre-paid plans. While they “promise” to lock in tuition at today’s rates, they aren’t guaranteed, and if the state doesn’t have funding for them, they may get shut down.

5. Can You Become Rich Working For Someone Else?

This was an interesting question. We both agreed that it’s totally possible.

Yes, self-employment means that you have more control over your earning potential, but there are several costs (like health insurance and taxes and saving for retirement) that employers will cover.

As long as you’re a diligent saver and a wise spender, there’s no reason you can’t retire rich from a “regular” day job. Of course, this is easier to do if you have more opportunities to advance in your field, but there have been plenty of stories of teachers retiring rich.

Being an entrepreneur may be a quicker path to wealth, but you can still become rich working for an employer.

That wraps up our answers for this round! If you’d like to ask us a question about your financial situation, please leave a comment, connect with us on Twitter, or email us!

Were you surprised by any of these answers? Do you have a different opinion? Any questions?

5 Things You’ve Always Wanted to Know About Money – Investing and Credit Edition

This week on the podcast, we tackled some of your burning questions about personal finance.

It’s common to have questions about money, but sometimes you may be hesitant to ask them of your friends and family. We get it! At one time or another, we’ve all had questions about personal finance that we wanted answered but were afraid to ask for various reasons.

This is why we decided to tackle some of these popular questions in our podcast, and in the summary below.

Here are 5 things you’ve always wanted to know about money, the investing and credit edition.

Everything you wanted to know about credit and investing but were too afraid to ask answered here.

What is the best way to start investing in your early 20’s?

This question can depend a lot upon your personal financial situation, but in general, we decided some of the best ways to get started investing are by contributing to your employer sponsored 401K if you have the option at your job. Otherwise, there are several other ways you can get started investing on your own with an IRA, or a Roth IRA.

The most important thing is that you start investing as soon as possible so you can take advantage of compound interest working in your favor so you don’t have to invest as much of your own money, but instead can take advantage of the interest earned on your interest for years to come.

Why is buying a house a good investment?

This question was fun to discuss despite the fact that we have no first-hand experience with using a house as an investment.

Our opinion is that you should NOT treat your primary residence as an investment unless you truly plan to use it as such in the near future (1-5 years). Otherwise, your primary residence shouldn’t be seen as an investment other than as an “investment” into your family or your life, not a financial investment.

Buying houses specifically for investments, however, is a good strategy, but you need to be well-versed in the best practices for this strategy before you get started.

What do finance experts thing about buying vs. renting a house?

Ahh! The old buying vs. renting debate. We actually dedicated an entire episode of the podcast to this very question a few weeks ago.

In the end, we decided that there are definitely pros and cons to both sides of this real estate debate, including both financial and non-financial factors that must be considered.

The answer to this question is really “it depends”, and this is something that has also been echoed by real estate expert Paula Pant of Afford Anything.

What are the best ways to invest money?

Once again, we touched on investing strategies with this question. One of the most important things to do when you are investing is to “set it and forget it” rather than being an investment micro-manager.

We also discussed using automated investing options such as lifecycle funds that will automatically adjust as you age and get closer to retirement and the need to withdraw your funds. Lifecycle funds will be more aggressively invested when you are young and will slowly get less aggressive so you are exposed to less risk later on.

Erin also advocated for the use of index funds to help your investment portfolio with diversity without having to select multiple funds yourself.

Most important of all is the need to understand and educate yourself about investing options before you buy into them.

Will closing old credit cards and setting up a new one hurt my credit score?

Your credit score can be hurt both by closing credit cards, as well as opening a new one. Here’s how:

  • Your score may be damaged if you close an old credit card because your credit history length may be shortened.
  • Your score may be damaged if you carry a balance on other credit cards because your credit utilization ratio will be higher if you close a card once the balance is paid off.
  • Your score may be damaged if you open a new credit card because creditors will do a “hard pull” on your score. However, the effects of this will be short-lived and rather minimal.

If you aren’t totally sure what a credit utilization ratio is, here’s an example. If you have two credit cards with a combined credit limit of $10,000 and a balance on one card of $2,000, your credit utilization ratio is 20%. If the card you close has no balance and a limit of $5,000, your combined credit limit will be decreased by $5,000 but your balance of $2,000 will stay the same. Now your utilization ratio is $2,000/$5,000 or 40%.

We also offered some alternatives to closing a credit card if your main reason is to avoid temptation of racking up more debt. You can hide your credit card, shred it, or freeze it in a block of ice so it’s hard to access it to spend money.

You can also call and lower your credit limit so you have less access to credit. Even if you rack up debt then, you won’t be able to dig as big of a hole. Lowering your credit limit will still have a negative affect on your credit utilization ratio though, so be considerate of that before asking for a lower limit.

Can you withdraw money from a credit card?

Our final question was if you can withdraw money from a credit card. The short answer is yes, but the better answer is that should NEVER do this if you can avoid it.

The interest rates on cash advances are often several percentage points higher than the interest rate for regular purchases, plus you may also be charged a fee for taking out a cash advance at an ATM.

Although we never advise people to take on more debt, if you are in a jam, you should consider all other options, like a personal loan, before taking out a cash advance to help pay your bills.

Do you have any questions about things you’ve always wanted to know about money?

If so, shoot us an email or reach out to us on Twitter. We’d love to hear from you!