Tackling Credit Card Debt With A CFP | Financial Audit | NerdWallet

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 Piles. This episode, we're bringing you another financial planning session between a listener and an advisor from the NerdWallet Advisors Platform. Our goal this time is to help a listener sort out competing financial goals, like paying off debt, buying a car, and saving for retirement. We're coming to you from a studio in Los Angeles where our listener lives. But before we get into that, I'd like to bring back Magda Dominy. She's a certified financial planner from the NerdWallet Advisors Platform. One thing I want to be clear about is that Magda and NerdWallet Advisors are a distinct platform from NerdWallet. Magda will give some advice to our listener to help them improve their finances, and that advice will be given on behalf of NerdWallet Advisors, not NerdWallet. Also, in exchange for coming on this episode, our listener is receiving a free one-year membership to the NerdWallet Advisors Platform. Magda, welcome back to Smart Money. Thanks, Sean. So, Magda, we've talked with you before, but give us a refresher on who you are and what NerdWallet Advisors is. Sure. I'm an advisor with the NerdWallet Advisors Platform, and what we offer is affordable financial planning memberships that give you access to a certified financial planner, like me, for a low monthly cost. And what we'll do with that is we will do a review of your finances and create a financial plan with some bite-size action items for you, and we'll check in periodically throughout the year, but you really have unlimited access to me via scheduling a call or sending us a message. All right. Well, Magda, we know that managing money can be really intimidating to some people, and that can lead them to disengage from their finances entirely. How do you think people can reclaim their agency and make the most of their money, even if they do feel kind of scared of it? I do think it can be overwhelming to jump in and try and sort through your finances if you feel as though there's a lot you have to tackle, but I think the best way to combat that is to break it up into smaller pieces. I'd mentioned bite-size action items, so really figuring out what the things are that you want to tackle and look at your highest priority one first, and then moving on to the next one. And that can make your goals more tangible, easier to accomplish one piece at a time. Exactly. So if somebody is saying they have a lot of debt, but they also want to save for retirement and maybe save for a trip or something like that, if your first step is maybe talking to somebody like me, and we'll look at those and say, well, the highest priority item would be your high-interest debt, and so let's take a look at that before we prioritize the other items on your list. And with that, we would say, okay, let's take a look at your expenses so we can see where we might be able to squeeze out some extra dollars to pay down this debt, or let's take some cash and pay this down. And then once we tackle the beginning steps of that process, then we can build in something else that just makes it a little bit easier to do it one step at a time. Okay. All right, well, let's get to some financial advising. In a moment, our conversation with a listener here in Los Angeles. Stay with us. Okay, let's get to the guest star for this episode. Jessica is a listener who is 48 years old and lives in Los Angeles. She's with us now in studio. Jessica, welcome to Smart Money. Thank you for having me. We're really delighted that you're joining us today. So to start, tell us a bit about yourself, what you do for work, what you do for fun, any passions that you have. Oh, well, I'm born and raised in Hollywood, California. I work in interior design. I work for interior designers. I'm not an interior designer. So basically, I'm execution. Okay. So they pick colors and designs, and then I make it happen. I've been doing that for 20 years. So how would you describe your financial situation right now? Does it feel stable? Does it feel difficult? Well, at the beginning of this year, I took a really strong hold on my finances, and I watched them. So right at this moment, I feel okay. I feel like I'm barely making it. I'm just covering the expenses. I can't get further than that. When you say you took a hold, does that mean you were really paying attention? I was really paying attention. And you weren't previously before the beginning of this year? I mean, to some degree, yes. In order to get my rent paid, so of course I had to watch it. But I wasn't really worried about those Uber Eats bills. So does something inspire you to get more disciplined about your finances, or was it just beginning of the new year, you had a resolution? Well, I had a car a couple years ago, and then I lost the car because it was gonna cost too much to fix, and I couldn't get the stickers. And now it's been almost two years, and I'm like, I gotta get it together. It's hard to not have a car in Los Angeles. Yep, and so I'm like, when am I gonna get it together? How long is this gonna go on? So this year, I was like, okay, I gotta figure out a plan. But six months in, I've been looking at all the details, and I'm like, I just don't know how this is gonna happen. I just, with all the other pressures of my dad with 401k and retirement planning, it's like, I just don't know what direction I should be going or how I'm gonna make it all work. Yeah, and you wrote to us about some competing financial goals that you just listed. You need a car, you wanna save for retirement, you have some debt that you wanna pay down. Can you talk us through your goals? I first wanna get a car. Then I wanna pay off my debt. And then I wanna work on retirement. Because I'm not gonna be happy at the bus stop just focusing on debt for another three years. Yeah, yeah, that's fair. So I feel like that's why I need a car first. Okay, so let's talk about some financial anxiety that you might have. You mentioned that you have some concerns. So what is your greatest concern right now? Is it the debt that you have? Is it the retirement that you're going to be funding eventually? Probably the debt that I have. It's like looming over me. And this is credit card debt? Credit card debt. Okay, and how much do you have? It's about 20, 22K, which doesn't sound like a lot, but it's a lot to me. And how did you accumulate this debt? It's a good question. Enjoying life. The Uber Eats? Or did you have an event that triggered going into debt? I don't have a good excuse of why. It just ended up that one day. And then I lost the car. And then I was like, I'm not paying anything until I can figure that out. And then American Express sued me. So you have collections accounts? Yep. Okay. Most of them all are in collection except American Express. I've worked out a deal with them. So I pay them monthly. Got it. All right. And let's talk about how you manage your finances on a regular basis. Do you use a budgeting app? Are you more one for a spreadsheet? Does it all live inside of your head? Spreadsheet. Okay. Excel. I learned how to do pivot tables and that was the most amazing thing that I could have learned to do. So you have a fairly complicated spreadsheet then? Yes, I put everything on my debit card and then I have specific categories and within that categories I have subcategories. So I can tell you exactly how much I spent at Trader Joe's this month or exactly how much I spent on Uber Eats or so forth. And is this spreadsheet a new thing as of this year or have you had that? This year. Okay. And it's been working for you? I like it. I feel much more in control. Okay, because that can be the hard part is finding a tool or a system that you can continue to use long-term and you don't just stop using it after a month or so because it's not quite right for your style. Well, I looked at other budgeting tips online and I used those but I made one that worked for specifically for me. My categories are my categories that are important to me. All right. Let's talk about savings. How do you set aside money for an emergency fund or other savings goals? Is that part of your budgeting strategy? Well, at the end of last year I got a bonus. I'm just giving you an example to explain myself. I got a bonus for my job and it was $3,000 and I was like, this is my savings, this is a car. But then life comes around and starts chipping at it. And so now it's not $3,000 anymore, it's a lot less but it was a goal but then life, I guess you can say they're emergencies. Like I lost my glasses, that's an emergency. So it really ends up being an emergency account slash savings account. But not specifically for emergencies, right? Or do you have a specified emergency savings account? No, it's just one. Okay. Well, at NerdWallet we are big proponents of high yield savings accounts. You can shop around. We have roundups that are updated monthly and I recommend looking into that because you can get a better yield on your savings than just a brick and mortar account from a traditional bank. Those banks typically will give you less than 1% on your savings. A high yield savings account can give you upward of 4% right now. So a lot more for your money that's just sitting there. And so it's helping you grow your savings as it's built out. Sounds good. Okay, great. So I want to turn a little more to retirement savings. You mentioned that you have around 20K, is that right? So what's your current savings strategy? Are you putting inside a percent in the 401K or do you have an IRA? I put $100 in each check to my 401K. Okay. Do you know what percent that is from your paycheck? I think it's around four. Okay, great. Well, Jessica, I know you two have been sitting next to each other for a little bit now, but I want to bring in Magda. So Magda, Jessica, Jessica, Magda. Hello. Nice to meet you. Magda, I'm curious about your initial thoughts based on what we've been talking about so far with Jessica. Anything stand out to you? I think in kind of conjunction with what you were talking about and then also some of the information that you sent me, I think ultimately, we talked about this, but Los Angeles is a very expensive city. I think something that didn't come up is that I think your daughter lives with you, is that right? And when that means that together you're not just supporting yourself, you're also supporting another person, if not partially. And so it's really important to figure out if your current income can support the cost of living in a city like this. Because I like to tell, you know, there is a floor of how much money you can spend on yourself, right? You can't literally sit in your home, only go to the grocery store, only get your toiletries and sit and do nothing. For your own mental health, we need to find a way for you to experience life. So looking at how much you bring in and how much you spend, I do think we're gonna have to go through it very closely to find areas that we can squeeze some money out. Because the first thing that you've done that a lot of folks haven't done is create a great spreadsheet and look at every dollar that's come in and come out. Do you find that in this, when you were reviewing it, it in some cases empowered you to spend more because you found that you were cutting back in so many areas that you said, let me maybe spend a little bit more in another area? As far as like household needs, or I organized it better where I feel like I'm spending a little bit more, but in the long run I'm not, because I'm planning a little bit better on those detergents and paper towels and so forth. Yeah, because I found in going through this, and so everybody has the context, I'm looking at just about six months worth of expenses. And when you look at it, you don't net negative every month, but on a whole you're running about $240 net negative. And one thing you mentioned that I actually suggest for a lot of folks is putting everything on your debit card. Why do you do that? So I can record it. Yeah, and so that you don't maybe add to your credit cards as much as you can. Yeah, I don't have any credit cards. So, right, and so my question is, for the months that we're running net negative, where is that money coming from? That's the savings account that I had. Okay, so- Pulling it out of there. And so how much do you have in savings right now? I probably have about 2,000. Okay, got it. And so how are you funding that? Are you putting a little bit in every month, or? Usually when my check comes, I put as much as I can in there, just blindly. And I'm like, okay, I'll just try to run with this. And then as the month goes on, I'll move money back and forth. Okay, got it. Which is great. I mean, ultimately, having the savings account and having the ability to move some over, we obviously don't want you to run net negative from that. We don't wanna have any payments that are paid if you are, what's the word I'm looking for? If you overdraft. We don't want you to have any overdraft fees or anything like that. However, I would say if you are looking at this spreadsheet that you had sent through, and I think you had mentioned the things you like to do for fun are go out, maybe Uber Eats, or just go out to eat with friends, tickets, concerts, things like that. And I do think that there might be a way that we can tighten that up a little bit without taking away too much of the fun, as well as I noticed you have a side gig of some kind. Can you tell me about that and the consistency of making additional revenue outside of your main job? It's a great side gig. I work from home creating invoices for a friend of mine. So it's basically on my time, and I get $500 a month from that. And it's really on my clock, so that helps. Is there a way to do that? Because I noticed it's either it's not every month or maybe you do twice in one month or something. Is there a way to make that either more consistent or also increase above the $500 a month? Is there a way to bring in any additional income? From that particular job, no. It's pretty much going to be $500. I could be more consistent if I'm just more consistent. Okay, and I think it's important because while your income is great for most of the country, this is one of the most expensive cities. And so I think in order to support not just your lifestyle, but a lifestyle here, especially while you're still supporting a little bit towards your daughter, we might want to find a way to not only increase the consistency of this side gig, but also find out if there's another way to bring in more money. And at your current job, are raises a regular part of the process? I don't see any raises. Do they give you raises? I got a, what's the raise they give for? Cost of living. Cost of living raise recently. So what's your current salary, Jessica? $74,800. Yeah, if you're living in somewhere in the Midwest, that might be a really great salary. In Los Angeles, it'd be a little bit harder. And you mentioned that you're supporting your daughter. How old is your daughter? She's 21. Okay. I support her, but I don't support all her fun stuff. Uh-huh, the food. I pay the phone, the Netflix, the lights, the rent. And she's in college, so there are expenses that come out of my savings. Like all of a sudden she'll need like $400 for some school things. So then it's like, okay, well, here you go. Do you talk with your daughter about household finances or do you keep it separate? Yes, when I created this spreadsheet, she has her own column. Okay. And then within the month, she's like, don't. We go out to eat, and she's like, don't put that in my column. So she knows. Okay. She's pretty aware. Do you feel comfortable bouncing ideas off of her when you're saying or thinking, oh, I'm kind of having a hard time getting a grip on my financial goals and my debt, or do you keep that more separate? She's pretty aware of everything that goes on. Yeah, we talk a lot. I know she's in college, but does she work? Does she have the ability to get a job? She has. She works a little bit. Okay. Is she able to support? I mean, she's living with you, so that's a huge savings on her part. But something I want to have you also think about is, one, when we look at a parent and a child dynamic, it's always more important to focus on you as the parent than on the child, because you have anywhere from 20 to 30, 40 years, or they have 20, 30, 40 years extra to figure it out, right? And so by you ultimately taking on debt or not being able to save to support her, it's not necessarily doing her any damage if you didn't do that. Because even if she did have to accumulate some debt, she has 20 or 30 more years to pay that down than you do. Right, at some point you do have to retire potentially or trim back the amount of work that you're doing, and it's going to be a lot sooner than her. And hopefully after school, she'll get a job and she'll be able to pay for her expenses. It's also a good opportunity for you two to learn and grow together. Yep. I want to get into some specific recommendations, Magda, that you would have for Jessica. And I want to start by talking about Jessica's credit card debt. So Jessica, if you can, can you just list some of your debts or all of them, if they come to mind, about what type they are, what the balances are, and how you're paying off your debt if you have a specific strategy that you're deploying currently? Okay, well, I have two cards with American Express and that I'm paying about $500 a month. For each or both total? Total. And they're the only ones that get paid right now. And that's because of your settlement, your agreement with MS? Yes. And the other ones have gone to creditors. They've sold, the credit company, like Bank of America sold it to somebody else. A third-party debt collector? And I'm not paying any of those yet because I haven't figured out how to yet. Did they send you a notice that says this is the amount? Yes. They send me emails and notices and they're like, if you just pay this, we can call it even. And I'm like, no, I'm not there yet. Got it. How much of the debt, of the $22,000, how much of it is for the Amex cards? Probably $10,000. $10,000, okay, so then another, call it $12,000, is for the collections? $4,000 Bank of America. Care credit for, that's like medical. That's another five grand. Another creditor is the remaining. Okay. And those are all in collections currently? Yes. Have you looked into strategies for resolving collections accounts? Well, I mentioned, I was on something called money management international. Yeah, a debt management plan? Which was great, and then I got on, and I did pay all my debts. And that was just credit card debt? It was just credit card debts. And then I was clean, then the pandemic happened, and it's just a lot of money. I went back into debt, and then I did money management, but then I lost my car, and then I was just mad at everything, and I was like, I'm not paying anybody anything. And so then I got kicked off the money management plan for the second time. Yeah, because debt management plans from credit counseling agencies, they're pretty strict with missed payments. If you miss one, they can kick you off. And I know one of your big items that you want to do is get a car. And having these not resolved is probably going to make it more challenging to get a loan to get the car. Where's your credit score right now? Do you know? It's a 668. Okay. And so having the higher your credit score, obviously the better the rate that you'll get. And so we would want to try and prioritize as much as we can getting rid of these debts. So I'd like to hear how you think Jessica could make a plan to get to a place where she can buy a car, or save more for retirement, because that's going to be a big priority with time horizons a little shorter for Jessica, as you mentioned, than her daughter, for example. So what do you think would be a good way to maybe work on that credit score, save some money for a down payment on a car? Where can she begin? I do think the first thing that we'd want to do is take a look at any other places we can shave off some money. And I think you can be honest with yourself as well to decide, is there a way we can trim down the number of dining outs we go to? And I like to, instead of using a dollar amount, similar to what you said, only one Starbucks every other week. Very similar strategy. That is a much more reasonable way to think about budgeting, which is maybe you only go out with your friends once a week or once every other week, depending on where we're at with the numbers you have. So finding some very short-term goals to rein in at least a couple hundred dollars a month from some of the spending, which I think we might have a little bit of room in there, but also figuring out if maybe we could even split the bills with your daughter. So instead of going from 400 a month on average that you're spending, can we do 200 a month? And now all of a sudden we have $400 a month that we could work with. I think we're gonna have to start really small because it's tight. I also would love to spend a little bit more time figuring out how we can increase your income in any capacity, whether it's working more with the side gig you have now or more consistently, or finding an additional one. We can look together to see if there's anything in your wheelhouse based on your expertise. And Jessica, how long have you been at this current job for? 10 years. 10 years with the same employer. So I imagine they're kind of like family. Yes. You feel close to them. It's hard because I'm thinking you could maybe go to another employer. You might be able to get a raise. But it's hard to leave that emotional connection that you have with them. Have you thought about this at all? No. I love my job. I love who I work with. At the end of the day, my sanity is important. And it's nice to be able to walk in. And I'm sure I could make a lot more money somewhere else, but it's close to home. Then do you think you could talk with them and say, hey, I would love to make this amount more? I'm sure I could have a conversation. This is actually the harder path to go down, is to figure out how to increase your income. It is a challenge, but it's something that could be permanent in increasing your income. So I do want to spend all the energy that you put into this spreadsheet. We should take some of that energy temporarily and shift it into seeing if there's a way to make more money, whether it's in your industry or outside of that. Because I do want to get to a place. Right now, what we want to prioritize is building up your savings account and paying down your debt. Your savings account will hopefully use somewhat to get you your car. It's a lot to juggle, and that's why it's helpful to check in with someone like Magda. I mean, you have this year membership with her, so you'll be talking regularly. You're not doing it alone. That's helpful. You also have your daughter's partnership. She can be a sounding board in this. I'm glad that you guys have each other through this too. Tell me more about the emergency fund. I'm not even really familiar with that, what that means, what that's supposed to look like. So an emergency fund is intended to be, really, it's supposed to be if you were to lose your job. Because if you lost your job, you could get a little bit, potentially, from unemployment. But that is usually not enough to cover the rent, let alone your other living expenses. And so for a single income household, which would be yours, we would want you to have six months worth of your expenses in cash at any given time. So that's something that we would want to work towards. It could be a big number, and it can seem really intimidating. But at the start of it, we're looking for maybe $1,000 in savings, which you have too, which is great. Once we get $1,000, then we can start to peel some of your extra money that you may have each month and split it between your emergency fund and your debt. And once we get to a healthier amount on the emergency fund, we don't have to fund it all the way, then we would want to make sure we're also chipping in some retirement along the way. You don't have to have your debt paid down to zero in order to contribute to retirement, absolutely not. But we want to make sure that anything that's costing you a lot of money, we want to be able to put your dollars towards that so we can get rid of it and move on. And if you're not adding to your debt already, that's a really good first step. So we're moving away from that, but we do need to find a way to trim back. And yes, we would just want to contribute a little bit towards your emergency fund every month. And how best to hold the emergency fund? Would that be held in a high-yield savings account? Exactly, exactly. So you would have your standard checking account, and then you could have a standard savings account, but you wouldn't really necessarily need to use that. The high-yield savings account, you can link them directly to your checking account and have it move within one to two business days. And the emergency fund would be over there, and don't look at it. I was just going to say, psychologically, that's a nice benefit, because you're not as able to pull from it instantaneously, whether it's at the same bank that you have your checking at. Well, Jessica, I'd love to hear how you are maybe thinking differently about your situation and what you want to do with your money. You mean differently from our conversation right here? Based on what we've been talking about, yeah. How I'm feeling about it. Well, I feel a little bit more empowered. I just got to do the work. I do like your ideas, so I don't feel overwhelmed. That's good. And like I said, this is just your first conversation with Magda. You'll be talking more. It feels doable. That's the word, doable. Well, that's great to hear, the hard part. I just got to do it. I know. But you've already put in so much work. You should be proud of yourself. A lot of people do exactly what you do, which is new year, new me. And then February comes along, and I don't know where that new person is, but it's not here. And you've been doing it consistently. And the data just alone, I mean, I don't think people recognize that my ability to even point out something like the dollar amount you're negative and the fact that we can even right now identify where we might be spending a little too much is something most people don't have. And all we're doing is talking generally about things that you might be able to do. We have real concrete things because of the work you've put in. And a lot of people don't even do that. So that is super exciting. And if you can take that into some next steps, which I know it's even harder to say I can't go out tonight because I'm trying to save. But that energy can become more habitual. And you can still be excited about the times when you can spend your money. We'll just do it in a more structured way. Great. Well, Magda, I'd like to hear what lessons you think our listeners can take from Jessica's situation or this conversation more broadly. I think it's really important to understand the cost of your living in general and balance it between happiness of work, happiness of location, but also understand what you're trying to accomplish. And finding ways to make sure that you're not taking on everything for everyone, like your daughter. You really, in financial situations, need to put you and maybe your partner or anyone who's kind of of your age first because of the time that you need to get there. And I think for you, if we do want a car and if folks are looking to actually accomplish something, like buy a car or retire, that needs to be what drives your energy to say yes or no to something. Because every time you are saying yes to something today, you just have to recognize that that is potentially keeping you in the same position you're trying to get out of. And so if somebody is saying, I like my job so much, I would never want to give this up, then we need to find a way to live within that paycheck. And if we can't do that, then we need to come to the realization that we do need to find a new job. Otherwise, we change the lifestyle so that we can accomplish the goals that we are trying to set forward. One of the two things needs to be true. And I think that is the hardest part of this process is trying to maintain your mental health and sanity while also accomplishing your goals and making sure that those two things are lined up. So hopefully, we can figure out what the true north is in terms of what we really want to accomplish and if those things are more important than finding other ways to make money. And that's something that we should dive deeper in. I like it. Feeling ready, Jessica? I'm ready. Let's do it. Thank you so much for coming on Smart Money and talking with us. Thank you for having me. I appreciate it. And 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-NERD. You can also email us at podcast at nerdwallet.com. Also, visit nerdwallet.com slash podcast for more info on this episode. And remember that you can follow the show on your favorite podcast app, including Spotify, Apple Podcasts, and iHeart Radio to automatically download new episodes. To learn more about the NerdWallet Advisors platform, go to nerdwalletadvisors.com slash smart-money. Here's our brief disclaimer. I am not a financial or investment advisor. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. This episode was produced by Tess Vigeland, Cody Goff, and myself. And a special thanks to Magda Dominy, Georgia McIntyre, and Emily Canedo. And a big thank you to NerdWallet's editors for all their help. And with that said, until next time, turn to the nerds. NerdWallet Advisory LLC, DBA, NerdWallet Advisors, is an SEC-registered investment advisor and wholly-owned subsidiary of NerdWallet, Inc. The advice provided in this episode of Smart Money was for illustrative purposes only and not intended as financial or investment advice specific to your personal facts or circumstances. Thanks for watching. I'm Sean Pyles, host of NerdWallet's Smart Money Podcast. 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