NerdWallet's Smart Money Podcast - Recession Anxiety, and Retirement Savings vs. Mortgage Payoff

Episode Date: April 10, 2023

A recession is imminent. Or, maybe it isn’t? News stories about looming recession can feel incessant, only for the economic turmoil to never materialize. To start off this episode, Sean and Sara talk about how to cut through the noise and focus on improving your financial life.  Then Sean and Sara talk with a listener, Lauren, who’s deciding whether to pull back from her retirement savings to pay down her mortgage faster.  To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [e-mail]. Timestamps: This Week in Your Money segment: 0:00 - 8:39  Money Question segment: 8:40 - 30:52 Like what you hear? Please leave us a review and tell a friend.

The specter of a looming recession feels like it's been haunting our economy for ages, and I gotta tell you, Sarah, I'm about ready to call Ghostbusters. Yeah, seriously, we've been hearing about an imminent recession for what, like over a year now? Yup. This episode, we will help our listeners cut through the noise and focus on what really matters. Welcome to the NerdWallet Smart Money Podcast, where you send us your money questions and we answer them with the help of our genius nerds. I'm Sarah Rathner.

And I'm Sean Piles. And I've got a question for our listeners. What are your money questions? What's that financial decision, big or small, that you just need some help answering? And I've got a question for our listeners. What are your money questions? What's that financial decision, big or small, that you just need some help answering? Let us know. Yeah, maybe you're wondering if now's finally a good time to buy that new home appliance. Or what's a reasonable amount to spend on vacation with your friends?

Whatever your question, leave us a voicemail or text us on the Nerd Hotline at 901-730-6373. That's 901-730-NERD. Or you can email us at podcast at nerdwallet.com. You can email us your voice memos too. Okay, on with the show. This episode, Sarah and I are joined in conversation by Lauren, a listener who's wondering whether she should pull back from retirement savings to pay off her mortgage faster. First, though, Sean and I are going to whip out our big ghost-busting vacuum thingies and vanquish those recession fears, hopefully. Or at least, at the very least, put them in a container where they can't pester us so much. That's the goal, yes. So to set the context, I was just reading about a survey from the National Association for Business Economics,

where more than half of economists surveyed expected the US to enter a recession this year. And I have to admit, when I read these articles, which seem to come out once a month or so, it's hard not to feel a pang of anxiety. And also like we've been here before. So I wanted to talk about how our listeners can both stay informed and focus on what matters most, which is improving your individual financial resilience while keeping anxiety in check. Yeah. So what's a good place for folks to start? One thing that really helps me is staying intentional about the media I consume, that's news and social media content, I really like is asking myself why I'm checking whatever website or social media app, because having a purpose going into one of these black holes of the internet

can prevent you from falling down and not being able to escape. So if you find yourself feeling anxious when following the news, maybe watching a TikTok or reading an article, consider walking away. Simply taking a moment to acknowledge an emotion saying this is making me feel anxious can help dissipate that feeling and allow you to regain control of your emotions. Yeah, I definitely get that. It's kind of like whenever you have like a weird ache or pain, and then you Google your symptoms, and it always tells you that you're dying. It's kind of like, you know, you're worried about the economy, and you start Googling, you know, news about the economy, and the news tells you that you're also dying. So you need to be a little bit careful about Dr. Google, or economist Google. And, and, yeah, like, that's another, an extension of that is also learning to rely on good sources of information, reliable sources of information.

There's so much out there that is accurate, but there's also a lot out there that kind of catastrophizes what's going on and makes you feel like you have to build a bunker under your backyard. Yeah. Well, it's also helpful to put a recession in context. folks should realize that for better or worse, recessions are not that uncommon. Economies are in recession around 10 to 12% of the time, according to a 2018 report from the International Monetary Fund, which is more than you would maybe expect given how extreme they can seem. But they're also rarely as dramatic and catastrophic as the recession that was brought on by the 2008 financial crisis. I think that those fears and the wounds of the 2008 crisis are still really fresh for a lot of people, but not every recession is going to be that dramatic. And, you know,

given the strength of the job market and other factors in our economy right now, if we do enter a recession, it could be mild. So it's kind of like all those teeny earthquakes in California that people don't really notice. And not just like the big one. Well, that's a relief, I guess, if you're used to those sorts of things. Yeah, another thing you could do is focus on what you can actually control, because each of us as individuals have no control over the economy at large. Sorry, nobody's that special. And so what you can really do is use this threat of a hypothetical recession to put yourself in as good a position as you can to weather financial uncertainty. And there are a couple areas to focus on. Savings is a big one,

especially your emergency fund. Even saving up about $500 can help you cover many unexpected expenses without having to put them on your credit card and then risk getting into credit card debt because you can't pay those expenses off in one go. And eventually aim to save, rule of thumb, three to six months worth of monthly expenses. But that can take a long time to build up, especially when you occasionally need to tap into those savings for those unexpected costs. But do the best that you can. Another big thing is debt. Paying down debt, especially now, interest rates are really high. Credit card interest rates in particular, as of November of 2022, the average credit card APR was 20.4%. And that has only gotten higher since then. And that's the

most recent data we have from the Fed. So we'll see how things play out in the next few months. But this is a time to prioritize paying down that debt as aggressively as your budget allows, or even look for ways to lower your credit card interest rates. You could do that through balance transfer credit cards or even a personal loan. And then you also want to think about not just how you spend money, but how you earn money, diversifying your job skills to adapt to a changing economy, and even just keeping your resume up to date and keeping your network fresh and intact and staying in touch with old coworkers, because that can really help you if you need to or want to switch jobs. And then on the emotional side of things,

when you're feeling really panicky and like the world might be collapsing around you, especially when it comes to the economy, think and talk through what is the worst that could happen. Ask yourself that question. Like if you lost your job, ask yourself how long you could get by on savings. And if needed, could you get help from a family member

or a friend to cover some expenses? And then if you have to move because you can't afford your housing, think through, okay, whose house could I crash at? Can I move into my parents' place or in with a sibling? You probably have a lot more support than you think. There's also 2-1-1. That's another resource you can call, or you also visit 211.org online to see what resources are available to you if you need them. And remember that nobody can predict the future, not even economists and especially not TikTok randos. And economists disagree about the timing of potential recessions all the time. Remember that survey that Sean mentioned earlier? When that

same survey was conducted back in December, half of the economists who thought a recession was coming expected to start by the end of March 2023. And we are recording this in April 2023. And let me tell you, a recession hasn't been declared yet. So in a more recent survey, that number was down to only one quarter of economists. So they are constantly changing their predictions. So it goes to show you 100 economists, a million opinions. Great. Well, listeners, hopefully that helps you work through some recession anxieties and shore up your finances a bit. Before we move on, we have an exciting announcement. We are running another book club giveaway sweepstakes ahead of our next nerdy book club episode. Next month,

we are talking with Tony Okamoto, author of Plant-Based on a Budget, Quick and Easy, which helps us approach cooking in a budget-friendly way. To enter for a chance to win our book giveaway, send an email to podcast at nerdwallet.com with the words book sweepstakes in the subject line during the sweepstakes period. Entries must be received by 11.59 p.m. Pacific time on May 18th. Include the following information, your first and last name, email address, zip code, and phone number. For more information, please visit our official sweepstakes rules page. And now let's move on to this episode's money question segment, we're joined by Lauren, a listener who wrote to us with

a few questions about which to prioritize, saving for retirement or paying off their mortgage. Lauren is 34 and lives in Northwest Indiana. Welcome to Smart Money, Lauren. Hi, it's great to be here. Great to have you. Before we get into this conversation, the NerdWallet legal team would like to remind you that we're not going to tell you what to do with your money. The goal of this conversation is to provide you with the information to make your decision with as much confidence as possible. Now that we've gotten that disclaimer out of the way, Lauren, can you tell us a little bit about your financial life right now? How are you feeling about your finances and what

challenges are you facing? Yeah, for sure. So my husband and I had a real good awakening during COVID. He is a nurse, so there was no kind of fear of him losing his job during that time. But I, on the other hand, work in the restaurant industry in a managerial position, and it was really, really scary for a while. Thankfully, I was able to keep my job, but I did have a reduced salary, and that kind of led us to budgeting. We never really did it before, and we kind of really took a hard look at our spending and our finances and figured some things out. We were able to actually pay off a lot of debt over COVID, which was really great. What kind of debt?

I paid off all my private student loans. I still have that looming public student loan kind of waiting to see what happens. We do have money set aside. If it doesn't get forgiven, that we'll just pay it off and be done with it. So I don't really, I guess, currently count that as debt that I'm holding because I will just be able to pay it off if the forgiveness doesn't go through. Great. So it seems like you've come really far in the past few years in terms of having some moments of crisis and then getting your house in order and really getting your finances into shape. Yeah, absolutely. Well, let's get to the reason that you're talking with us today. What is your money question? Sure. So my husband and I are really in debt payoff mode. Well,

the only debt that we currently hold is our mortgage, aside from those bits of student loans that I mentioned. And so we're kind of wondering if it's better to focus on paying down our mortgage and being debt-free, which is very appealing to us, or also focusing on saving for retirement. Because in all honesty, we did start a little late in really focusing on our Roth IRAs and 401ks. Okay. Well, tell us a little more about your mortgage. What's your interest rate? Do you have PMI? That sort of thing. Yeah. So right now we owe $116,000 on our mortgage. We did refinance over COVID. So I have a low mortgage rate. It's 2.75% on a conventional loan. Yeah, I know. I was super excited to do that over

when mortgage rates were super low. Our mortgage payment is about $1,200 a month. We have a 15-year note and we do not have any PMI or anything like that. So that's just the payment and escrow. Okay. And for folks who may not know, PMI is private mortgage insurance. You have to pay that if you haven't put 20% down when you buy the house or if you haven't had the house long enough to shake it free, something I'm hoping to do this year. So you mentioned also your retirement accounts. You mentioned both Roth IRAs and 401ks. So could you share a little bit about what 401ks are available to you through your employers? Do they offer a match, things like that? So I have a 401k through my employer.

I do contribute the maximum allowed amount annually. I just started doing that maybe a year ago or so. However, the match for my employer is very, very poor. They only match $400 a year. So that's kind of a tough spot to be in. My husband left his hospital job and is a travel nurse now and is not contributing to a 401k currently. Is he contributing to another kind of retirement account? So that's where things get a little tricky for us. We both opened Roth IRAs a couple of years ago, but now our income is beyond the maximum allowed income to contribute to a Roth IRA. So we're a little bit in a tough spot.

Yeah. Have you thought about maybe traditional IRAs? You don't get the great tax benefit of a Roth, but that's still a decent retirement option. Yeah, for sure. I guess I don't know enough about how they work other than the tax benefit is like the opposite of a Roth IRA. I'm not aware of income restrictions, if there even is one. I would just say explore some different options because right now you guys are still pretty young. So you have a lot of time ahead of you to be saving for retirement. And in one note around your match, the $400 match isn't great, that's for sure. But it's still $400 free dollars that you're getting essentially from your employer that's

in a tax advantaged account. So it's a pretty sweet deal, even though it's not as good as what maybe other companies offer. Yeah, for sure. And even when I was, you know, my company is really great. And no matter what, you know, what level of the company you're in, there was a 401k available. So when I was younger and not making quite as much money, I did contribute just like the minimum per paycheck to get the match. And I was like, that's better than nothing. Yeah, well, that's true. Well, one thing I want to talk about is the true magic of compound interest.

Because when I hear about people who are around, I'm about the same age as you, Lauren, when I hear about people our age pulling back from retirement savings, my worry is that pulling back by even 100 or $200 can mean that you would maybe have 10s or hundreds of 1000s of dollars less safe retirement down the road over 30 years. So one thing I would encourage you to do is pull up a compound interest calculator. There are plenty of them online. NerdWallet has one. And you can see what the difference would be over time if you scale back what you're putting toward your retirement savings now. So that's my word of caution.

Okay. That's fair. I'm definitely newer to the whole investment game. And so I feel like I've started listening to a lot of podcasts, including the NerdWallet podcast. And I hear about compound interest every day, no matter what podcast I'm listening to. Well, what's hard about saving for retirement, especially early on, is that you can feel like you're putting all this money into an account and nothing's really happening with it. Like, am I going to see the payoff of this over time? And I've talked with co-workers who are later on in their career and they're beginning to see their interest earning interest and it is absolutely paying off for them. And another thing I want to highlight as well is that you have such a low interest rate on your mortgage that when you think about returns of your money,

you'll be getting a better return putting your money into a retirement account because the average stock market return is about 10% per year for nearly the last century or so. That's measured by the S&P 500. So some years are going to be better, some years are going to be worse like we saw in 2022. But on the whole, you'll be getting a lot more for your money than the roughly 2.3%, whatever it was for your mortgage. Well, that makes a lot of sense. Yeah. So we talked a lot about compound interest and using calculators and average stock market returns. Here's the thing, money decisions aren't always about the math. They're not always about the best possible return. And those things are important. But at the same time, a lot of money decisions are emotional as well. And sometimes they don't make mathematical sense,

but they make the most sense for you. So that brings me to a higher level question, or two questions, really. What are your main financial goals? And what do you want from your money? Sure. The debt-free feeling is definitely something that we are thinking about a lot, especially having paid off so much debt recently. Just like each time that one of those numbers goes away, you're like, wow, does that feel great? I don't have to think about that anymore. It's out of my head. We are looking to start a family and the thought of like not having a mortgage payment by the time that we're even 40 with kids is really great. Those are a couple of the big ones. Gosh, my husband and I were just talking

about this yesterday because, side note, we actually decided to get a financial advisor as well recently just because we are... Congrats. Yeah, thank you. It feels so good. We, in comparison to what we were making three years ago, it's a really big difference. And we felt a little lost on how to invest a decision like this that I'm talking to you guys today about what our financial plan is. We've been having a lot of conversations about financial goals over the last couple of days. On the topic of talking with a financial advisor, I recently started working with one more closely, and it is so liberating in a way to have someone that you can bounce ideas off of. And it's just great

to feel like you're not alone, like someone has your back, because they can show you things that you are maybe not aware of opportunities that you hadn't considered yet. And they can help you craft a very specific tactical plan to get there. For sure. And like from such an outsider's perspective is really helpful, too, because like me, you know, maybe I could talk to my parents about it, but they're going to have some, you know, like feelings, thoughts, concerns as you know, me as their daughter, whereas this person's like, you just need to do this and with no, no emotional baggage required. Yeah. Yeah. Sometimes I find that like your loved ones, your friends, your family, they care deeply about you, but they're going to approach your situation with a little bit more bias because they have, you know, they do have a personal stake in your life.

They know you really well. Maybe they remember how you were when you were a child. Maybe the way that they choose to manage their money is very different and they can feel it can feel kind of personal when you make different decisions than they did. So yeah, definitely really helpful sometimes to turn to a pro. Yeah, well, I do want to revisit the boosting your mortgage payoff question, because I am a big fan of getting everything you want all at once working toward many goals simultaneously. And if you do focus heavily on saving for retirement, which would help you meet your goal of being able to retire early, that doesn't mean that you can't also boost your mortgage payoff. So there are a few different ways that you can do that. One common route you

might have heard of is to add enough to your monthly payment to make a what's called a 13th payment each year. So when you do that, you basically divide your monthly payment by 12 and then add that amount to your monthly payment. And if you do this, make sure you tell your mortgage lender that that's your plan. Otherwise, they might just direct that extra payment towards your next month's regular payment. But that's really handy and pretty easy for a lot of people. Okay, perfect. Yeah. When I paid off my car, I made payments biweekly instead of monthly. It's like every time that I got paid, I would just make the payment. And I found that that was like a really nice way to add that 13th payment in. And our mortgage, like the app that

we use for our mortgage provider, it's very clear on like, do you want this to go towards principal? Do you want this to go towards your next month's payment? So we, yeah, we'd pay a little bit extra now. Right now our base payment is $1,168 and we pay $1,300 just so it's like a couple extra bucks being thrown at it. Yeah. In a way you're actually already doing that 13th payment because technically that would be around another $100 a month for you. And it sounds like you're already there. Yeah. So way to go. Yeah. Well, one thing to keep in mind, though, is that most lenders have limits on how much you can overpay on your mortgage. Usually it's around 10% of your outstanding balance each year. And some will charge fees if you pay more than that. So just be careful that while you are making progress on this, you're not going too far. All right. Let's say not too long in the distant future, you are totally debt-free. You've

paid off your mortgage, paid off your student loans, or they were forgiven. Who knows? You're fully investing in retirement accounts. What would your next money moves be? We definitely love to travel a lot. So really focusing money on seeing the world would be amazing. I have always wanted to be a snowbird because it's really miserable up here by the Great Lakes in the wintertime. So into retirement, definitely looking for a second property somewhere that's warm and kind of getting out of here for the first few months of the year would definitely be a huge dream of ours for sure. Have you started saving at all for these goals or you currently just focused on mortgage and retirement and stuff like that? Yeah, currently just focused on those two things. We recently discovered the beauty of the high yield savings account. And so we opened up one for like our emergency fund money, basically.

And then I want to open a second one that provides like those savings buckets. Like I'm a huge like visual. I need to see it and know like what money is going to where. So I want to open one that has the option of capping those savings buckets so we can more consciously put money towards specific goals in the long term. I love this. I do this too. Lauren, I have a feeling that you may have been listening to our podcast because we talk about savings buckets all the time. Well, you're totally doing the right thing. And I just love the savings buckets method, especially with having automated deposits into them. I can just put a certain percentage into

my fund money account bi-weekly when I get my paycheck. And it's just so rewarding to see that money grow. And honestly, it seems maybe dorky to say this, but I love spending that money because I've earned it and I've been taking the time to dedicate the money for the specific purpose and then using it for that is just so gratifying. Yeah, absolutely. I will say sometimes I hate spending the money in my savings buckets because I have an account for home repairs. So if I'm spending that money, it means something's broken. It doesn't always bring you joy, but at least the money helps you solve the problem, right? Yeah. And it's less stressful to know that it doesn't have to come out of thin air. It's somewhere and I can just take from it. I do have to ask, you mentioned investing for retirement

and then saving money for shorter term goals and shorter term needs like emergencies. Do you invest in any additional kinds of taxable brokerage accounts or other non-retirement investment accounts? Not right now. No, I don't. Everything's through retirement. Okay. Is that a goal for you?

It's a little scary, to be honest. I don't know why I feel a little bit more comfort in the investments that are made in my retirement account because perhaps they're just... I know that nothing needs to happen with that money for a long time. So if things go up and down, it's not the end of the world. But having just like a straight up brokerage where if I invest in stocks, it is, I don't know why, it feels more like real money than my retirement account. I don't know if that makes any sense. Yeah. I mean, a lot of people equate investing with gambling. That's just a very common just way to feel about it, especially in times

where the market is up and down and left and right. And it's really scary and the news is scary. But it's definitely something to talk about with your financial advisor is ways to invest a little bit more conservatively for maybe medium term goals. So it's not money that you need in 30 years. It's not money you need in five years, but maybe it's money you want in like 10 or 15 years. And that's definitely something to think about because it's those medium term goals that I feel like are never talked about. It's so easy to say, well, I need money to replace my car. I need money for emergencies, or I need money to retire. But a lot happens in between, especially when you're younger and you're not really thinking about, well, what's life going to look like when I'm 50? 50 is not, I hate to say, I'm sorry, 50 is not that far away. And I say this as somebody who's several years older than you.

So maybe I'm talking to myself as much as I am to you, but yeah. Yeah. I've never thought about that word medium-term goals and how to get there outside of savings. So that is something really interesting to consider. Right. And then if you do have children as you're saving for their educations, for example, that's another form of investing as well. And the older your kids get, the closer they get to college or trade school or grad school, then the more that becomes a medium-term goal and then a short-term goal. And so there are ways to invest in 529s that account for the fact that your timeframe gets shorter and shorter as your children get older. So those are all wonderful things to talk about with a financial advisor as you're making those decisions, as you're

opening those kinds of accounts, things like that. All right. Great. Well, Lauren, I realize that we've thrown a bunch of information at you, but I'm wondering right now, as you go into your conversation with your financial advisor, what are you thinking your decision might be? on investments versus the interest rate of the mortgage. And that's, I think, something that's going to weigh into the decision for sure. Because if our money is going to grow faster than our debt's going to grow, it seems more advantageous to continue investing in retirement. And like we were talking about earlier, the emotional idea of just being done with it is also still on the table. So it's tough. I don't know. I don't know that I'm at a decision making point, but I definitely have a little bit, I guess, more guidance and more ideas on what might make the decision.

Great. Well, you don't have to make a decision right now. So that's good. Thanks. That was stressful. Just kidding. I love this. And I will say you're doing so much right, right now, even just thinking about these things, but also a lot of the actions that you and your husband have taken and the conversations you've had. And ultimately, whatever you decide, the most important thing is that the two of you are comfortable with the decision and you can sleep at night. I always say, you know, if any sort of financial decision stresses you out, it's something you don't understand, it's confusing, it feels too risky for what's your comfort level. Ultimately, you want to feel comfortable, you want to feel like you've come to

this decision together, you can both live with it, you're both happy. So no matter what you do, if those things are satisfied, then you are moving in the right direction. Yeah. And one thing I'll add is that a lot of decisions are not permanent. You can change course if you want to. And often it's not exactly what your decision is. It's what you do with that decision and how you move forward and what you do to really accomplish your goals over the course of your life with your partner. Amazing. Thank you guys so much. Thank you so much for talking with us, Lauren. Yes, for sure. Oh, thank you. Well, Sarah, what did you think about that conversation with Lauren? I think Lauren and her husband are already doing a really great job of not just taking actions like paying off her private student loans, which is amazing, or refinancing her mortgage when interest rates were low, which was also amazing.

But they're also doing a great job of planning out for the future and having these conversations about what they want their life to look like over the next few years or even the next few decades. And just by having those conversations, getting that all out there out loud, you're going to move in a direction of setting goals. It's when you keep quiet about these things that progress won't happen. One thing that stands out to me is how many options they have right now. And that's in large part because they put in the work to improve their finances over many years, where they can think about putting more toward their mortgage or how much they want to save retirement to potentially retire early. So I'm really excited for all they're going to do. I can't wait to hear how that financial advisor meeting goes. But I just think that they're, as you said, in a great position. Yeah, you know, Day to day, you don't necessarily feel the impact of

those little quote unquote, like right decisions. I mean, right in quotes, because what's right for you is very dependent on what's going on with you. But the decision to put a little bit more into savings, the decision to put a little bit more into a debt, when you're doing it, it doesn't feel like much, but you do it for a while and then you look back and you realize the impact of all of those small decisions over a long period of time. And that's what gives you the options, making those little decisions that open doors for you later on. So if you're in the middle of making the little decisions and it doesn't feel that rewarding, just keep in mind that eventually one day you're going to look back and be like, oh, I did everything right. That was awesome. Yeah. A little plus a little plus a little can equal a lot over time, especially when you throw in compound interest. Yeah. Then it equals a whole lot. Yeah. And that is all we have for this episode. If you have a money question of your own, 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.

Visit nerdwallet.com slash podcast for more info on this episode. And remember to follow, rate, and review us wherever you're getting this podcast. 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 may not apply

to your specific circumstances. This episode was produced by me with help from Tess Biglin and Sarah Rathner. Jay Bratton wrote our show notes. Kaylee Monahan mixed our audio. And a big thank you to the folks on the NerdWallet copy desk for all their help. And with that said, until next time, turn to the nerds.