NerdWallet's Smart Money Podcast - Rising Interest Rates, and Budgeting With Apps

Episode Date: December 12, 2022

The Fed is poised to raise interest rates — again. To kick off this episode, Sean Pyles and Liz Weston talk about who’s actually hurt when the Fed raises rates and what you can do about it. Then they answer a listener’s question about which budgeting apps are the best and whether you might want to use multiple budgeting apps to track your money.  Also, next year, the Smart Money team wants to talk with you, on the podcast, to answer your money questions. We’ll be able to explore what’s really driving your money questions, provide even Nerdier information and help you make even smarter decisions with your money.  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 - 8:59  Money Question segment: 9:00 - 30:33  Like what you hear? Please leave us a review and tell a friend.

What do you use to keep track of your budget? When in doubt, there's an app for that. Several, actually. 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 Sean Piles. And I'm Liz Weston. If you have a money question for the nerds, call or text us on the nerd hotline at 901-730-6373. That's 901-730-NERD. Or email us at podcast at nerdwallet.com. This episode, we're answering a listener's question about the best way to manage their money, including which budgeting apps might work best for them,

and whether you might want to use multiple budgeting apps. But first, in our This Week in Your Money segment, we are talking about who's really hurt when the Federal Reserve raises interest rates. There's another Federal Reserve meeting this week. It seems like they're happening almost every week at this point. It does feel like that. Yeah. And most experts think that the Fed is going to raise interest rates yet again. We've talked a lot this year about what happens when the Fed raises rates. In general, borrowing money gets more expensive. That's things like mortgages, personal loans, interest rates on credit cards, things like that. On the other hand, savings get rewarded. So you'll probably earn more interest on the money you have in your savings account,

especially if it's a high yield savings account or with certain savings vehicles like treasury bonds. Raising interest rates is one tool that the Fed has to help slow down inflation. especially if it's a high yield savings account or with certain savings vehicles like treasury bonds. Raising interest rates is one tool that the Fed has to help slow down inflation. The theory goes, if borrowing money is more expensive, you'll spend less of it. The hope is that sellers may reduce prices or at least slow down their price increases as demand falls and they're having to compete for limited dollars. But like so many things, the impact of rising rates is not equally distributed. We're seeing it put more pressure on certain kinds of economic activity and on people with less wealth. So we're going to talk through a few ways that rising

interest rates may be hitting you. And let's start with home buying. One thing to note is that mortgage rates are not directly tied to what the Fed does. But for all intents and purposes, when the Fed raises rates, we often see mortgage rates go up. And right now they are above 7% on average. Wow, which is more than twice what they were a year ago. Yeah, I know. A lot of people who bought houses a year ago or two years ago are probably feeling pretty lucky right now. But for those who want to buy a house, that means that they probably need to target a lower sticker price than a year or two ago to end up with the same monthly payment that they would want to have. Yeah. Or they can stretch a little bit further,

but that's always a little bit dangerous. The farther you stretch to buy a home, the more things can go wrong and you can wind up not being able to afford your payment. And more homebuyers are turning to adjustable rate mortgages, which offer a lower interest rate going in, but it's only fixed typically for a limited time. And once it's no longer fixed, your payments can really jump up and that can be scary. Mm-hmm, yeah.

And we talked about car buying a little bit earlier. When the Fed raises rates, auto loans tend to go up in tandem, which is exacerbating a pretty difficult market for those looking to buy a car right now. This is particularly pertinent in our house because I really would like to replace one of our cars, but it's just such a lousy market. We're still having those pandemic related supply chain issues and cars are so much more expensive than they were even a couple of years ago. Yeah, you're telling me I've been looking a little bit myself and it's just not going to be the time for me to buy most likely. But the good news is that car prices are showing some signs of cooling. Buying a new or

used car is still likely to be expensive regardless. It's made all the more expensive by rising interest rates. One thing that really stood out to me is that the average monthly payment for a new car was $748 in October. Holy cow. Yeah. That's huge. It's so much money. And what scares me is how normalized expensive car payments are becoming. I'm not sure, Liz, have you seen these videos going around, especially on TikTok of people going in their office, especially at car dealerships and asking people, oh, what are you paying for your car?

And a lot of them are paying over $1,000 for their car payment. Holy cow. That is crazy. I know. And it seemed to me like the car dealership that was posting this, they maybe had a vested interest in making it seem like, oh, yeah, everyone has a car car payment around a thousand dollars. It's totally normal. Come on in and get your new car today. And for a lot of folks, that is simply unaffordable. You talked about how if you're paying too much for your mortgage, you probably won't have a lot of money for other

things. The same is true for a car payment. I wrote a column a long time ago, basically saying, if you're having trouble making ends meet, maybe the problem is sitting in your driveway because people regularly are allowed to way overspend on car payments because they get talked into them. You know, it's just it's it's a very slippery slope to go down. That's kind of like those things you read about where, you know, the average cost of a wedding is thirty thousand or thirty five thousand. And it doesn't have to be. There are a lot of other alternatives to spending a fortune either on a car or on a wedding. Yeah. And it will get the job done. Yes, you want to have a special moment for your wedding. And yes, it's nice to have a somewhat cushy ride to get you around town. But you don't need to spend as much money as

possible to make that happen. Yeah. And obviously one place to go is to buy used instead of new, although you probably will be paying a higher interest rate on your loan. That's just sort of baked into buying a used car. If you don't need to buy a car right now, it might be a good time to hold off because while interest rates are likely to stay high, it seems like the market is beginning to figure itself out. So next year might be a better time for you to buy. Yeah, if you possibly can. I'm also hearing from a lot of retirees who are kind of in a bind. If you're on a fixed income, inflation is already hitting you hard. It's also been a really rough year for stocks. And on top of that, a lot of people move around the time that they retire. If they're not

going to age in place, they might want to downsize or sell and move to another part of the country. So those mortgage rates are coming into play here too. Yeah. And with inflation, I could see some retirees actually reentering the job market to cover the gap between what they have coming in and what they have going out. They're already doing this sort of in the gig economy of picking up more work in what are supposed to be their retirement years. The bottom line is that while interest rates are designed to encourage us to spend less money, they're also designed to cause some pain. We spend less money because it's not fun to spend money because it hurts. But a lot of people do still need homes and cars and they're ready to retire. So let's talk about what folks can do right now. One thing that's good is

that interest rates are not fixed across all lenders. So it's more important than ever to shop around when you're getting an auto loan or a mortgage or any other kind of financing. Yep. And we have a lot of resources here at Nerd Wallet that can help you with that. Also, if you are paying off credit card debt, now is a really good time to look for a balance transfer card that offers a low or 0% teaser rate that can help you get your costs down. And again, we talk about these things a lot, but really high yield savings accounts have not been this appealing in quite a long time. They are offering the best rates that we've seen in years. Many are north of 3%. So I would say, look at what your bank is doing right now. And if another bank can offer

you something better for the money you have sitting in it. Yes, absolutely. And don't just assume you're getting a great rate. Go and actually look. Yeah, because you might have an unpleasant surprise like Liz, you did a few weeks back, we talked about. And I found another one. I found another CD that had matured and dumped into a really low rate savings account. And I was just so ticked off. So yeah, check your savings, check to see what rate you're actually getting now. And if you're not getting 3% or so look around for a better bank. All right. Well, I think that is enough about the

Fed for now. Before we move on to this episode's money question segment, we have a call out for our listeners. At Smart Money, our goal is to help you make the smartest decisions with your money. And while we can do a lot with the money questions that you send us, sometimes you just got to talk things out. So next year, we're going to do exactly that we are inviting our listeners to talk with us on the podcast to help us get more context, understand what's really driving your money questions, and generally help you make more informed financial decisions. So if you want to join us on smart money, please let us know you can email us at podcast at nerdwallet.com, or call or text us on the nerd hotline at 901-730-6373. When you reach out,

tell us what your money question is, and hopefully we can find a time to talk soon. I think this is going to be so much fun, and we're going to be able to get so much more information packed into those episodes. I can't wait. Now let's get on to this episode's money question segment. This episode's money question comes from a listener's voicemail. Here it is. Hi, my question is, what do you think is the best app or best way to get a handle on where all your money is going and also budget at the same time? Do you do all of that in one app or do you think you need more than one app? Like you need a budget and, you know, something else like a mint? Or is there an app that does both things efficiently for you? Thanks.

To help us answer this listener's question on this episode of the podcast, we are joined by personal finance nerd Lauren Schwan. Welcome to the podcast, Lauren. Hi, thanks for having me. So from what I understand, you have written a decent amount about budgeting, and you've looked at a bunch of different apps. So I'm excited to hear your thoughts on different apps and when they are or are not useful. But I want to start off kind of at a high level. Our listener is interested in figuring out how to understand where their money is going. And what do you think is a good place to start? I would say really just to start with the basics, which kind of comes down to two things. And that's

your after tax income and your spending, right? What's going in and what's coming out. So it's pretty easy to get a grasp on these things, especially if you have a regular income, you can check your pay stub and get your after tax income figure there. And then you can also sign into your accounts, be it your bank or credit card accounts, and get a sense for what you're spending regularly on bills and other expenses. And then, of course, online, there's also an abundance of free resources, which is really great. So you can kind of explore what's out there in terms of different budgeting templates

and spreadsheets. And those often come pre filled with all kinds of categories. So you don't even have to think of it yourself. And you can just fill in your information from there. Yeah, one strategy that I think can be helpful for people when they're first starting out with getting a grip on their money is to print off the last three months of pay stubs, and the last three months of spending across their credit cards, checking account, etc. Just to get a feel for where their money is going over the past quarter or so, because they might spot trends around, oh, I'm actually spending a lot on eating out,

or oh, my utility bill isn't as much as I thought it was. They can get a feel for overall patterns and their cash flow over time. Yeah, it can be really helpful to get those trends versus just a snapshot. Because if you look at one month, that may not be your typical month, right? And we also have to acknowledge that a lot of people have variable incomes, which can make it really tough to budget. And people also have variable expenses. Things can come out of the blue and kind of surprise you. Yeah, and there are always going to be expenses that you have maybe once a year. Like I have a magazine subscription that without fail surprises me every spring.

Also, there are a number of different tools that can help people get a feel for how to manage their money and what they have coming in and going out. Can you talk over a few different options that are out there? There's a lot of different options people can explore. One, as we mentioned,

there are a lot of different websites and apps. And Mint obviously is a really popular one of those, which is free. There are also the spreadsheets, worksheets, calculators. The Federal Trade Commission has a free worksheet you can download, and you can print that out and fill it out yourself. And then you can also get templates through places like Microsoft Office and Google Drive. Then, of course, just pen and paper works just as well if you're the type of person who just wants to make a list and jot things down as you think of them.

It seems like there's a spectrum of different ways that you can do this. On one end, there are apps like Mint that will really hold your hand and show you where your spending may fall into different categories. A spreadsheet is sort of a DIY version of that. But there are even templates that can help you find a middle ground between structuring things on your own, but also getting some guidance. And then, as you mentioned, old pen and paper can be helpful, but you have to really craft things totally on your own. So how do you think someone can determine which sort of tool would be best for them? Yeah, there's a few things to consider. And I think a lot of it really depends on the person's style and preferences, and also what they're looking to get out of budgeting. You know,

do you have a specific goal in mind? Are you trying to cut back? Are you trying to save for something? In terms of the labor involved, some tools just vary widely. So if you're doing something like a spreadsheet, that's going to be a little bit more involved, and you're going to have to do things manually. But there are also a lot of tools that will do the work for you. If you want to take more of a passive role, you could link your accounts and all the categorization and analysis will be done for you. But there's things besides that to consider as well one being cost. A lot of these tools are free, or at least have a free trial if you want to try it out. But others might have a one time or monthly

or recurring fee. I would consider that as well, especially if you're on a tighter budget, or you're not as flexible with your income, then you may not want to have money going towards another thing. There's a lot of free resources, which are great to start, but they may not be robust enough for you. And that's when you may consider spending on something a little bit fully fledged. Another thing would be to consider what the capabilities or limitations of these tools is as well. And you may get some features with one tool that you don't with another. For example, one tool may remind you when you have upcoming bills due so you don't miss a payment, but another may not do that. Or certain tools may only track certain types of accounts, so some may get left off. Another thing that's important to a lot of people is being able to budget with a partner. If budgeting with a partner is something that's

important to you, then there are apps like Honeydew, which are really great for that. One thing I want to throw in around apps, because we'll get into this later on, but I have some issues with budgeting apps, is that they can give this somewhat false sense that they are one easy to use. And in my experience, apps have often been a little bit more complicated than they're worth. I often have a hard time syncing my various accounts. And this is in part because the bank that I use for my high yield savings accounts doesn't partner with Plaid, which is an intermediary between a lot of banks and apps like this. So if I'm trying to get a breakdown of all of my money, I simply can't do it on many of these apps. I think it's worth noting that these apps can take a lot of work too, even if they make it

seem like it's going to be simple. Yeah, sometimes there's a significant investment upfront that may pay off down the line or may not. It really depends on your situation. And Lauren, we have resources on the site. We have reviews of these various apps, right? That's correct. Yes, we do have a roundup of some of our best budgeting apps. So you can kind of look through and see what might be a good fit and give it a try. And we'll include a link to the article where we have a roundup of various budgeting apps in our show notes post and folks can find that at nerdwallet.com slash podcast. So let's talk about the purpose of a budget, why we're doing all this work. It can be helpful to know where your money's going, but it also can

be a tool to help you meet your goals. Can you talk a little bit about that? Yes. So budgeting is a really great foundation that can lead you to understanding how to better make basically any financial decision you're going to make. And I think some of the more common examples of that are it can help you spend less, it can help you save more, whether that's for something like an emergency fund or retirement or a new car. And it can also help you to get out of debt if that's something you're struggling with. But I think that first step of learning where your money is going is really important because it can allow you to spot areas you might be overspending and allow you to make changes. And you might also just realize you're simply not earning enough

money to cover all the expenses and goals that you have. And so it also just realize you're simply not earning enough money to cover all the expenses and goals that you have. And so it can be a good exercise in discovery, just maybe informing you that you could talk to a professional, be that a credit counseling agency or financial therapist, or it might also signal that you should look for ways to boost your income. One thing that I've always found interesting is that the type of people who budget is maybe not who you would expect. Like, in my experience, I've seen a lot of people who have tighter incomes, they know where their money is going down to the penny. Whereas a lot of folks who are maybe making six figures will be sort of fast and free with how

they're spending their money and will not have a clear understanding of how much they have coming in and how much they have going out across different categories. And you would think that if you have a lot of money, you would really want to be tracking it and making sure that you're using it in the best way since you have a little more of a cushion to invest or take a vacation. But that hasn't often been the case, which I find surprising and kind of counterintuitive. You would think that if you have extra money, you would want to make sure it's all working for you in the best possible way. But realistically, that's not what people do. Yeah, I was just talking to a financial planner about this exact thing. He's a wealth manager. And he doesn't think that most people who have a good income actually need a detailed budget. Basically, if they're saving enough, if they're meeting their

goals, they're not going into debt. He thinks it's fine. But when you're in a situation where you're trying to pay off debt, or for the topic that we were talking about, which is planning for a career break, it becomes really important to get granular and to know exactly where every dollar is going. And your needs will change over time. So someone could even go years without needing a granular budget, they have a big life shift, all of a sudden, it's important for them to dial it in and understand how much they are spending on going out or weekend getaways, that kind of thing. Yeah. And if people are approaching retirement, it's a really great time to know exactly how much you're spending, because you need to know how much you have saved and how much you can tap

those savings and what you need to cover. Once again, it becomes really important to know those details. Yeah, and I think with inflation the way it's been over the past year, it's really important for everyone to take a moment just to dial in how much they are spending on all of their groceries or gas or what have you so they can see what's changed over the past 12 months. Well, and if you've used one of these apps and you have a history with it, you can compare, you can create your own individual inflation rate, simply by looking what you spent on groceries last month compared to a year ago, that kind of thing. And that can be a really

interesting exercise. Yeah, the beauty of budgeting is you could do it at your own pace. And I think, as you were mentioning, a lot of those big life events can signal even if you don't necessarily want to do something every month or every quarter. If you're about to buy a house, or you're about to have a kid, those are really good times to revisit it. Yeah. Now I want to drill into a few specific budgeting apps that folks might be familiar with and talk about who they are best for. One that we've mentioned a few times already is Mint. Lauren, can you give us a rundown of how Mint works and who might be a good candidate for it? Yes, Mint, a lot of people love. It's a free app. It's pretty hands-off, which I think makes it approachable for a lot of people. You

can link up all different types of accounts to it. So your credit cards, checking and savings accounts, different loans you may have. And the app automatically categories the expenses. But it also gives you some room to personalize those categories. So you can make little tweaks. And you can set spending limits for those categories as well. So that might help you stay informed and you'll get alerts if you're approaching that budget limit. Oh, that's kind of handy. So if you say your limit for eating out for the month is maybe $100. and midway through the month, you're at 89, it might send you a notification saying, hey, you're about at your limit for eating out for the month.

Yeah, exactly. So that way you can be a little bit more cautious with the rest of the month and you're spending. Okay. And another one that I have been interested in, but haven't actually used myself is you need a budget or YNAB people call it. And that is a very different form of budgeting. Can you describe how this works? Yeah, it has sort of the same basic budgeting features that a Mint or other apps have. But it's really built around a specific method,

which is called zero-based budgeting. And what YNAB says is it's giving every dollar a job. It's about planning for every dollar of income that you have and making sure it goes to something specific. It's a little bit more hands-on, which can be good for people who want to get ahead of their spending or to better control how they're saving and spending every month. If you're working toward a specific goal or you're trying to get out of debt, it can be a little bit handier than other types of apps. The way that giving every dollar a job works is if you're familiar, there's a system called the envelope system. This is sort of a digital version of that. So the envelope system is basically if you were to have all your income in cash, you would divvy it up into different envelopes based on category. So you'd have

an envelope dedicated to restaurants, an envelope for your subscriptions, an envelope for clothes, and so on. This is kind of taking that into an app experience. So you can really get ahead of your spending. And it's not looking back, like some of these apps are just kind of telling you what you've already spent. And this is allowing you to have a more hands on active role in your planning. But unlike Mint, YNAB has a fee, right? It does, yes. So I believe you can pay either monthly or you could pay for the entire year. Okay. What's interesting is that I follow the You Need a Budget subreddit, which is very active. A lot of folks are troubleshooting how to use it. And that's something that stood out to me over the time that I've followed the subreddit is that many people are confused with

just how to get it to work right for them. Have you ever used this? And if so, what was your experience? I used it years ago, I think actually, when we were writing about it at one point. And yeah, I noticed the same. And this is true for not just YNAB, but several other apps where there can be a bit of a learning curve. So I think the more time you can devote, and the more you can practice, the easier it gets. It was kind of confusing for me at first, and I couldn't get things to work. But I was able to eventually play around with it enough that I could make some sort of a budget in there. Another app that folks might have heard about is Personal Capital. And this is slightly different, again, from You Need a Budget or Mint. Can you describe how it works and who it might be best

for? Yeah, Personal Capital, again, has some of those similar features where it's more for monitoring purposes. So it'll show you what you've spent, and it'll give a breakdown percentage by category. But what's different about personal capital is it's a little bit geared more toward investments. So it's ideal for somebody who wants to use budgeting as a way to better track their portfolio or to keep an eye on their net worth. But it can be used for some standard budgeting use as well. One thing our listener was wondering about as well is whether it's good to use one app or multiple apps. What are your thoughts on that? Yeah, I think, again, it comes down to a person's individual preferences. But I think

there are some advantages to using a few. And one is that it can help you find something that works best for you, or maybe the one that links to the accounts that you have, the one that has the best user experience. So it can be a great way to find something that fits a little bit better with your style. Using multiple apps long term actually works well for some people, again, based on personality and preferences. But if you're the type of person who likes to compartmentalize things, I think there could be some value in using one app to track purely your goals and one app to look at your spending. And then that kind of separates it out easily that way. Well, I want to hear from you too, how you track your spending on a regular basis.

I actually am not super into regular budgeting. I think I get enough info out of just logging into my credit card and bank accounts and keeping track of things that way. But I do use a two pronged system. So my husband and I do like to if we know we're going to have a big purchase coming up, or we're trying to save for something specific, we'll sit down every once in a while and we'll create a spreadsheet. And I really like that because it kind of forces us to focus more on each line item, what we're spending money on, what we have coming in. But it also lets us play around with the numbers a little bit. So if we want to plan for a hypothetical purchase, for example, we're renters, but we're hoping

someday that we'll be able to buy a home. So we could create kind of a fake budget for a month and just say, hey, you know, if we had a mortgage, and we had to make repairs, and we had homeowners insurance, how would that affect the rest of our finances. So I really like being able to tweak that and see how the numbers shift the overall budget. But we also just like to occasionally pop into something simple, even like the NerdWallet app, which does the categorization for us. So we can more easily say, oh, it looks like we were spending more than we should on takeout or we have one too many subscriptions. Let's get rid of one of those. So it's nice to have, I think, a combination of something that's a little bit more manual and time intensive, but also something that is automatic and does the

work for you. Okay. Liz? I've been using these things for a while. In fact, back in the day, I actually would buy Quicken in a disc and like load it onto my computer. Quicken is something very different now. And then it became Quicken Online, which became Mint, which is now a competitor of Quicken. So I've kind of lost track of who's doing what to whom. But I do use Mint. It's incredibly frustrating at times. And also incredibly helpful. I just went to my account and was looking for how much we spent out of pocket on medical expenses. And I needed to compare what we were spending versus the year before. And that was very helpful. It came up very quickly.

On the other hand, it consistently miscategorizes things and will not straighten it out even after I correct it over and over and over. But the pros must outweigh the cons for you if you're continuing to use it. They actually do. I have tried other things. I have tried its competitors and I always come back to Mint probably because I just understand how it works a lot better and I W-2 income and regular household expenses. So it's a lot to keep track of. And I really like the fact that not only does Mint keep track of all of these things, but it also, as Lauren mentioned, will let me know what bills are

coming up, what I'm going to owe when so I can keep track of my cash flow. And that again, is very helpful to have. Yeah, interesting. How about you, Sean? I would say mine is a little bit less conventional. As folks maybe have gathered, I'm not a big app user. So here's how I do it. I do quarterly check ins with the 50 3020 budget framework. And that's where half of your income goes to cover needs, 30% is allocated to wants, and then 20% is for debt payments and savings. And then I usually will go in and scrutinize my wants spending and try to cut back on spending in one category or another, like, like dining out or buying clothes, because that's where I tend to spend a lot of my wants money. But on a day to day basis, I keep a lot of stuff in my head. And I'm able to

do this because I check my credit card and checking accounts on a daily basis or nearly daily basis to monitor what I'm spending money on and make sure that it aligns with my current financial goals. I'll occasionally check apps if I do want a reference for how my spending is fitting into different categories. But it's usually more out of general curiosity than it is to get any sort of new insight into how I'm spending my money. Well, Lauren, thank you so much for talking with us today and sharing your insights on budgeting apps. Of course, happy to. And with that, let's get on to our takeaway tips. Liz, will you please start us off? Number one, start with the basics.

Look at your bank and credit card statements to know how much you have coming in and how much you spend each month. Next up, try out different options. When you're new to budgeting, play around with using a spreadsheet, different apps, or even a pen and paper to find the system that works best for you and your personality. Finally, know why you're budgeting. Getting a grip on your finances is a good starting point. From there, set goals and use your budget to meet them. And that is all we have for this episode. Do 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. This episode's money question segment was produced by Liz Weston and myself. Rosalie Murphy produced our This Week in Your Money segment and edited its audio. Kaylee Monaghan edited the audio of our money question segment. Jay Bratton wrote our show notes and a major thank you to the pros on the NerdWallet copy desk for all of their help. And here's our brief disclaimer. We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. And with that said, until next time, turn to the nerds.