NerdWallet's Smart Money Podcast - Simple Steps to Budget Better and Manage Credit With Confidence

Episode Date: January 16, 2025

Learn how to create an effective budget and manage credit responsibly to build a strong financial foundation for 2025. How can you create a budget that works for you? What are the best ways to use credit cards responsibly? NerdWallet personal finance expert Kim Palmer joins host Sean Pyles to discuss budgeting strategies and smart credit management to help you build a strong financial foundation for 2025. They begin with a discussion of budgeting, with tips and tricks on choosing the right budgeting method, tracking expenses effectively, and overcoming common pitfalls like unexpected expenses. Then, Sean and Kim discuss credit card management and how to use credit responsibly. They explore the importance of monitoring transactions, strategies for avoiding overspending, and tips for keeping your credit utilization low to protect your credit score. They wrap up their conversation by sharing actionable advice for managing debt and improving your credit health over time. Enter your monthly after-tax income into NerdWallet’s free budget calculator to create a suggested 50/30/20 budget: https://www.nerdwallet.com/article/finance/nerdwallet-budget-calculator  Here are NerdWallet's picks for the best budgeting apps, broken down by what works best for different needs: https://www.nerdwallet.com/article/finance/best-budget-apps  In their conversation, the Nerds discuss: how to budget effectively, creating a budget, 50/30/20 rule, zero-based budgeting, cash stuffing, best budgeting apps, credit card tips, responsible credit card use, credit utilization, how to manage credit, credit card debt help, financial planning, credit score improvement, debt payoff methods, snowball method, avalanche method, NerdWallet app, best apps for budgeting, income tracking, expense tracking, managing credit card debt, avoiding overspending, building credit, financial goals 2025, smart financial habits, credit score tips, common credit card mistakes, planning a budget, household budgeting, monthly budgeting tips, using credit wisely, and setting financial goals. To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [e-mail]. Like what you hear? Please leave us a review and tell a friend.

All right, everybody, raise your hand if one of your promises to yourself in 2025 is that you're going to follow a budget. Hey, look at that. I see lots of hands in the air. Just kidding. I can't see you. But there are probably quite a few of you who've made that promise to yourself. Today we're going to help you keep it, and we're going to make sure that your credit

life doesn't get in the way. The main caution to watch out for with credit cards is overspending. Credit cards can just be really tricky because it doesn't necessarily feel like real money. And other than the credit limit on the card, there's really nothing stopping us to keep swiping away to buy what we want. Welcome to NerdWallet's Smart Money Podcast. I'm Sean Piles. And I'm Kim Palmer. Throughout this month, we're featuring several episodes to help you get the year started off on the right financial foot, if you will. It's your money in 2025. Kim, you've joined us today

to talk about budgeting and credit. And when I say credit here, I mean the credit you use, like from a credit card, as well as your credit scores and credit reports. Yes, these are two aspects of our financial lives that are so common, but they're also really frequently misunderstood. We are going to walk people through some of the basics of setting up a budget. We'll actually go a bit beyond the basics. And then we're going to have some tips and tricks for layering credit onto that budget. And that's a really good way to think of it. Know your budget first, then you can figure out how to use credit, aka debt. Of course,

we are aware that probably most of the audience already has some credit cards. So we're really going to get into how to use credit responsibly and make sure you're making it work for you, not against you. Credit is something you really need to actively manage. And one excellent way to do that is budget. Budget. Exactly. We're going to meld these two aspects together so listeners can really head into 2025 with a really solid financial foundation. Kim, I always enjoy hearing how my fellow nerds put their advice into practice for themselves. I want to ask whether there's anything you do at the start of the year to help yourself along these lines. Any reviews you do of the previous year or mental exercises

to figure out how you're going to budget and manage your own credit life for the coming year? Anything you'd like to share with the audience? Yes, of course I do. I absolutely love doing spending reviews. So I do a big one at the end of every year, but I actually also do more frequent reviews. So every month I like to pull up my credit card statement, which is basically where the bulk of my spending is. And then I just see what surprises me, what trends do I notice? Sometimes I'll even notice some mistakes or errors that I have to fix. Sometimes there's a big expense that I want to kind of dig into and figure out why something went up so much that month, like takeout, for example. And from there,

I can also just make decisions about where I might want to scale back or shifts I want to make. Sometimes there are irregular expenses. For example, right now I'm going through a lot of deposits for summer camps because now's the time to sign up. Wow. So far in advance. Oh, so far in advance. Yes, we have to get those spots now to make sure we're set for the summer. It means putting up a lot of deposits. So I'm noticing that and just helps to plan for that. And then I can realize, okay, this month is a lot because of these certain reasons, but I know that won't repeat next month. Now you have to tell me, I would love to hear what you do. Well, I do something similar, but I'm maybe a little bit

lazy and I try to automate this as much as I can. I use an app that gathers all parts of my finances in one place, things like my investments, my spending categories, my savings accounts, so that at the end of the year, I dig into that app and I review what I do with my money. I did that at the end of 2024. And I looked at different spending categories. And I asked myself what spending I felt good about what spending I did not feel so good about. And then I also asked myself what changes I wanted to make based on how I felt I spent my money and managed my investments and savings and all of that the year before. So it sounds like we kind of have similar approaches, but we do it a little differently in terms of you like using an app. I do it more just logging into my account, but we're asking ourselves similar questions. Yeah. And one key difference is

that I don't have kids I'm putting into summer camp. So that makes my life a little bit simpler. Yes, that is so expensive. Well, we want to hear what you think too, listener. What are you working on in your financial life as we start the new year? Leave us a voicemail or text the nerd hotline at 901-730-6373. That's 901-730-NERD or email a voice memo to podcast at nerdballot.com. Kim, these are a couple of the most common topics we get from listener questions here on Smart Money, all about credit and budgeting.

Let's start actually with budgeting because you really need to do that before you even want to think about using credit. Now, if we have some folks out there who have never done a budget before, but decided that 2025 is the year they will finally do it, what is step one? Maybe creating a complex, complicated, fancy spreadsheet that they will finally do it, what is step one? Maybe creating a complex,

complicated, fancy spreadsheet that they will never use? Well, I definitely think maybe keeping things a little bit simpler could be more appealing. Yeah, I am kidding, of course. This is one thing that you want to make sure is the opposite of complicated. It should be easy to read, easy to navigate, easy to follow. Kim, if you were designing a personal budget, what would your very first step be? Maybe deciding analog versus digital? Before we even get into that question, I think it's helpful to take a step back and choose an overall method of budgeting. I am actually a really big fan of the 50-30-20 budget. It basically involves giving yourself some ballparks for where your

money's going. You're aiming to spend 50% of your take-home pay on needs, 30% on wants, and 20% on savings and debt payments beyond the minimums, but you can make adjustments. For example, for a lot of people who are living in a really high-cost city, it's really hard to keep your needs to that 50% figure. So you can adjust it, you might do more of like a 60-20-20 breakdown or something like that. I think this method is appealing just because it allows for that kind of personalization. I'm really glad you mentioned the flexibility of the 50-30-20 budget because this budgeting framework has gotten some flack over the past couple years for being, shall we say, unrealistic to some people, or maybe out of touch with the current way that

people manage their money, given how expensive everything from housing to groceries is. The real benefit of the 50-30-20 budget, or maybe the 60-20-20 budget, or however you want to structure it, is that it allows you to see where your money is going under these three broad categories. And you can't really make smart changes to how you manage your money without first knowing how you're allocating your money. That's exactly right. And I know there's a couple other methods that are appealing to people for different reasons. It's really all about finding the one that fits best for your preferences. But another one that stands out is the cash stuffing or envelope based method where basically you're putting your expenses into different buckets or sometimes different envelopes each month.

You're allotting it out that way. Another method that appeals to people is called the zero based budgeting approach. Basically, you're accounting for every single dollar when you use that method. I think your point around personal preference is a really good one. And I want to emphasize that because you have to know yourself to know how you might budget best. For example, I've heard from listeners who have suggested that I personally might like the zero based budgeting approach, in part because of how I have my savings account set up. Kim, in case you didn't know, I have about 10 different savings and checking accounts, each with its own purpose. Even though I like to have my paycheck distributed savings and checking accounts, each with its own purpose. Even though

I like to have my paycheck distributed to these different accounts, I don't really like to track each penny at a high level. I know that I have enough money going into each account to cover my monthly expenses. And I've tried really granular budgeting in the past, but it just does not work for my brain. Budgeting in the macro is much better for me. And I'll also own that I'm fortunate enough to not have to pinch pennies, which of course makes this a little bit more feasible. I really love your approach and how you break down your savings accounts like that.

I've actually heard from quite a few financial planners that I've interviewed over the years that they use that approach too. So I think it definitely appeals to people that like that level of organization. So you're definitely not alone. Let's talk about some of the budgeting apps out there. Mint was the popular kid on the block, but that's not an option anymore. Can you walk us through some of the other apps that are proving useful to folks wanting to work on budgeting? There are actually so many helpful apps out there. You have a lot of options. And I think the key is

to experiment and to see what works for you because you want to choose an app that you really enjoy opening up every day because that's what helps us stay on track. First of all, there's the NerdWallet app. Of course, you can pull up all your spending data. You can get offer recommendations. There's the YNAB, which stands for you need a budget app that uses a zero based budgeting approach. So it's tracking every dollar. And then there's also honeydew, which basically helps you coordinate if you have a partner that you're making spending decisions with, it can be a useful tool just so you're both on the same page. And that's honeydew, honey D-U-E. Our fellow nerds spent time researching a bunch of different budgeting apps, including

the ones that Kim just mentioned, and broke down what works best for different needs, plus what to watch out for. You can find a link to read NerdWallet's picks for the best budgeting app in today's show notes, or just search online for NerdWallet best budget apps. Kim, how do you go about deciding what exactly to put in your budget and how detailed to get with it? Some people probably really do it down to the penny, but as I mentioned earlier, that won't work for everyone. What are some things to think about when deciding how much to include and what to exclude from your

budget? Well, the goal is definitely to include all of your expenses because if you forget something, then you might just not have the money set aside for it. I think it's really helpful to look back on your spending over the entire last year. That's such a good predictor of what you might spend in the coming year. And that way you don't forget about costs that pop up less regularly. There might be a quarterly or an annual cost, like an insurance payment, some kind of emergency or an unexpected expense, like a home repair. And then also it helps you remember once a year expenses like tips for caregivers or service providers, that kind of thing. What about the timeline? Is it better to budget for a month, a year, a day? Personally, I think a year can be a little overwhelming. So

taking it month by month can be a really good place to start as long as you're not forgetting about those less frequent costs. And then some people do prefer to break it down even more and go day by day, giving yourself a budget for each day. Let's pretend we're putting together a budget for this new year. And I'd like us to walk through the big major categories and some best practices for tracking these things. So first, the fun stuff, income. Yes, income is definitely the fun side of the equation.

You can calculate your expected income each month after taxes and other pre-tax deductions are made, and then you're allotting that over your other expense categories. To use the earlier example, if you are going to go with that 50-30-20 budgeting approach, you basically are just going to divide up that monthly take-home income into those buckets. And then we start tracking our expenses, right? And we're comparing it to what we've budgeted. That's exactly right. And then with that kind of tracking, we can make adjustments as we go until they're all in alignment. What are some of the challenges that folks tend to face when they first start working with a budget? And what are some ways to get over those challenges?

I think one of the most common challenges is just facing those unexpected expenses, ones that you forgot to account for. And then it can just feel like you're getting totally thrown off. You almost just want to throw your hands up because it feels so hard. So the goal is to leave enough wiggle room so we don't feel that frustration and we can handle those hiccups. And finally, Kim, talk to us about how important it is to review your budget on the regular. Budgets are not set in stone. They're constantly changing. Our needs are changing. Our income might change. It's really important to be checking in frequently and that way you can make adjustments to help you stay on track. In a moment, we are back to talk about how to take this budget and layer on credit. Stay with us. So Kim Palmer, now that we've got ourselves all budgeted up, let's talk about how to responsibly layer on credit, as in using credit and maintaining your credit scores. Most of our listeners probably

already have at least one credit card. And let's stick to credit cards here, not other kinds of debt like mortgages or car loans. We've got this aspect of our lives where we technically get into debt on the regular with these cards that make it very easy to buy things. What are some primary cautions when it comes to credit cards? The main caution to watch out for with credit cards is overspending. Credit cards can just be really tricky because it doesn't necessarily feel like real money. And other than the credit limit on the card, there's really nothing stopping us to keep swiping away to buy what we want. Credit cards, on one hand, they can be a really great tool because they give us flexibility to

make purchases and to pay for them later. But in general, they come with a pretty high interest rate. If you are late to make a payment, you can get hit with a late fee and also interest charges. But if you pay off the balance in full each month, then you get to enjoy all of that convenience without a price. In many cases, you might even be earning rewards like cashback or points. I do love those cashback and points. That is my primary goal with using a credit card. Kim, I feel like a phrase that gets tossed around a lot is responsible credit. What does that mean? It basically just means that you're using your credit card responsibly. You're tracking your spending, you're paying off the balance each month,

or at least making a plan to pay it off as soon as you can, and you're avoiding that risk of overspending. Then what are some best practices for making sure that you're using credit responsibly? Let's assume someone has qualified for a credit card. What are the best ways to utilize it? First of all, a really good approach is to just be constantly monitoring your transactions. That's not only helping you stay on top of your spending, but it's also letting you know if there's any error or fraud so you can get

that fixed really quickly. Secondly, you really want to try to pay off the balance each month or at least make a plan to pay it off. Third, you want to try to keep your credit utilization below 30% of your total credit limit because that helps you protect your credit score. And if you're spending one month, it's especially high. You can always make payments early before the due date. What are some ways that people get into trouble with credit? What are the warning signs? One of the most common ways to get into trouble is to spend more than you can pay off at the end of the month. Once interest starts accruing on that balance, it's just really easy to get into a situation where it feels a little

bit overwhelming. And some of the warning signs include missing payments, seeing your credit utilization rate inch higher and higher, and just struggling to pay that balance. This is something that we review quite often on the show, but let's do it again since we're at the beginning of a new year. If you find yourself in trouble with credit card debt, what are the first steps to take to get out of that situation? The first step is really to get organized and to make a plan. You want to list out all of your debts and then choose a method to pay them off. One method that's popular is called the snowball method. And that means you're starting with the smallest balance where you're paying that off before

you move on to the next smallest balance. It helps you build up some momentum. There's also the avalanche method where you start with the highest interest rate debt. Either one, you basically want to choose what you feel you can stick with best. You can use online calculators to help you figure out how much to pay each month beyond those minimum payments that can really help you stay on track too. And if you're struggling, you can always turn to a resource like the Nonprofit Debt Counseling Association, the National Foundation for Credit Counseling, they can give you extra help with budgeting

and other options to like consolidating the debt. And now let's talk about the importance of good credit. This is often a helpful time of year to go through and review how your credit life is going. You know how they say to check the smoke detectors around this time of year? Well, how about a checkup on your credit reports too, right? It's a great idea.

And you can access your credit report for free through annualcreditreport.com. Many credit card issuers and apps like NerdWallet offer access to your credit score for free too. So you have a lot of options. If you're in there reviewing your credit reports and you see something funky, what's your advice? If there's an error on your credit report, then you really want to try to fix it as soon as possible. And the way to do that is to let the credit bureaus know. Each credit bureau actually lists out the process for correcting an error on its website. Each one is slightly different, but basically you can do it online, by phone, by email, whatever works best for you. What about the credit score? First off, this is in fact

different from the three credit reports. Remind us what the difference is and how you can make sure your credit score is up to snuff. Your credit score is a number that reflects your history with credit. And that history is what's contained in your credit report. I kind of like to think of it as your credit report is an exam that you turned in, the credit score is the grade that you get. We each actually have multiple credit scores that are given by the different credit bureaus. And the formulas that make up those credit scores are proprietary. So they're a little mysterious. We don't know exactly how they're calculated, but we can draw some conclusions like the ones we've shared today.

I think that test comparison is really helpful. And I also want to touch on what score folks should have. There isn't one specific passing score, but some people can carry guilt or shame if they don't have a perfect 850 credit score, which in this case would be an A plus, or maybe their credit score is nowhere near 850. The truth is the average FICO 8 credit score is 717. That's a good credit score. For context, the best rates on loans like mortgages will generally go to those with credit scores north of 740. But also, I think it's helpful for folks to zoom out and think about what they want a good credit score for. If they don't currently have a great credit score, but they maybe aren't planning on applying for a new line of credit soon, I think that's fine. They can spend some time improving their credit now. So it's in better

shape when they actually do need to use that credit score. I think that's a really good point. And it also speaks to the fact that we're talking about numbers a lot. And we're not just trying to get ahead just to improve these numbers, but we're trying to achieve some bigger life goals. So I think it always helps to step back and think, okay, what are those bigger goals that I want to achieve? It helps us stay motivated. Right. I personally am getting very close to paying off my auto loan, which I'm excited for,

but I'm expecting my credit score to take a dip after that. I'm going to be very interested in seeing how well I practice what I preach in terms of separating my self-worth from the number of my credit score. Congratulations. That's a big milestone. Thank you. Thank you. And I'm sure I'll update all of our listeners when that does happen in just a couple months. Finally, Kim, if you absolutely need to carry a balance on your credit card either now or at some point this year, what are some helpful tips to manage that as the

year goes along? I think it can be helpful to have a plan for how and when you want to pay it off and how much above the minimum payment that you want to try to pay off each month. Personally, I think even just playing around with some of the debt payoff calculators that you can find online, including the ones we have at NerdWallet, it can just help you track and then set the goals. Is there anything folks should be on the lookout for this year that might impact their credit? This time last year, we were talking a lot about the high interest rate environment. Rates have started to come down. What else are we watching for? We are watching for so much because there is a lot of uncertainty

right now. There's a new president coming in, questions around inflation, interest rates, tariffs, all of that we have to watch closely just to see how we can best manage our personal finances in response to those broader policies that are beyond our control. It's always a good idea to keep an eye on the news just to know how current events might impact your money and to adjust any of your budgeting and credit strategies accordingly. Kim, any final thoughts on credit or budgeting for our listeners? Putting in some time now to review last year's spending and planning your 2025 budget can go such a long way to keeping your finances on track. So I think it's really worth making that

investment. And I would argue it can even be fun because ultimately it's letting you reach your bigger life goals. Well, Kim, thank you so much for coming on and talking with us. Thanks for having me. We hope this has been really helpful for folks and join us next week when we're going to talk about the coming year in housing. And then the bottom line really is if you find a suitable place that you can afford at today's rates, just go ahead and make an offer. I mean, you might be tempted to wait for rates to drop, but rates are unpredictable. And at NerdWild, we urge people to not try to time the mortgage

market. For now, that's 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. And remember, you can follow the show on your favorite podcast app, including Spotify, Apple Podcasts, and iHeartRadio to automatically download new episodes. This episode was produced by Tess Bigland. I helped with editing. Courtney Neidell helped with fact-checking. Megan Maurer mixed her audio. And a big thank you to NerdWallet's editors for all 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.