NerdWallet's Smart Money Podcast - Spring-Cleaning, and Paying Off Different Types of Debt

Episode Date: April 3, 2023

It’s officially spring, which means it’s time to bust out the duster, broom — and your bank account logins. To start this episode, Sean and Sara talk about how you can do a little financial spring-cleaning. Then they answer a listener’s question about paying off different debts, like taxes and credit cards.  Want the Nerds to answer your money question? Call or text the Nerd hotline at 901-730-6373 or email [e-mail]. Timestamps: This Week in Your Money segment: 0:00 - 10:34 Money Question segment: 10:35 - 27:04

Sean, does it finally feel like spring where you are? Kind of. Here in the Pacific Northwest, the crocuses and daffodils are in bloom, but the weather is still a little soggy. How are things in Virginia? Oddly enough, February was warmer here than March was, so we already have flowers everywhere too. Lovely. Well, this episode, we are going to help our listeners make the most of what spring has to offer. And by that, we mean the opportunity to do some spring cleaning. 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. We know you have money questions, so send them our way. Call or text

us on the NerdHop line at 901-730-6373. That's 901-730-NERD. You can also email us at podcast at nerdwallet.com. In this episode, Sean and I take on a listener's question about how to pay off different kinds of debt, like tax bills and credit card balances. But first, we're grabbing our brooms, dusters, and bank account logins to do a little bit of financial spring cleaning. And this year, we're focusing on how to tidy up our finances through the magic of automation. The hope is that by simplifying your financial tasks, you have more time to do things like,

I don't know, spend five hours meticulously planning the arrangement of your raised garden beds for the year. Sounds like you're speaking from personal experience. Yes, that was my weekend. So anyway, this segment was inspired by an article our colleague and regular Smart Money guest, Kim Palmer wrote. So shout out to Kimmy P.

I don't think I've ever heard anyone call her that, but we're going to go with it. Anyway, so what does Kimmy P suggest folks do first? Well, Kimmy P says first, you really got to get a feel for your cash flow, which might sound basic, but it's important before you start doing something like this. Know how much you have coming in and going out, especially the dates of deposits and of payments, so you know that you'll have enough money in your account and bills like a car loan or credit card are due. So it sounds almost like this is like the basic foundation of budgeting, which I know is a thing that a lot of people hate to do, myself included.

Yeah, it is basic budgeting, but before you shift around when you have money coming out of your account or going into different accounts, you should know what your cash flow is like. Well, if spring cleaning with a broom is that, we could talk next about automation, which is what happens when you buy a Roomba. Love that. Did that metaphor work for everyone? I'm on board. It sounded pretty good in my head. You know what I mean, right?

Okay. Yes, of course. So if step one is manually going through your statements and your accounts just to see where your money's coming in, how much is going out on a month-to-month basis, next phase is thinking about what you want to automate. And there are two main areas here,

payments and savings. So payments means paying your bills. And what Kim recommended is focusing on those bills that remain the same from month to month. So things like cable bills, insurance payments, cell phone bills, and some cell phone carriers even offer discounts for setting up auto pay. So auto pay can not only make your life easier, but in some cases, it could even save you a little bit of money. And the other area is savings. So monitor your checking account, make sure you have enough cash in it, and then set up automatic withdrawals from your checking account to a savings account.

And that way, while you're busy doing other things, your savings are beginning to accumulate and grow, which is really great, especially at a time when high yield savings accounts are earning really high interest rates. That means they're working harder for you. Yeah, I'm a big fan of the pay yourself first approach to putting money in savings accounts. That's where you have direct deposit go into multiple accounts, depending on whether your employer offers that. But that way, you don't even have to worry about money first going into your checking account and then going into a savings account. It helps you budget and make savings automatic. And it's so easy to say, whatever money is left at the end of the month, I'll put into

savings. But money has a way of flying out the window, and things have a way of costing money unexpectedly. And then at the end of the month, you don't have anything left. So if you pay yourself first and you get used to living without that money in your checking account, you're not going to be able to tap into it. Obviously, emergencies happen and there might be months when it's harder for you to save any amount of money because you have more expenses. But for those months that kind of operate the way you expect them to, pay yourself first. And that way you can spend money on other things without having to worry about meeting your savings goals because you already did.

Right. Well, let's also talk about some areas where you might not want to automate. And one that comes to mind are variable bills. Those are things like utilities, credit cards, potentially, given how much things like a water or an electricity bill can fluctuate from one month to the next, you might want to pay these manually so you don't accidentally overdraw your checking account if you have a month where the bill is especially high and it's on auto pay. Now, there are some programs with utility bills where you can pay your typical average amount due per month. So it's the same bill every month. And then at the end of the year, if you've overpaid, then you get some money back. But if you've underpaid, then you owe some money. Some people like to set this up just because it's easier to budget for. But you just want to watch out for if you end up using more of a utility than you anticipated.

Maybe this year is different from last year. You might owe a large chunk of change at the end of the year. Yeah. And for some people, they might not want to automate in general because they just don't like that. Like my partner is this way. He doesn't want to relinquish control over his cash. And also he doesn't trust companies to not mess this up. So he pays his bills manually. And that's perfectly valid too. That's absolutely valid. There are bound to be errors on your bills or on your credit card bills or suspicious charges.

What you don't want to do is get into this mindset where the money is whisked out of your account. You never check on it. You never check on whether or not your electric bill is much higher than usual or if there's a weird charge on your credit card statement. You always want to check these things at least once a month when the bill becomes available just to make sure everything is accurate. Because if something is wrong, you want to take action to get it fixed as quickly as you can. And another thing around this

is that you don't want to get lazy about shopping around either. Auto insurance is one area where the longer you stay at a company, the less incentive that company has to actually give you a great rate. Kind of counterintuitive, but that's how it is. So even if you have auto pay set up, you still want to shop around annually, especially for auto insurance to verify that you are getting the best price for the coverage that you need. So maybe if you're pretty new to auto pay, you can try this with one or two smaller bills, maybe your cell phone bill, something that's a manageable charge for you before you break out the big guns and start putting some of your bigger bills on auto pay, like your rent or

mortgage payments. And just see what you're comfortable with and add one bill at a time. And if there's anything you're not comfortable with adding, then don't and just continue paying it manually. Yeah. Well, one thing that's nice about autopay is that one, it's not all or nothing. You can choose just a couple accounts to have autopay set up with. And then two, you can change how you have your autopay set up over time. So say you've realized

that you've actually hit a savings goal. Maybe you want to minimize the amount of your direct deposit you have going into a specific savings account and then put more of that into another account. You can always mix this up. I do that at least once a quarter and I make sure that I am happy with how I have my savings set up. Yeah. So Sean, how do you use auto pay with your own money? I have a lot of things automated, like my mortgage, my credit card bills, deposits into investment accounts, savings accounts, like I just mentioned. But in practice,

I do tend to pay a handful of my bills manually, especially my credit card, which I pay weekly, if not more frequently, because I just like maintaining a zero balance just as a psychological thing, a holdover from years ago when I had credit card debt. But things like my internet, I don't even really think about that. I get a text when it's paid monthly. And I'm like, great, that's taken care of something I did not have to think about, but is settled for me. You know, you're not the only person I know who used to have credit card debt and now pays their bill more than once a month just to keep that balance super low. So how do you do it, Sarah? I do a blend to what my mortgage is automated. And I also have auto pay set up for two of my

credit cards. And I also have some of my savings automated, I have a couple specific savings goals, and I have set amounts of money withdrawn weekly or monthly from my checking account that automatically gets transferred into different savings accounts for different purposes. But otherwise, I pay things manually, because it does force me to check on everything and make sure the charges are accurate, especially for those variable bills. All right. Well, listeners, I hope that helps you manage your money as we go into the warmer months. And now that we are somehow a quarter of the way through the year, we want to know what you guys need help with right now.

Maybe you're wondering how you can buy a house this year, or if you can actually afford to get a dog because those little dudes are really expensive. Yeah, a lot more than you would think initially. Or maybe you just want some help gardening on a budget, something that I would love to talk about on Smart Money. Whatever money question you have at the moment, let us know. You can write us or send us a voice memo to podcast at nerdball.com. You can also text us or leave a voicemail on the Nerd Hotline at 901-730-6373. That's 901-730-NERD. Before we move on, we have an exciting announcement. We're running another book giveaway sweepstakes ahead of our next Nerdy Book Club episode.

Next month, we're 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 1159 p.m. Pacific Daylight Time on May 18th. Include the following information, Now, let's move on to this episode's money question comes from a listener's email. Here it is. Hi, I have tax debt and also credit card debt and school loans. I feel like I'm drowning in it. I'm trying to get myself back on a budget and I'm going to start to pay the debt down. I'm wondering about the best strategies. Should I prioritize my very high interest credit cards over my tax debt? Listener, I feel for you. That's a really tough situation to be in. So to help us answer your question on this episode of the podcast, we are joined by personal finance

nerd, Tommy Tindall. Tommy, welcome back to Smart Money. Hey, thanks for having me, Sean and Sarah. Good to be back. So you've been writing about debt at NerdWallet for a little while now, and I'm just going to throw it right at you. Tommy, which of our listeners' debts do you think should take priority for them? Thanks to the listener for this question. It's the right question. And not to be an alarmist, but the tax debt has to take priority here, even over the high-interest credit cards. And that's because the IRS has incredible ability to collect back taxes. We're not talking about some credit card collection agency. They're the US government, and they will get their money, and they can make your life pretty tough along the way and they can come after assets. And of course, what you owe and your circumstances are factors here, but they can collect, they can file a federal tax lien, which is a legal claim to your house. They can seize an asset like your car. They can even levy wages, meaning they can have your employer send part of your paycheck

to the IRS. Yeah. The IRS has plenty of tools to make your life really miserable if they do not get what you owe them. But this sort of thing is not going to happen overnight. It takes a while for them to go from the point of saying, hey, you owe us this amount of money to then levying your wages, right? Absolutely, absolutely. Yeah, it's not automatic. And the level of action will vary by what you owe and they'll notify you of an intent to levy to take an asset at least 30 days before. But just the point here is it's really important to have a plan to pay this off and at the least go to the IRS's website, make contact with the IRS to explore your options. And one note about debt to the IRS, they will send you plenty of written warnings before they go after your assets. And I wanted to emphasize written there because there are a lot

of scammers who will call you saying they are the IRS and demand payment immediately. The IRS is not going to call you in that fashion. They will send things in writing to you. Yeah. And that's a reminder to open your mail. I have so many people who are like, oh, I never opened my mail. But you leave it in a pile on a table somewhere. Definitely open the mail. You've got important financial stuff in there that has deadlines. Do not neglect getting and opening your mail. Yes. And sometimes you get good financial things in the mail. I actually was just reimbursed for overpayment on some dental work I had done. So that was 500 bucks I wasn't expecting. So it that be a reminder to all of you listening that your dogs are right. You should pay attention to the mail. Yes.

Well, Tommy, if someone has tax debt like our listener, what options do they have for paying it off? Yeah, well, of course, you can pay with a lump sum if you have the cash, which is the path of least resistance for sure. But if time is what you need, you may qualify for an IRS payment plan. Especially qualification becomes very simple for this if what you owe is below $10,000. A couple options on those plans, there's a short-term payment plan. It gives you up to 180 days to pay a max of $100,000 combined tax debt. And the combined there means your taxes owed, penalties incurred, and interest accrued. And then there's also a long-term payment plan, also called an installment

agreement. And this is more than 180 days. The max here is $50,000 of combined tax debt. I'm going to chime in here and just say, at one point, I actually had some tax debt back when I was a contractor in my early 20s and did not set aside any money to get to the IRAX. And I had a long term payment plan. I set up monthly payments that fit into my budget. And it was a fairly painless way to resolve a debt that I really did not want to pay. But I'm glad I figured it out, didn't have my wages garnished. It's not that difficult once you sign up for it. So Tommy, are these payment plans through the IRS the only options you have if you can't pay it off in a lump sum? Or are you able to work this out in a way that doesn't involve the IRS? Yes, there are definitely options outside

of the IRS to take care of this. And it may be worth seeking a personal bank loan or other non-IRS form of financing to take care of it. You might get a lower interest rate in doing this. It could be lower than the interest and penalties combined that you've netted through the IRS. You may have a longer time period to pay it off. And most importantly, you'd have the IRS off your back because you take that loan and pay your taxes off in one fell swoop. So, so long as you can make payments toward the bank or credit union that you borrowed money from,

the IRS is off your back. But you definitely also want to keep that bank or credit union off your back too. So that's something to keep in mind if you're borrowing a very large sum of money. The IRS also offers something called an offer in compromise where you can settle your taxes for an agreed upon amount. How does that work and how likely are folks to get that? Yeah, I almost am hesitant to mention this because it is very seldom given, but it may be an option when you absolutely can't pay your tax debt, but it's very hard to get the IRS to sign off on an offer in compromise.

There are lots of hoops to jump through. So if you're sort of in this realm and looking at this option, you're going to want to talk to a tax pro first and somebody who's a tax attorney. So yeah, so long story short, this is not the top takeaway from this episode. Offers and compromise are very rare. So it's best to seek other options first. So we've talked about taxes. Our listener, unfortunately, also has pretty high interest credit card debt. What should they know about paying that off? Yeah, well, credit cards ideally would come next, especially given what can be astronomical interest rates on credit cards.

But I think at this point, it's really time for a hard look at your numbers. So you can determine, is there an income problem? Am I not making enough money to make my expenses? Or is it a spending problem? Do I make enough money, but I'm spending too much on quote unquote wants? So I think taking a few minutes, I mean, it doesn't have to be a crazy process with spreadsheets. You can list your income out and your expenses, looking at needs and wants can help you decide if your debt is manageable and if it is something that you can take on. So when is it feasible to kind of do it yourself when it comes to paying off your debt versus seeking some sort of professional guidance or assistance? And what are some strategies for people who are planning on tackling their debt on their own?

Yeah, debt is generally thought to be manageable on your own when it's less than 42% of your gross annual income. And also you'll hear that referenced as your debt to income ratio. And there are some really good proven strategies that work well with discipline, of course. You may have heard of some of them. There is the debt snowball. This is where you pay your loans with the smallest balance first, and then you roll up to the highest. It can be motivating as you gather steam and what you've paid off grows. There's also the debt avalanche. This is sort of the opposite approach where you're going to tackle your loan with the highest interest rate first. You make extra payments on that if you can, and then work down towards the lowest. So that bigger push right off the bat could cut down on interest in the long

run, saving you money. It's a good thing. And then there's the debt snowflake. You might notice the blustery theme here for whatever reason. This is a more subtle, delicate approach, if you will. You find a little extra money in your budget, you pay a little extra on your debt as you can. But those aside, don't discount the importance of simply paying the minimums on your debt while you work to build an emergency fund because just having a couple thousand dollars in the bank or whatever you might need can add critical peace of mind when the unexpected happens. Yeah. In the personal finance and debt payoff world, debt snowball versus debt avalanche is one of those great unresolved arguments. And which one may be best for you can come down

to personal preference. If you find that you really want some positive reinforcement to keep you going, debt snowball can be a good fit. But if you are maybe more analytical and mathematically minded and want to pay as little in interest as possible, then you might be better off going the debt avalanche route. But no matter which one you choose, it's important to pay the minimums on all of your debts while you are focusing on the primary debt that you're going to resolve. Yeah. And also getting started with something is better than not starting at all. So maybe focus a little bit less on which is quote unquote, right or the best, and really just go with what speaks to you and work toward paying off your

debt. And that way, one day, hopefully you could be out of the situation. Yeah, I'm somewhere between debt snowball and debt avalanche, where I believe people tend to need more positive reinforcement that the debt snowball method can offer them. But right now, given the way that interest rates have been rising on credit cards, I'm very pro not paying that amount in interest because it gets so expensive. So debt avalanche may be a little bit better in that regard. But there are also some products that people can use to help them minimize what they're going to be paying in interest. Can you talk about some of those, Tommy? Yeah, I think this is where you look at sort of the concept of debt

consolidation and really rolling multiple debts into one loan with a lower rate and a quicker time to pay off, hopefully. One of those products is a balance transfer credit card. So you're moving the balance of a card or cards with a high interest rate to another that's made for this with an introductory low or no interest period. So of course, there's a caveat, always is. You're going to need good to excellent credit to qualify for the best offers. And there's typically a fee to initiate the balance transfer. Not always, but typically.

Another product to consider is a debt consolidation loan. This is a bank loan you use to gather and pay multiple debts and work down the consolidated balance over time and ideally at a reduced interest rate. I think the benefit here is you're rolling your debts into one and making a single payment. And again, with an ideally lower interest rate. With a debt consolidation loan, you can qualify with less than good credit, but lower scores will tend to mean higher interest rates. One thing to keep in mind around the balance transfer card specifically is that you want to make sure that you can resolve what you owe before that zero or low APR period is up. Because after that, the interest rate can really

skyrocket and make this debt unaffordable again. One tactic that some people will do is just roll their debt from one zero APR card to the next, which can help reduce the amount you're paying in interest, but it can also become a slippery slope where you just keep hunting this debt from one card to the next and you never really pay off everything. Yeah, another thing to keep in mind with these cards is the amount of a balance you can transfer over is limited by what credit limit you're granted when you are approved for the card. So if you have $10,000 worth of credit card debt, and then you're approved for a balance transfer card for a credit limit of $500, that's a drop in the bucket of how much interest you're going to save on that total debt. So that's something to keep in mind. And the unfortunate thing is you just don't know what your credit limit is going to be

with most cards until your application is complete. So it's a little bit of a risk there. If you think that it's a good option, if you have the credit score to potentially qualify, it could be something good to pursue. But just be aware of the limitations of this product. Yeah, right. Well, Tommy, there are going to be times where DIY methods or financial products alone aren't going to be able to help people get out of debt. If that's the case for them, how can they know that that's the situation they're in

and what tools can they use? I think for the sake of your health, financial, mental, physical, people in this situation should seriously consider some reputable relief options. And to start, there's bankruptcy as a viable option. It sounds scary, but it is absolutely a consideration, and especially when debt to income is pushing past 50%. You may think filing for bankruptcy automatically means giving up all your prized possessions, but that does not happen for most, especially in the common chapter seven cases. But if you think you're here where bankruptcy might be an option, it's generally just a good idea to get a free consultation from a bankruptcy attorney to check on your options there.

Contacting a nonprofit credit counseling agency is another option just for general financial advice. But they may also be able to put you on something called a debt management plan, which allows you to consolidate and pay off multiple credit cards at a much reduced interest rate. So this is something that takes time. It can take three to five years to get through it, but the rates can be cut by half or more, which can save a lot of money over time. And these agencies actually work with creditors or the credit card companies to negotiate reduced rates because they've got relationships with them. And if you do this, obviously you'd need to live without credit cards for the duration of the plan. And just to note, these are not designed for debt like medical bills, personal loans, and tax debt.

Look for national accreditation. You can use the U.S. Department of Justice. They have a good search tool on their site for finding legit agencies. And also, you know, NerdWallet, we've written a handful of reviews on reputable agencies on our website as well. One good rule of thumb is that if you're going to consider talking with one of these to a bankruptcy attorney or a credit counseling agency, you should really talk with both. And that's in part because these nonprofit credit counseling agencies, while they offer a fantastic product in the form of the debt management plan and also free budgeting help,

they kind of have an incentive to get you into one of their products when you might actually be better off with filing for bankruptcy, which can be one of the fastest and cheapest ways to resolve your debt. Well, thank you so much for talking with us, Tommy. Absolutely. Thanks for having me. And with that, let's get on to our takeaway tips. I will start us off. First up, get the IRS off your back. If you owe taxes, that debt should be a top priority. Talk to a tax pro if you need help. Next, minimize interest. Consider a balance transfer card, debt consolidation loan, or the debt avalanche method to reduce the amount you're paying in interest. Finally, ask for help. A non-profit credit counselor or bankruptcy attorney can help you find a path to resolve your debt that's faster and cheaper than going it alone.

And 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. Also visit nerdwallet.com slash podcast for more information on this episode. And remember to follow, rate, and review us wherever you're getting this podcast. And here is 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 Vigeland and Sarah Raffner.

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.