#17 Debt: You can Dig Yourself Out of that Hole
In light of the recent announcement of a debt jubilee on student loans, Emily & Amanda decided it was time to dig into how we think about debt, both individually and as financial advisors.
We discuss:
- Psychological factors that factor into decision-making around debt;
- Creating a plan to pay off your debt;
- Examining your behavior to prevent going back into debt;
- Prioritizing paying off debt vs savings; and
- Emily & Amanda revisit the money diaries they kept earlier this year to examine their own spending.
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Additional Resources
Advisor David Vaught recommends “The Total Money Makeover” by Dave Ramsey
Emily recommends this Etsy seller’s custom cat pillows
In Episode 13, There is No Free Lunch: When it Comes to Financial Advice Who Do You Trust?, we first talked about the potential pros & cons of keeping a money diary.
Amanda & Emily also discussed their thoughts around spending in Episode 9, What to Do with Your Tax Refund: Consider your Money Personality.
For reference, here is our blog post on the different money personalities. Also informative is Advisor Danielle Woods's walk through her process for creating a financial plan.
Connecting the Dollars podcast and additional resource links are for informational purposes only. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Propel Financial Advisors cannot guarantee that the information herein is accurate, complete, or timely. Propel Financial Advisors makes no warranties with regard to such information or results obtained by its use and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation. Propel Financial Advisors may change their outlook at any time.
Full Transcript
Emily Agosto (00:08):
Welcome to Connecting the Dollars, a Personal Finance podcast. I'm Emily Augusto, a CPA and financial advisor.
Amanda Vaught (00:16):
And I'm Amanda Vaught, attorney and financial advisor. Both Emily and I are co-owners at Propel Financial Advisors.
Emily Agosto (00:25):
Propel Financial Advisors is an investment management and financial planning company. We are fee only fiduciaries and independent registered investment advisors. I'm based in Chicago and Amanda is in New York City, but we work with clients nationwide.
Amanda Vaught (00:39):
The purpose of our podcast is to explore personal finance topics, including budgeting, investing, behavioral finance, current events, and other helpful information. We also hope you'll get to know us along the way.
Emily Agosto (00:54):
Thanks for listening.
Speaker 3 (01:00):
Hello, Amanda.
Amanda Vaught (01:01):
Hey, Emily. How are you?
Speaker 3 (01:04):
Doing well, How are you?
Amanda Vaught (01:07):
Really good. I recently learned that I will be the recipient of some student loan forgiveness, and so I was, Yeah, I was very excited to hear that. I also got, then I realized that I had received a Pell grant for undergraduate, which meant I qualified for the bonus $20,000. So I was like . I was like almost started crying when I heard that because Wow. Like I didn't even realize that the amount of the loan was like such a weight on my shoulders until I thought, Oh, if this could be, this could be gone potentially, You know? Yeah.
Speaker 3 (01:50):
So anything, this, this, or like just any kind of loan for ness can really be life changing for a lot of people, especially student loans. If you're, you know, 20 years out of school, you're like, Oh man, this is never gonna go away.
Amanda Vaught (02:05):
Yes. That's what it feels like. That's what it feels like.
Speaker 3 (02:08):
Well, that's exciting. I'm very happy for you.
Amanda Vaught (02:10):
Yeah, thank you. And, but I think, you know, the reason I, one of the reasons I'm bringing it up is that I think it speaks to some of the emotions that come with debt and, and I think, you know, today we're gonna talk about debt and a lot of what drives that is some emotional, psychological type of issues that, that come up with people. You know, like you can see it's a lot of happiness when people get rid of debt, you know, either through a federal program or you know, people pay off their mortgage when they have a big party. It's a big celebration, you know those type of things make people feel happy, you know?
Speaker 3 (02:54):
Yeah. And we're gonna talk about a few different kinds of, of debt but specifically about student loan debt. I mean, that's something so many people have, and a lot of times you don't necessarily feel like you have a choice at that time. Like you're going to school, you're not working yet, you're trying to go to school to get a better paying job or a better job, or a, you know, a different career. So it's this like, I dunno, it's like a catch 22
Amanda Vaught (03:24):
Almost. Mm-Hmm. . Yeah. And for some people they just, they get caught up in it without being too conscious about it or conscious enough. Right. We've, we've talked about this on the podcast before. People think they're just supposed to buy a house and they, you know, end up with this big financial commitment. I mean, sometimes that happens to people too with college. They sign up for this big expense and then they don't realize the consequences of it right down the line. So but yeah. But student loan debt is a, is a unique type of debt, right? Because a lot of people wanna go to college in our society. That's how you get ahead and what are you supposed to do if you can't afford it? You sort of have to take out a loan in order to do it. But it's also the other type of, the only type of debt that is protected. And in bankruptcies you can't discharge it. So it's not, it's not going away for most people unless you do benefit from some type of debt jubilee, like the one we've just had.
Speaker 3 (04:37):
Yeah. So the missing part, or in the missing puzzle piece, it seems if you're considering taking out student loan is doing the planning for paying it back. Like you have to so we talked about the psychological emotional part of student loan debt, and this part, the planning to pay it back is the math problem. So you know what your interest rates are gonna be. You can usually figure out what your minimum payment has to be ahead of time, like how much your salary based on how much you think your salary will be when you get a job after school. So it's definitely worth to do a little bit of an exercise there to make sure that it's really worth it.
Amanda Vaught (05:17):
Yes, for sure. And I think, you know, we're talking about these are federal student loans that were, you know, recently forgiven, but there's also the private student loans, which, you know, speaking personally, I have both. And you know, it depends on the type of loan you get. And my private loan, it has a variable rate, and so that rate is changing. And now with the fed raising rates recently, I log in and I can see that rate going up and up and up. And that is not fun to see which is why it's important to have a plan if you do have debt, that you have this plan to pay it off.
Speaker 3 (05:56):
Yeah.
Amanda Vaught (05:57):
I think it's similar too with, with credit cards and other, any other type of variable interest rate loan. Those with the rates, interest rates going up, if you have those around, you know, and you have been trying to like ignore it or not deal with it. Now it's, it's, it's always a good time to deal with these, but it's especially, especially a good time to pull out those statements, come up with a plan because the rates continue to go up. Like they are, it's getting more and more expensive to carry this debt.
Speaker 3 (06:30):
Yes, definitely. And you know, if you are someone who is struggling with credit card debt, like no one's here to judge you with what you spent that on. Like maybe it was a medical emergency that put you in debt or you know, something serious or you lost a job. Or maybe you just, I don't know, we're a little frivolous with your spending in your twenties or something like that. So it doesn't matter how you got there, it's just is important that you try to get out of it. Yeah. In a way that's feasible for you. At least just start and don't keep adding on the debt because it can really, you know, once you're already there it's like, Oh, well I might as well just keep going. I'm never gonna get out of debt anyway.
Amanda Vaught (07:10):
Yeah. Or you know, you come up with a plan and you pay it off and then you run it right back up. I mean, that's not that's when we're getting beyond, you know, the math problem, right. Of paying off the debt and the budgeting and the, and you know, what's the interest rate and all that stuff. That's when we're getting into more psychological behavior issues. Right Emily?
Speaker 3 (07:35):
Yep. It's back to that kind of emotional response of like, I want this thing, I have this credit card, I can buy this thing. Yeah.
Amanda Vaught (07:42):
Yeah. And that's when you know who you are is not gonna change overnight. Right. So you can give yourself some grace there, but at the same time, you know, think about if you are running up this debt, what are you sacrificing when you say, Oh, I want this, whatever. Yeah. New shiny object, What are you not getting at the same time?
Speaker 3 (08:08):
I mean, the credit card industry, like they sell you your dreams, like, Oh, you don't have enough money. Well here now you do, but they don't tell you about, like, they don't pull back the curtain and say, Okay, but here's the price you pay plus extra. If you do take us up on this offer or this dream fulfilling your dream. So personally, whenever I got my first credit card, I was always like, Okay, this is an emergency situation. You know, I was only paid once a month at my first job, so it would get me through until I got paid again. Cause it was, I was not making a lot of money at that time. And it just really stuck with me. So if that's something you can, I don't know, be able to focus on or like try to shift your thinking of it as it's like a, a fallback kind of situation more than like a fulfill my dream situation when you have a credit card.
Amanda Vaught (09:05):
Yeah. Yeah. And I do think if you are working on paying off a credit card debt, it's good to have that building up your emergency fund at the same time. Because once you get that credit card paid off and say you have a flat tire, you know, and all of a sudden you're like, I need a few hundred dollars, I'll just put in my credit card. No, that's an emergency. Take it from your emergency fund. Don't run your credit card bill back up. You now have the savings to cover it.
Speaker 3 (09:33):
Yeah. So it's a little bit of a mind shift.
Amanda Vaught (09:34):
Yes. Yes. So what what do you think about Emily? We do have some clients who say, I wanna pay off this credit card loan or this credit card balance. I wanna pay off my car loan. I wanna take money out of my retirement fund to pay for this to get rid of this debt. What do you, what would you think you would tell a client like that?
Speaker 3 (09:57):
Yeah, if someone came to me and said, I wanna take money outta my retirement account to pay off a car loan, I would say, Okay, let's take a step back. What is your car loan interest rate? A lot of times, especially lately, car loan interest rates have been under 3%, maybe as low as even one one point half percent. So we don't really look at that as necessarily bad debt. If you can make more in the market in a good year which in the performance over the last, I don't know, 10 years has been over 5%, then you wanna let that money, your retirement funds, you wanna let that money grow at that higher interest rate instead of taking it out and losing out on all that compounding interest and growth mm-hmm. just to pay off a low interest debt.
Amanda Vaught (10:47):
Yeah. Cause a low interest debt isn't really hurting you at the end of the day. Right. It might feel like it's hurting you. Right now we're getting into the more emotional feelings around debt because you see that amount come out of your checking account every month and you, and you don't like it, you'd like to have that few hundred dollars back in there, which that makes sense. But if, if you are wanting to pay off a low interest debt because you don't like it, because you don't like the way it makes you feel, try to maybe, depending on your personality, it could help to take a step back and look at the numbers and say, Maybe I can get this money from somewhere else. Maybe I can adjust my spending a little bit and get this car loan paid off a different way without digging into my retirement funds.
Speaker 3 (11:35):
Yeah. And there are situations where it isn't necessary to take funds out of your retirement, but that's, as financial advisors, we try to leave that as the last resort.
Amanda Vaught (11:47):
And then another situation that we've seen people get into is not really appreciating a level of risk that they are taking with their lives. And this is not talking about people who are saying, you know, YOLO and, and going cliff diving, or, I'm not talking about that kind of kind of risk. I'm just talking about a basic financial risk that a lot of people don't appreciate. Like I'm thinking of people who make a good income and don't wanna think about the chance of being laid off or, you know, there's a lot of talk about recession, you know, they could lose their job and no, we don't want anyone to lose their job, but we have to think about, okay, what's gonna happen if you do lose your job? You know, any, any job you have, you have a risk of losing that job.
Amanda Vaught (12:43):
Even, you know, if it feels very secure, you have a risk of a spouse losing a job, you have a risk of taking out too big of a loan to cover the house you just bought. I know that's a situation a lot of people found them in the past few years with the prices of homes going way up. And if you have over leveraged yourself and you took out this big mortgage and then you lose your job and you can't make the mortgage payments, What, I mean, what are you gonna do? This is why we encourage people to have these emergency saving funds save money when you're making money because we really, we don't know when the good times are gonna end, Unfortunately. And for a lot of us, you know should happens and you know, like,
Amanda Vaught (13:35):
I don't know how else to say it, but it's true. You know, you get some medical emergency, somebody loses a job. You, we have a client who this tree fell on their house out of nowhere and really, you know, caused a lot of financial headache fighting with the insurance company. You never know when these kind of disasters are gonna strike. And so we really hope that you plan in advance and if you haven't, you can get into in a lot of debt and get yourself into a big financial hole that can be difficult to dig out of.
Speaker 3 (14:13):
Absolutely. yeah, along those lines, I mean, there's been flooding across St. Louis or in Missouri and Kentucky and Mississippi and maybe some other surrounding areas.
Amanda Vaught (14:27):
Yeah. It looks really like a really sad situation. Yeah.
Speaker 3 (14:31):
It's just like one disaster after another. So I hope that people will finally realize like the importance of emergency savings. Like, you know, if you're gung home getting ready to buy a home, maybe say, Oh, this should be the priority first before we actually consider buying a house. Or before taking out some other kind of loan, like a vehicle loan or whatnot. So there's a lot of advice out there. I think Amanda earlier had mentioned Dave Ramsey to me.
Amanda Vaught (15:00):
Oh yeah, that's our, our co-founder David really loves Dave Ramsey's approach to debt, Although he did say that he finds Dave Ramsey a little too extreme and impractical, but
Speaker 3 (15:14):
So
Amanda Vaught (15:14):
He said if you do find yourself in a lot of debt, you should read his book.
Speaker 3 (15:19):
We'll link that in the show notes for anyone shifted. Yeah, sometimes if you read things or you think about things too extreme, it just makes you go in the other direction. Like, screw that. I'm not gonna take that advice. So I'm just gonna, you know, not take any of the advice even if there there is some good, some good points in there.
Amanda Vaught (15:41):
Yeah. Sometimes people don't wanna hear what you're saying, right?
Speaker 3 (15:45):
Yeah. Oh yeah, I get it. . But in general, so we've talked a lot about the emotional decisions or the emotional effects of debt and also the math problems that come along with it. And that's what we're here for. We're the financial advisors that will help you kind of take the emotion out of it cuz we're not emotionally tied to your debt. So it's easier for us to take a step back and look at it as a third party because we are, and help you identify those actual math problems. Like obviously if you're making a thousand dollars and spending $1,200 a month or a week or whatever, you're never gonna get ahead. So there does need to be some work done on both sides and that's, that's something that we can help you with.
Amanda Vaught (16:31):
Yeah.
Speaker 3 (16:33):
All right. Anything else on debt you wanna share before we talk about our exciting update to our money diaries?
Amanda Vaught (16:41):
Nothing's coming to mind.
Speaker 3 (16:45):
All right, well let's jump into the exciting update then. Okay. In an earlier episode about savings and where you get advice from on the internet, Amanda and I talked about creating our own money diaries and tracking our spending for a week just to see if we learned anything or if we were off track or if we were, you know, our habits were not aligning with where we thought we were. So, Amanda, what, what did you get out of this exercise?
Amanda Vaught (17:16):
Well I, I hate to say this, but I really, really hated tracking my spending. I a very strong visceral reaction to it. And, and I did it cuz I committed to doing it, but I, I just found the whole process just not fun.
Speaker 3 (17:34):
Yeah, same.
Amanda Vaught (17:36):
Yeah, yeah.
Speaker 3 (17:37):
To admit I didn't actually finish the whole week.
Amanda Vaught (17:39):
Oh. But I'm surprised that of that Emily. I
Speaker 3 (17:44):
Too personally I'm a rule follower, so I'm surprised about that as well. But one thing I did notice and like I I even said this on a previous podcast about how like if you're trying to save up for something or you think something is like a hundred dollars, I'm like, okay, for me that's too much. But then you'll go and spend $20 at Target five times.
Amanda Vaught (18:09):
Right.
Speaker 3 (18:10):
And that ends up being your $100 that you could have used to buy that thing you really wanted instead of, you know, now I have like another hair tool and an extra t-shirt laying around that's worth the same amount of money.
Amanda Vaught (18:24):
Right? Yeah. So
Speaker 3 (18:26):
I kind of realized about myself that I was a little more lax on those unplanned purchases.
Amanda Vaught (18:32):
Yes. Yes. And the unplanned purchases don't feel as fun if you have to write it down and be sort of intentional about it and rationalize it. Because sometimes you just don't wanna rationalize it. You just wanna go get an ice coffee because you just feel like it . Right, Right. But I know we've also talked about the money personalities and, you know, mine is very money avoidant, so I sort of expected to not like having to like write down my daily money expenses, but I thought you, you know, you're I forgot what yours is, but I know you're not money avoidant. Yeah. I feel like you're a lot more lot.
Speaker 3 (19:18):
Yeah. Like I was partially money worship and partially something else I,
Amanda Vaught (19:25):
Yeah. But so it just makes, you know, a lot of these blogs or internet websites out there, they say the first step is to create a budget. And if that is your first step to figuring out your finances is doing something that you really hate doing, I don't know. I feel like that doesn't really set people up for success necessarily.
Speaker 3 (19:47):
Yeah. I do have to say though, I think that if I would've had a goal at the end of it, if I was like, okay, at the end of the week I wanna have X amount in my checking account or whatever, I don't know, something very manageable, something measurable, I think I would've stuck with it even if it was for a month. Cuz I used to do this all the time when I was, again, back in my first job when I was first getting my paycheck and paying, getting paid once a month, I had to really plan things out. So I think, you know, if you could see something at the end of the tunnel, it might be a little more motivating for this time it was just kind of like, Oh, we're doing this for the podcast, you know?
Amanda Vaught (20:26):
Yeah, yeah. Like setting us savings goal. I mean, then you can see the numbers adding up. But when you're just tracking spending, you see the numbers adding up to how much money you don't have, which is not, is not as not as fun. Right. yeah, I mean, I feel like one big expense I noticed was almost everything I was spending money on was for my kids. And you know, it's like my daughter grew out of her shoes. She needed money for, you know, something at camp or, you know, whatever it was, it was just these things just kept coming up. And it's just like, people talk about how expensive kids are and then when you see the numbers you're just like, Oh, , you know, I love this girl, but man, wow. It, it takes it adds up. But yeah. So that was, that was one thing to see,
Speaker 3 (21:24):
In fact it advocate for something to spend your money on. Yes. You can't, no one can see it who's listening, but it's a pillow of, with a picture of my cat on it, my dearly departed cat named
Amanda Vaught (21:38):
Bruce. Oh, okay. I think you have to hold this up, Emily, so I can take a screenshot. Okay. I got it.
Speaker 3 (21:46):
. It's been, it's really weird. It's very comforting. Like I'll squeeze it at night. I dunno.
Amanda Vaught (21:53):
Oh really? Oh.
Speaker 3 (21:55):
So we'll put that in the show notes and I'll put the Etsy shop
Amanda Vaught (21:59):
. Oh, okay. Yes. Emily recently lost her favorite cat Bruce. He was what? 18.
Speaker 3 (22:07):
18 years old. And if it hasn't been revealed on this podcast yet, we are cat people.
Amanda Vaught (22:12):
. Yes, I know, I know. I think my cat is like 12 or 13. She's getting up there, but she's she's a good health. So
Speaker 3 (22:24):
Foster inmates sooner than later. So maybe, maybe you'll find me on some other CAT podcast.
Amanda Vaught (22:29):
Yes. I think our, that's our next episode, Emily talking about budgeting for a new pet.
Speaker 3 (22:35):
Wonderful. Love it.
Amanda Vaught (22:36):
Right.
Speaker 3 (22:38):
All right, well I think we're at the end here. If anyone has any questions about debt or wants to dig into a deeper issue that we've touched on a little bit on this podcast, please reach out to us at connect info connecting the dollars.com. You can also find us on, at our website connecting the dollars.com and all the links will be in our show notes.
Amanda Vaught (23:03):
Okay. Till next time. Great.
Speaker 3 (23:07):
Thank
Emily Agosto (23:10):
For all links and resources mentioned today, head over to connecting the dollars.com. Thank you for listening.
Amanda Vaught (23:17):
This podcast is for informational and entertainment purposes only, and should not be relied upon as a basis for investment decisions. This podcast does not engage in rendering legal, financial, or other professional services.