Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions.
This week’s episode starts with a discussion of the recent $1 billion Powerball lottery and the many decisions the winner has to make now.
Then we pivot to this week’s question, from Mike in Columbia, Missouri. He says, "When my wife and I met, neither of us had a ton of savings and I was carrying some debt. After years of work, we have no debt other than a mortgage and a good cushion in the bank. We've also had career success that led to big raises in recent years. I feel like the habits that got us here are not necessarily the habits that we need now. It doesn't feel like a good use of our extra funds for it to be sitting in a savings account.
"Our life context: My wife and I are in our late 40s and work in fields where we could continue to work well past retirement age. We have a 10- and a 12-year-old who are both likely college-bound when the time comes. One final question: The pandemic has actually been good for us financially — our incomes have not changed and our expenses are way down. Do you have any advice about how to help the many people who have not been so fortunate?"
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But few people have enough money to pursue every goal they may want to achieve, which is why figuring out your financial priorities is essential. If you have a partner, regular discussions about money and goals can help you come to an agreement about what’s most important.
Once you have your priorities figured out, you can set timelines for when you want to achieve your goals. Retirement may be decades away, for example, but paying for college will be an issue in just a few years for Mike’s family. Knowing your timeline helps you determine how much risk to take. You can invest more heavily in stocks the further away your goal is. If your goal is within a year or two, a safe option such as a high-yield savings account may be a better bet.
Helping others can be an important part of your financial plan as well, particularly if the pandemic hasn’t clobbered your finances as it has those of so many others. You can aid your community during the pandemic by giving money to local charities and patronizing small businesses.
Change with the times. You’ll need to recalibrate your money habits over time as your life changes.
If you have kids, make college savings a priority. Every dollar of savings is a dollar they won’t have to borrow.
Give with purpose. If you want to help those affected by the pandemic, look to give locally and deeply.
More about setting financial goals on NerdWallet:
Liz Weston: Welcome to the NerdWallet Smart Money podcast, where we answer your personal finance questions and help you feel a little smarter about what you do with your money. I'm Liz Weston.
Sean Pyles: And I'm Sean Pyles. If you want your money questions answered on a future episode, turn to the Nerds. Call or text us your questions at 901-730-6373. That's 901-730-NERD. Or email us at [email protected].
Liz: If you hit that subscribe button, you'll get new episodes delivered to your devices every Monday. If you like what you hear, please leave us a review. This week, Sean, and I answer a listener's money question about what they should do with the money they've saved during the pandemic. But first, in our This Week in Your Money segment, we're talking about what to do if you happen to win a billion-dollar jackpot.
Sean: You mean after you've cashed the check and started a new life on a tropical island, right?
Liz: Well, there's a few decisions you have to make before then. One of the biggest is how are you going to get this money? Are you going to take the lump sum? Are you going to take the annuity? And there's a lot of calculations that have to go into that.
Sean: Right, and this was a big debate that I had recently with Garrett, because there's that $1.05 billion mega millions jackpot that someone won in Michigan. He said, "I'm just going to take the cash prize because it's still over $550 million." And I was leaning a little bit more toward the annuity because it seemed like over 30 years, getting those regular installments might be the better way to go. I'm wondering what your thoughts are on this?
Liz: Well, the way they figure annuity payments has a lot to do with what the prevailing interest rates are. So when interest rates are as low as they are today, that's going to mean smaller payments going forward, which would kind of tilt the scales toward taking the lump sum. The problem is most people are not in a great position to manage a lump sum of money. Unfortunately, they will overspend, they'll run through the money too fast, they could be victims of fraud. A lot of things can happen to part you with that money. And if you make bad investment decisions, that's another way the money could just go away. So a lot of times when you do the lump sum versus annuity, you’ve got to put your thumb on the scales toward the annuity, just because there's so many ways for the other way to go wrong.
Sean: And with the annuity, you're still going to be getting millions of dollars annually, which I'm guessing is a lot more than folks were getting beforehand.
Liz: Yeah. And you do need a team to manage this. You're going to need a fee-only financial planner who is a fiduciary, which means they put your interests ahead of their own, because most advisors are not. So you want that. You need a good tax person. You need an excellent estate-planning attorney. You need an insurance agent who's used to dealing with the issues of the very high net worth, because this is not your mom-and-pop situation where you can throw up a million-dollar liability policy and be done with it. There are a lot of parts to this that you maybe have never thought about or never heard of. And the folks that are used to this are going to be able to help you with this. Now, the problem is a lot of people are going to come out of the woodwork promising to help you with your money, and their primary purpose is to get it out of your hands as quickly as possible.
Sean: Yeah. It's like your third cousin twice removed has a great business opportunity that you just have to invest in. And when you have those many millions of dollars, what's a couple thousand invested in something like this. But I think this is also why a lot of people, when they do win the lottery like this, or they come into a big windfall of some other sort, they tend to wait a little bit before moving forward with what they do with their money, because they're consulting all of these advisors.
Liz: Yeah. If they're smart, that's exactly what they're doing. They're staying anonymous and they're setting up this team. And again, you don't want the people who come to you. You want to seek out those people. And if you have no idea where to go, start with the people who are wealthier in your life, maybe ask your doctor. I mean, that's a better start than just hoping that somebody will come across your path that can help you out.
Sean: Right. And one thing, I would also advise people in the situation obviously there aren't that many, but anyone who is coming into a billion dollars, I would just keep your head down and maybe look at what other past lottery winners have experienced because so many have overspent or taken on a lot of debt or gambled it all away or been sued or had a bunch of family loans. I mean, these crazy things can happen to people who come into so much money.
Liz: Well, and think about even smaller amounts of money that come into your hand, the windfalls. You can feel really rich for a while and start spending. And the money's gone before you know it. I had a very small inheritance — I want to say it was like $30,000 at one point — and I was astonished at how fast that money went. It was like 18 months. So I'm actually glad that happened early on because it brought it home to me. You really have to be careful and deliberate or the money will just sift through your hands.
Sean: Well, let's talk a little bit about how people should think about spending windfalls. I've heard that it can be good practice to break up the amount that you have into different percentages. Maybe 10% goes toward debt payment if you're paying off debt, another 10% can go into savings and then having a different section for this fun money so that you're not being too disciplined all of the time. How do you think about this Liz?
Liz: Well, the research shows that if you have a plan you're going to do better than if you don't, because again, it can be really tempting to spend the same dollar over and over and over and not realize it until it's too late. So my general advice is take at least 10% and make it mad money. Just have some fun with it, do what you want and then figure out where the rest of the money should go. In general, NerdWallet recommends that you get on track saving for retirement, that you have an emergency fund and that you pay off high-rate debt like credit card debt. So keep those things in mind as you're coming up with your plan.
Sean: All right. Well, one big part about winning all this money is how much it's going to be taxed. And Liz, what do you think people should know about that?
Liz: Well, expect a big chunk of it to go for taxes. Here in California, if you took that lump sum, you're going to be at the top of the state and federal tax brackets, which means more than 50% would be going out the door to taxes. In some areas that don't have income taxes, like some states that don't have income taxes, it might be less, but in general, it's going to be a big chunk of that money.
Sean: Right. Well, with that $1 billion jackpot that someone won in Michigan, after taxes, it was reduced to $557 million.
Liz: Only $557 million? Awww.
Sean: It's still an enormous sum of money, but it's a little sad to see that it's essentially halved. OK. Well, I hope that this helps anyone who might want to be a billion dollar jackpot winner in the future. I know that I'm counting myself in that group. Best of luck to everyone out there.
Let's get on to this episode's money question, which comes from Mike in Columbia, Missouri. He says, "When my wife and I met, neither of us had a ton of savings and I was carrying some debt. After years of work, we have no debt other than a mortgage and a good cushion in the bank. We've also had career success that led to big raises in recent years, I feel like the habits that got us here are not necessarily the habits that we need now. It doesn't feel like a good use of our extra funds for it to be sitting in a savings account. Our life context: My wife and I are in our late 40s and work in fields where we could continue to work well past retirement age. We have a 10- and a 12-year-old who are both likely college bound when the time comes. One final question: The pandemic has actually been good for us financially — our incomes have not changed, and our expenses are way down; do you have any advice about how to help the many, many people who have not been so fortunate?"
Liz: I love this. There are so many topics in here to talk about, but to help us answer Mike's question on this episode of the podcast, we're talking with Amrita Jayakumar, a Nerd who has recently reported on how to make your donations go further.
Sean: All right, let's get into it. Hey, Amrita! Welcome back on the show.
Amrita Jayakumar: Hey, thanks for having me again.
Sean: Happy to have you. So, our listener Mike is wondering what to do with some extra money that's sitting in his savings account. And to me, a good starting point would be a conversation between Mike and his partner about what their priorities and goals are.
Liz: Yeah. Financial planners actually want you to do that first. Figure out the goal so that you can figure out how long you have until that goal is due or when you need to have the money raised, and that, in turn, lets you know how to invest the money. If it's a short-term goal, it needs to be somewhere safe. If it's a longer- term goal, you can take more risk and get into stocks. So, that's the whole point behind the goals discussion.
Sean: But having that conversation can be really challenging, and even knowing where to start can be hard for a long time. My goal was simply to even have a goal at all. So, I know that both of you have had some pretty big life changes with your partners. And I imagine you guys had some money conversations, or maybe two or three, along the way. So, to start, can you guys share with me how you guys talk about money and priorities with your partners?
Amrita: Sure. Yeah. I'm happy to share. My husband and I — we actually have a calendar invite, which reminds us to talk about money regularly. And this is something that I never used to have until I started writing about finance myself. I'll confess we don't always stick to it, but it's a good jumping-off point to at least sit down and talk about our goals, what our money's doing right now to achieve those goals, and if there's anything we need to think about or change as life changes.
Sean: Do you guys have a checklist when you go into these conversations or is it more, "OK, let's check and see what our bank accounts look like." That kind of thing.
Amrita: We should have a checklist. I will add that to the agenda for the next one, but no, we just sit down, open our accounts and like you said, just look through them and see how things are going.
Sean: And Liz, what about you?
Liz: We tend to be a little less formal about it at this point. We've been married almost 25 years, so a lot of the big discussions and the big decisions have been made, but we do have a financial planner. And the great thing about that is there's a third party that can help us talk about what our different goals might be and help us coordinate those. And we check in with her multiple times a year — I think we have a big discussion maybe once or twice a year if we need to adjust or change things. And I'm a huge fan of having that third party, especially if you're running into issues on coordinating.
Sean: Yeah. I imagine that they would be a good mediator when you guys have some differences.
Liz: Yeah, exactly. And Sean, what do you and Garrett do?
Sean: We are probably somewhere between what both of you guys do, but maybe more on the casual end of things. Instead of having a regular calendar invite, we have pretty much an ongoing conversation about our money. And I think, like you, Amrita, this is something that happened out of my work at NerdWallet. I'm just so used to thinking and talking about these things that it naturally flows out of one conversation to the next. But I do find that when Garrett and I go on walks — it's something that we really enjoy doing, going on long walks with our dog ‚ that's when we have an opportunity to have deeper conversations about these priorities. And I really liked that because it's out of a sort of formal dinner table conversation that feels like official business and it's more relaxing and we can have these sort of rambling think-out-loud conversations that help us figure out what we really want to do and how we can achieve that.
Liz: Yeah. I think it's important for couples to make sure that they've got some basics covered. The one thing that concerned me about our questioner is that he didn't mention retirement funds at all. And given that they're in their late 40s, it's well past time to get started with that. So I think with most couples, retirement just has to be a top priority. And once you've got that taken care of, then you can kind of expand your list of priorities and goals and add some on top of that. So is that one of the topics of conversation you've had with Garrett?
Sean: Oh yeah. We were just talking about that over the weekend actually, because I set up my retirement savings to increase 1% every year and I just saw that change on my pay stub. And so we got to talking about how much each of us is saving what that might mean for us down the road. Obviously, we're a ways out from retirement, but at least having a check-in helps. And then that also opened up other conversations around ways that we might want to invest together. And what having two different properties means for our finances and these conversations kind of spiral and ramble all over the place, but they help us get a feel for where each of us is in like a dollar-and-cents stance. Like what our bank accounts really look like and then also what we want to do over the coming weeks.
Liz: OK. And the other topic that comes up because they have kids is college savings, and Amrita, this is probably a good conversation for you as well, because when you're a high earner, as these folks seem to be, you don't get a lot of financial aid or a lot of need-based financial aid, if any. And I think a lot of higher earners, especially if they live in a high-cost area, are really shocked when they fill out that financial aid form and realize they're not getting squat. So, saving is super-important if you have the money to do so. I don't think you should be saving at the expense of your retirement, but it definitely should be up there if you value getting education for your kids, which most of us do, right Amrita?
Amrita: Yeah. And it's funny, you mentioned that, because we did actually have a conversation. My husband and I, we had a baby last year and also bought a house, which I talked about isn't necessarily easy during a pandemic. But we had a hard conversation about all our goals, like paying the mortgage, saving for my baby's college by putting money into 529, and so we made the decision to cut back a little bit on our retirement contributions. I'm still getting the company match, which I know is at least the important thing to do. But we had to take a call on our priorities, and we chose that education and the house were a little more important than trying to add more to our retirement savings.
Sean: That actually makes me think about the other part of Mike's question, which was how to update your financial habits to reflect where you are in life right now and your current priorities. So, Liz, you mentioned that goal setting is really the first step here, identifying what you want to accomplish, what your priorities are, where you want to be in three to five years. And from there, I think it can help to break that down into smaller tasks that you can accomplish on a weekly or monthly basis. And that will help you define what those habits that you really need are.
Liz: Yeah. And the one that Amrita mentioned, the 529 college savings plan, that is a great place to start with the college savings because in some states you get a tax break. In our state, California, you don't, but it doesn't matter. The money goes in and it grows, tax-deferred, and you can use it at any college. If you use it for education, then the withdrawals are tax-free. So, that's a really big tax benefit. And I think even more important than that, you've got a dedicated account, you know the money is there, you know what it's for, and that is really key to reaching your goals — making sure that things are adequately labeled and you're not just grabbing that money for something else.
Sean: Yeah. Well, and one thing about 529s is that you can put in $20, $30, $50 a month, it doesn't have to be a huge amount of money that you're putting in regularly. And it will add up over time.
Sean: It also strikes me that because they have kids, they should probably be thinking about life insurance and Liz, I know that you know something about this, so what should they be considering maybe?
Liz: Yeah. Basically the life insurance you have through your company is great. A lot of companies offer that. It's not enough if you have kids, especially if you have little kids. When you have the littles, you should be looking at maybe having 10 times your salary in life insurance. And that's a lot, that's a lot more than most companies offer. Also, if you're younger, you tend to get a better rate on life insurance if you buy it on your own, rather than through the group rates you get from the company, because the group rates reflect the experience of all those people. So, us older folks are skewing things and making it more expensive for you younger folks. And then the third part of that is that having your own policy kind of frees you up from losing your life insurance, if you change employers. So, all that being said, Amrita, do you have life insurance?
Amrita: No, actually I'm going to add this to our next money conversation.
Liz: Excellent. Good, good, good. Yeah, you basically want to think about what would happen if your income went away. And if you're a full-time at-home parent, what the survivor would need to spend to hire somebody to replace you. And obviously nobody can ever replace you, but there would need to be more child care on hand. So those are the things to think about. And we have all kinds of calculators and information on the site to help with that as you know.
Sean: So, Liz, your daughter is, she's 18 now, right?
Liz: Yeah, she's just turned 18.
Sean: That's super exciting. And maybe a little scary. I'm thinking about how you have probably gone through so many phases with her, not even just because she's a teenager, but just in how you've managed money with your daughter from the time she was the age of Amrita's child to now. So, what are some changes that you experienced and had to adjust to financially throughout that time?
Liz: One of the interesting things is that she's always seemed to be a little bit ahead of me in all kinds of things, in terms of ability to take on responsibilities, ability to do things. And I think that's part of being a parent. It's just constantly being surprised by your kid and what your kid can do. And the one thing I'll mention is that when she was very little, about 3 1/2, we started her with a little savings bank and we divided it into spending, saving and sharing. She got the spending part. You know, once kids know what money can do, they're interested in spending it and having their own. Savings, she got because she knew that savings led to spending. Sharing she did not get it at all. It was like "Why should I share my money?" And we were reading this book about cheetahs and she decided she wanted to give some money to the Cheetah Conservation Fund. And that's how she started these charitable donations at 3 1/2. But I guess this leads right into the next discussion of sharing.
Sean: And Amrita, you wrote an article about this at the end of 2020. And I'd love to hear what your thoughts are on how to think about giving charitably and how to make that money go as far as possible.
Amrita: Yeah. It's great that Mike and his partner want to give back. And actually as part of the CARES Act last year, people have more of an incentive to give back. So any donations that Mike and his partner made in 2020, they can actually deduct that when they file their taxes this year. So, a part . . .
Sean: $300, right?
Amrita: Yes, yes. Taxpayers would take the standard deduction that allowed an additional deduction of $300 for any charitable donations made in cash. Previously, you could only do that if you itemized. And if you are a taxpayer who itemizes, you can deduct up to 100% of your adjusted gross income for those donations. And that's also up from 60% before the CARES Act. So, Mike and your partner, if you've made donations already, definitely take advantage of those things when you file. And the people I spoke to, the philanthropy experts, recommended giving deeply to a cause that you really care about. So, one way to do that when you're setting money goals is also to make a giving plan — and it can look however you want it to — but write down your values, write down the things you really care about, and that helps you figure out where to send your dollars to help people that you really care about.
Sean: That's something that I struggled with over 2020 was figuring out how to give, how much to give, where to give. And I ended up settling on sort of a compromise approach where I have regular monthly contributions to a couple of organizations, but then I have money set aside in case some sort of emergency pops up, which seems to happen all the time now and some organization or some individual needs money, so that way I have a little bit of flexibility where I'm still giving deeply, but I also have the ability to adapt in a crisis.
Liz: Sean, you and I have talked about the importance of doing monthly donations, not just waiting until the end of the year, when everyone's scrambling and they've got other expenses as well. And we did that this year. We stepped up some of our monthly donations because, obviously, the money is very needed right now. One thing I want to add is that the COVID relief bill that passed at the very end of the year, the one that has the $600 stimulus payments, it also increased the above-the-line deduction for charitable contributions. So, joint filers who don't itemize their deductions can deduct up to $600 in cash contributions in 2021. That's up from $300. And Sean and I have talked about the importance of keeping your money, or at least keeping some of it, in your local community. How do we do that with charitable donations?
Amrita: Yes. And I think Mike said that he's from Columbia, Missouri, which is where I went for grad school. So I'm very, very familiar with the town — it's a great place. So, Mike, you're probably wondering how to support your community, and the philanthropy experts I spoke to recommended keeping some of your donations within the community to support local businesses and generally to keep your community the place you still want it to be after all this is over. So, look into how you can support your coffee shops or some people continued paying their hair salons, their hairstylists, even though they don't go in anymore. Yeah. I think the good people of Columbia will welcome that.
Sean: Absolutely. Well, Amrita, do you have any final notes for Mike to consider?
Amrita: Yeah, there are resources online websites like Charity Navigator and GuideStar that really give you a comprehensive picture of charities' financial health, their practices, and you can plug in the name of your charity and just read up about it and decide if you feel good about giving to them.
Sean: All right. Well, thank you so much for joining us.
Amrita: Thank you.
Sean: And with that, I think we can get onto our takeaway tips, and I can kick us off. First step, change with the times. Realize that you'll likely need to recalibrate your money habits over time to fit where you are financially and personally.
Liz: Next, if you have kids, make college savings a priority — if you're a high earner, you likely won't get much in need-based financial aid.
Sean: Lastly, give with a purpose. If you want to help those affected by the pandemic, look to give locally and deeply.
Liz: And that's all we have for this episode. To have your money question answered on a future episode, turn to the Nerds. Call or text us your questions at 901-730-6373, that's 901-730-NERD. You can also email us at [email protected]. Also, visit nerdwallet.com/podcast for more info on this episode and remember to subscribe, rate and review us wherever you're getting this podcast.
Sean: And here is our brief disclaimer, thoughtfully crafted by NerdWallet's legal team. Your questions are answered by knowledgeable and talented financial writers, but 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.
Liz: And with that said, until next time, turn to the Nerds.