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Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions.
This week’s episode starts with a discussion about why you should scrutinize your bills.
Then we pivot to this week’s money question from a listener’s voicemail. Here it is:
“Hi, guys. Thank you for doing the podcast. I really appreciate it. I have a question about prioritizing. I’m in my late 20s, and I am about to have an over $200,000 pretax income after basically never having a salary before.
"I’m starting at a big law firm, and I have about $100,000 in debt from grad school, some of which has, I think, a 6.8% interest rate. And I just have no idea whether to start off by putting any or all of that excessive income into a 401(k) or a Roth IRA, or going against my student loans. What’s the smart order to go in here? Thank you. Bye.”
Check out this episode on any of these platforms:
From medical bills to bar tabs and even your insurance, questioning your bills can save you money. Errors in medical billing are common, so know how to read your medical bills and dispute any errors. This may entail a few calls between your medical provider, their billing department and your insurer, but the time is well worth it if you save money. And those who shop around for car insurance can pay less than those who stick with their insurer year after year.
If you get a big raise, take the time to refigure your budget so you know how to allocate your income. The 50/30/20 budget, where half your income goes to needs, 30% goes toward wants and 20% goes to debt payments and savings, is a good framework to start. Now is also a good time to think big. Know what your financial goals are over the long term and make a plan to achieve them.
Paying off debt is a laudable goal — but don’t let it get in the way of other ambitions, like saving for retirement. Multitasking can set you up for a stronger financial future than if you wait until you’re debt-free to start saving for your golden years.
And while getting a big bump in income is something to celebrate, take steps to avoid lifestyle creep. That means continuing to budget and asking yourself if you really need that extra pair of shoes or expensive dinner out. Additionally, giving your dollars a job — like investing or paying down debt — can help you avoid frivolous spending.
Know what you’re working with: When you face a big change to your personal finances, take the time to reassess your budget and financial goals.
Multitask: If you’re making a hefty salary, work to max out your retirement contributions while paying off your student loans.
But keep your lifestyle in check: With more money in the bank, you may be tempted to spend it. Give your dollars a job so you can keep lifestyle creep at bay.
More about managing your money on NerdWallet:
Sean Pyles: Welcome to the Nerd Wallet 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 Sean Pyles.
Liz Weston: And I'm Liz Weston. To send the Nerds your money questions, call or text on the Nerd hotline at 901-730-6373, that's 901-730-NERD, or email us at [email protected]. Hit that subscribe button to get new episodes delivered to your devices every Monday. And if you like what you hear, please leave us a review.
Sean: This episode, Liz and I answer a listener's question about how to manage a change in income. But before we get into that, in this episode’s This Week in Your Money segment, we're talking about why you should question everything, at least when it comes to what you're being asked to pay.
Liz: For medical bills, restaurant tabs and even your insurance, it's worth giving everything you're expected to pay a little more scrutiny. Sean, this was inspired by a recent bill you received. You want to tell us about that?
Sean: I recently received a bill for a hundred dollars more than it should have been. And that inspired me to dig into what was going on and realize that I'm actually being charged for more things than I really should be. So let's start with this bill. Basically, I have the same medical appointment every four months. It's pretty standard. And every time I have it, it's covered by my insurance, even though I have a high-deductible health care plan.
For the latest appointment that I had, I received this bill that was for over a hundred dollars and I looked into it a little bit. I called the billing department. I called my insurance company. I had a lot of back and forth. It turns out that they coded the wrong appointment. The code that they used was one number off from what they typically use. After talking with them for a long time — it took over two hours to get this whole thing sorted out between all of the phone calls — they ended up reissuing the bill to my insurance company and it was covered. And if I hadn't done that, if I had just accepted the bill and thought, "Oh, bummer, got to pay this bill," I would've been out over a hundred bucks that I really didn't have to pay at all.
Liz: Medical bills are notorious for being incorrect for charging you things they shouldn't have charged you. And the problem is, if you wind up in a dispute with your insurer about a medical bill, it can go on your credit report, which can affect your credit scores. So that's the worst-case scenario. You don't want that to happen. A little bird-dogging can make a big difference.
Sean: It's worth being pretty punctual about this, as well. The moment I got the bill, I knew it was not right. And so I called, and I dug into it, and it was resolved within a day, which is great. But it also can be a lot more of a lengthy process for those who aren't as well-versed in how to do this. Any time you get a bill for any sort of medical expense, it's worth asking a couple questions, just making sure that the billing code is correct and that you are being charged what you're supposed to be.
Liz: And I'm a huge fan of automatic payments. I have almost everything on auto pay, but the downside of that is you can let things slide. Cable bills, internet and satellite radio are really notorious for jacking up the price after they've given you some kind of teaser intro rates. That can wind up being hundreds of dollars that you don't need to spend.
Sean: And somewhat similar to my experience with the medical bill, I also recently had a prescription that because I'm on this high-deductible plan was not covered by my insurance. So I talked with my medical office and they said, "Oh, just charge it through GoodRx, here's the price that I'm seeing." I've talked about GoodRx before, but I'd never actually used it. So I finally signed up and I was able to save half off what the pharmacy was originally asking me to pay.
Liz: That's something about those high-deductible plans: They really inspire you to look around for some savings.
Sean: But that's where the health savings account comes in pretty handy. So I could have just expensed it. But again, I'm trying to have as much money in there as possible so I can invest it.
Liz: One of the things you can do to make sure that you're not overpaying is keep an eye on your transactions, whether you auto pay or not, making sure that you review your transactions. I try to do it like every month or so. And our app, the NerdWallet app, is a really good way to keep track of a bunch of different accounts at once and look at those transactions. Is that something you do or is that something you have to remind yourself to do?
Sean: So I am a big weirdo who pays off my credit card almost daily because I used to have credit card debt years ago, and it's something that has stuck with me, this almost hawkish approach to making sure I'm keeping my spending in check. So I look at it more than maybe I should or most people would even want to, but it helps me know that what I'm paying is what I should be paying.
I actually had another similar experience to this, touching on the whole aspect of making sure you're getting billed correctly at restaurants and bars, where I was recently going through my credit card statement and I saw a charge for a bar that I went to. I only had one drink, but I was charged over $70. And...
Sean: ... I realized that my friend was trying to close out their tab, everything they had been charging wound up on my credit card. So we had to sort it out. It was fine in the end, but it's a reminder to double-check everything you're being charged because that really stood out. And if I hadn't double checked and looked at this closely, I would've been paying that.
Liz: And that's not something you want to do.
Sean: No. As much as I love my friends, I didn't want to shell out $70 for their tater tots and beer. Another thing that I've been thinking about, because it is still the holiday season, and no, I have not finished all of my holiday shopping yet, is price matching.
Liz: Oh, Sean.
Sean: I know. There are still a couple gadgets that I'm hoping to get some family members. And I recently discovered that Target and Best Buy in particular have excellent price-matching policies. So if you're looking for something and you see that it's a little bit more at Target, but it's easier to shop at a Target because it's in your neighborhood and you don't want to rely on shipping or something like that, you can say, "Hey, here's what I'm seeing at this other retailer, can you price-match me?" And they pretty much will. Another area folks should look into, if they don't want to be overcharged, is their car insurance. While a lot of people will just be tempted to sit with their same car insurance company year after year, one analysis found that folks could save an average of $560 by shopping around for car insurance.
Liz: OK. That's some serious cash. And I know we've talked about this before, but again, it's something that's really easy to leave on auto pay or leave on automatic and not realize that you can save a ton of money with just a little bit of effort.
Sean: Absolutely. And the Nerds on the insurance team found that the ideal cadence for shopping for car insurance is once a year.
Liz: OK. I think I can manage to do that.
Sean: Yeah, just set aside an hour, maybe even less on a Sunday afternoon and just knock it out. Liz, I know you recently had an experience, not getting the credit you deserved for credit card purchases and points. What happened there?
Liz: Yeah. Well the big one has to do with a voucher for a trip we had to cancel in 2020, and it's a fairly substantial voucher. It's like for $2,500.
Sean: Oh, wow.
Liz: Yeah. It's like, I can't find it on the airline site and customer service is so backed up. I actually got an email when I inquired about it. It's like, why isn't this voucher on my account? They say they'll get back to me in 10 weeks. Excuse me?
Liz: Yes. That's kind of an outlier, but I've noticed when you sign up for, say, money back offers on your credit card, like you can get $50 off if you spend $250, half the time I have to go the customer service line and say, "Hey, I didn't get credit for this particular purchase." So again, the credits are inducing you, those offers are inducing you to spend money. If you do it, make sure you follow up and make sure you got that money.
Sean: Yeah. Make sure they're following through on their word.
Liz: Because they don't always do so. And again, we all get busy and it's easy to let it slide, but this can add up to real cash.
Sean: All right. Well, I think that about covers it. Let's get onto this episode's money question.
Liz: This episode's money question comes from a listener's voicemail. Here it is:
Listener: Hi, guys. Thank you for doing the podcast. I really appreciate it. I have a question about prioritizing. So I'm in my late 20s, and I am about to have an over $200,000 pre-tax income after basically never having a salary before. I'm starting at a big law firm, and I have about $100,000 in debt from grad school, some of which has I think a 6.8% interest rate. And I just have no idea whether to start by putting any of the excess income into a 401(k), into a Roth IRA or going against my student loans. What's the smart order to go in here? Thank you. Bye.
Sean: To help us answer our listener’s question, we are joined on this episode by our occasional Smart Money co-host, Sara Rathner. Hey Sara, welcome back on.
Sara Rathner: Thank you. It's fun to be on the other side of the proverbial microphone today.
Sean: Yeah, well we are going to grill you so I hope you're ready for it.
Sara: Oh boy.
Sean: Our listener is about to experience a sudden and dramatic change in their personal finances. And I think that they should probably take some steps to set themselves up for success and make sure they're managing their money properly going into this new phase of their life and their career. And where do you think they should start?
Sara: Well, one, acknowledge that this is a very nice problem to have. Congratulations to our listener for getting this job offer coming out of law school. That's a big deal. So you should be proud of yourself. Whenever you experience even a somewhat major life change, like an income increase or decrease, or new job or relocation for work or anything like that, it's a great time to ask all of these questions. All the questions that this listener is asking are great. And you never really want to go into these situations just thinking that I can just keep managing my money the way I did before, because things are different. So it is good to take stock of what you're doing currently, if it's working for you, what more could you be doing with your new situation? And earning $200,000 a year, even if you have substantial grad school debt, is the kind of thing that can give you a really nice head start in life if you play your cards right. That's what we’re here for. We're here to help you with that.
Sean: Right. Well, one thing I was thinking is that it would be helpful for them to take stock of their income and expenses. Basically getting a grip on their new budget. One tool that we like to recommend is the 50/30/20 budget, where half of your income goes to cover the needs — that's rent — 30% goes towards wants — that's kind of fun things like travel — and 20% goes towards debt payments and savings. And with the pretty hefty income that our listener has, I think they should be able to use this pretty well.
Sara: Something that's a big adjustment when you're new to working is figuring out how much you cost. Because your life might have been very different when you were a student, maybe you were being supported financially by family, or you were working part time while in school, living with roommates.
Sean: Living off of ramen noodles.
Sara: Yeah. Living the broke student life. And now, you are out into the world potentially kind of taking the reins of your finances on your own for the first time, possibly. And so figuring out how much do blueberries cost, you know what I mean? It's the little things you need to know.
Sara: And that's going to take some time, but it's OK to take a couple of months and just sort of observe your spending and formulate a budget based on where your money is going. And then also where you wish it would go if it's not going where you want it to go.
Liz: Well, and if somebody is jumping from being a broke law school student to having $200,000, it's going to be really hard not to go nuts, buy a new car, get a great apartment, buy clothes, do everything.
Sara: Yeah. Listen, I know you want the Tesla, OK. Can we talk for a second? You don't need the Tesla yet. This is not Tesla time.
Sean: And also there are plenty of other great cars besides Teslas. Let's start there.
Sara: I mean if you aspire to a Tesla, do it, they're beautiful. But it is just important to recognize where you are. Especially when you're going into big law. The lifestyle creep temptation has got to be significantly higher than it is in other industries because it's one of those industries where, depending on what firm you work for, what city you live in, how you look matters.
Sara: It matters to clients. It matters to the partners, and how you look is, it's how you dress, it's what you drive. It's how you arrive. You know what I mean? Do you golf on weekends? That's a very expensive hobby. Do you ski? I don't know. These are people who do things like this, and you are entering this world. And if this was not part of the world that you grew up in, it could be a real adjustment, too.
Sean: Well, yeah, that also brings me to the point that I think our listeners should think about their financial goals and they can set them for one, three, five years down the road and then actually establish a path toward meeting them.
Sara: Yeah. That's really big. The listener in their question asked about retirement savings, and they asked about student loan debt. But there's a lot of other things you have to plan for in life. You're not just paying off your student loans and retiring. I would hope that you do other things, and those other things are going to cost you money, like potentially buying a house or traveling, or maybe you want to help family out financially. Maybe you want to have children eventually. If you are working in a big law firm, childcare is definitely going to be something to budget for because you work long hours. There's a lot of life that happens in between grad school and retirement. So it's important to list out what those things are for you and then begin putting some numbers behind them and begin making some monthly savings goals for those things.
Liz: We should also make the obvious observation that you don't net $200,000. And when you're up in that stratosphere, you might be a little shocked at how much comes out in taxes, so figuring out what your after-tax income is going to be will really help with the 50/30/20 budget. But it will also help you right-size some of your expectations about how much you have to spend for an apartment, how much you have to spend for a car.
Sean: One tool that might be helpful is having a savings bucket strategy that I'm super fond of. And Liz, actually, you turned me onto this earlier this year.
Liz: Oh, cool.
Sean: For me, I have half a dozen different savings accounts with different goals attached to them. And I have a certain percentage of my income go into them, each paycheck. So that way I am saving toward different goals. One of them is just fun money. And that is my general bucket of cash that I have for things like travel and gifts for friends and restaurant nights out, things like that. So you can have fun with this, but I think it's important to give every dollar a purpose.
Sara: Yeah. That's super helpful. And when you name your goals, I think there's studies that back up the fact that if you have a named goal, you save more, more quickly, than if it's just, this is my savings account, it's for saving.
Sean: It can help gamify it, because you're seeing how much more you're getting each paycheck.
Sara: Right. Yeah. And that way you can say, like, "Hey, in five years I'm celebrating a milestone birthday, and I want to take a big vacation and I'm going to budget five grand to do that." OK. So you have to save a thousand dollars a year towards your vacation. Divide that by 12, set that money aside, make an automated transfer into your vacation account. And when you're ready to book, you have the money. You don't have to take on debt to take that trip.
Liz: Yeah. And you're doing more than one thing at a time. People can get really focused on, “I'm going to pay off all my debt and then I'll save for retirement.” No, you do it at the same time because you want to take advantage of the time value of money, and multitasking is the way to go.
Sean: But there is also a balance between multitasking and prioritizing where you put your money, which is a question that our listener had. So Sara, what are your thoughts on how to prioritize different financial goals and ways to direct money?
Sara: All right, there are the big goals like retirement, buying a house, getting married, things like that. Retirement is big. Everybody has a different vision of what they want their retirement to look like, but there will be a point in your life where you can no longer work. So even if you want to work until you're 80, your body might have other ideas, and you'll have to quit earlier because of medical issues. That's unfortunately really common.
You do need to plan for an eventual time period where you're not working anymore, where you might have higher medical expenses, things like that. And so you're young, you're just out of grad school. You're just getting started. And Liz mentioned the time value of money. Getting started early means that you can save less every month and end up with more money when you're in your 60s or 70s than if you wait until you're in your 40s or 50s and try to catch up. That's how compound interest works. The more time you give it, the better off you're going to be and the less aggressively you'll have to save. And when you're in your 40s or 50s, you might not have the money in your budget to save that aggressively for retirement because by then you might have kids in college, and your vacation home and your fleet of Teslas or whatever. And you're just not going to have as much money every month to put into your retirement account. And so start early when your life is a little simpler and just save, save, save.
Sean: But prioritization can also be a matter of personal preference, too. Maybe our listener really doesn't like having that six-figure student loan debt hanging over them. So that might be something they want to prioritize just because psychologically that would benefit them.
Sara: Honestly, that's what I did with my student loans. I thankfully did not have $100,000 in debt, but I did have debt. And every year before tax time, you get a letter in the mail that tells you how much interest you paid over the year. And I remember I was making my minimum monthly payments every month. And then I get this letter and it tells me how much I paid in interest. And that letter made me mad like, "Oh, I just spent this money to literally just have debt." And I was upset. I took a hard look at my budget and I was like, "How much more can I put toward this every month?" And I put like an extra $40 a month toward the principal for a while. And when I got down to the last thousand dollars, I paid it all off.
Sara: If having that number hanging over your head annoys you or makes you angry, that's a good thing. That's power. You can put that anger to work.
Sara: Even if you can put an extra $25 to $50 a month into the principal, it's something — it will chip away that debt that much faster. If you get an annual bonus, for example, from your law firm — a lot of law firms do that — it could be that you set aside a certain percentage of your annual bonus and put it toward the principal of your loan just to chip away at that faster. So that's another way that you can prioritize that debt.
Liz: The interest rate they're paying makes me think that they've probably got federal student loans — it's probably graduate PLUS loans. And if that's the case, they're probably going to get pitched to refinance those loans into private loans, just to lower the interest rate. And I'd be really hesitant about doing that just because federal loans have a ton of protections — as we know from the pandemic, pausing the payments for so long. If you lose your job, if you have any kind of economic setback, you've got some flexibility there. Whereas private student loans don't have that as much.
Sean: Yeah. And there's still a potential opportunity, maybe someday down the road for student loan forgiveness. We don't really know whether that's going to materialize for most people, but it is a possibility.
Liz: If they do happen to be private student loans, then refinancing can be a great idea because it just lowers your interest rate and you're not losing anything, but you do lose something very substantial if you're trying to refinance federal student loans. And this is relatively high-rate debt, and I doubt that they're getting any kind of tax break on it. Usually we say don't worry about your student loans, let them ride. You’ve got more important things to do with your money. But in this case, I endorse paying some of that down.
Sean: That brings me to another question from our listener, which is what is the “smart” order to do things in?
Sara: Well, that's a million dollar question, isn't it?
Sean: Yeah. I think the answer is that there maybe isn't one specific perfect smart order to do things in.
Liz: Yeah. I think it's very individual. With most people, you’ve got to prioritize retirement because most of us are going to get there. Most of us are going to need the money and it takes a long time. That's an expensive goal.
Liz: But if this debt is bothering you and you want to pay it off faster, that would be the next thing for me.
Sara: Obviously, if something's a top priority, and this listener mentioned retirement and debt, sounds like that's on their mind. That could be a good place to start, getting yourself set up so that you have your automated payments into your student loan. So you know that that money's going out every month on time. If you want to add to those payments and overpay your loan, to some extent, go ahead and do that. You also automate your retirement savings, if it's through your employer that comes out of your paycheck automatically when you start your job, there'll be some paperwork to fill out, but get that going. Don't delay. Get that money into your retirement account, select your investments and just let that money accumulate over time.
Sara: So once you automate all those things and you learn to live without that money in your bank account every month, that's when you can really start thinking about, "OK, well, this is what I have left. What do I want to do with it?" And that's where that 50/30/20 budget comes in.
Sara: And what you want to prioritize can change from year to year. You might prioritize living super cheaply so you can save up for travel. But then the next year you finished your trip and you're like, “I hate my apartment. I don't want to live with roommates anymore. Now I want to prioritize finding an apartment that's just mine that maybe is a little bit nicer.” That's going to cost you more money. Leave room in your plan for those changes, because you're at a point in your life where a lot's going to change from year to year.
Sean: But you kind of touched on getting things set up to begin with. And I think that's something that is very smart to do first, if possible, because there's a certain amount of administrative overhead involved in setting up your savings accounts. As you mentioned, getting your retirement savings and contributions and investments all organized, and that might take a good Sunday afternoon set aside to dive into. But then once that's done, you pretty much have it going in the background and your money is going where you want it to.
Sara: Yeah, you revisit it every couple years, but for the most part, those things can run on autopilot for a while.
Sean: Right. All right, Sara, do you have any final thoughts for our listener?
Sara: Well, it's just like we said, this is a huge change for you. You're going from being a student to making a substantial annual salary, which is amazing. And this gives you options. Don't sleep on how well you can set your life up with this income. This is a really great time to sit down and make a plan for yourself and really think about where you want your money to go, how hard you want it to work for you. I mean, like you do work for clients as a lawyer, right? So think of it as if you are your money's client and it's got to work for you or else you're going to fire it. Well, you can't fire it, but you know what I mean? I'm trying to make a metaphor here, just go with it. But really the people I know who have made it to their mid-30s and later who are financially comfortable for where they are in life are people who didn't ignore this stuff when they were in their 20s.
They're the people that used that time to set a good foundation for themselves. The people who just kind of winged it, they were like, "Eh, I make money. I spend money, whatever. It's all in my checking account. I don't know." They're the ones who are hitting their mid-30s, and they're like, "Why can't I afford a house? I don't have a retirement account. Should I have a retirement account?" Yeah, yeah. You should. Because yeah, we're millennials. We're not going to have any social safety net, right? We do need to save for these things. That's the advice I would give to you as somebody who's been out of school long enough and who has friends in the same boat to see all the different, choose-your-own-adventure paths people have taken, I would say, use this time wisely. You can still have fun. You can still do all the things you want to do.
Sara: But you could do it because you know, you're also doing the things you have to do.
Liz: That is an excellent point, Sara.
Sean: Well, thank you so much for talking with us.
Sara: Thanks for having me back, guys.
Sean: Well, with that, let's get onto our takeaway tips and I can start us off. First up, know what you're working with. When you face a big change to your personal finances, take the time to reassess your budget and your financial goals.
Liz: Next, multitask. If you're making a hefty salary, work to max out your retirement contributions while paying off your student loans.
Sean: But keep your lifestyle in check. With more money in the bank, you may be tempted to spend it. Give your dollars a job so you can keep lifestyle creep at bay.
And that is all we have for this episode. Do you have a money question of your own? Turn to the Nerds and call or text us on the Nerd hotline at 901-730-6373, that's 901-730-NERD. You can also email us at [email protected] and visit nerdwallet.com/podcast for more info on this episode. And be sure to subscribe, rate and review us wherever you're getting this podcast.
Liz: And here's our brief disclaimer, thoughtfully crafted by NerdWallet's legal team. Your questions are answered by knowledgeable and talented finance 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.
Sean: And with that said, until next time, turn to the Nerds.