Welcome to NerdWallet’s SmartMoney podcast, where we answer your real-world money questions — in 15 minutes or less.
In this week’s episode, we’re talking about some of the financial issues surrounding the pandemic, including what people need to know about emergency savings, budgeting and travel in the months ahead.
The value of emergency funds and the 50/30/20 budget have never been more apparent as unemployment skyrockets. If you still have a job, consider boosting your savings to help you cope with the tough economy ahead.
The 50/30/20 budget recommends limiting your essential, “must have” expenses — shelter, utilities, food, transportation, insurance and minimum loan payments — to 50% of your after-tax pay. Wants should comprise 30% and you can devote 20% to debt repayment and savings. If your income drops or stops, you can reduce the wants category quickly to help make ends meet.
Prioritize paying those essential expenses and contact your lenders to ask about hardship programs if you’re having trouble paying your bills. NerdWallet’s COVID-19 guide can point you to resources that may help.
If you’re still able to pay your debts and have good credit, you may be able to benefit from one of the pandemic’s side effects: lower interest rates. Consider 0% balance transfer offers from credit cards or a low-rate personal loan as options to help you pay less interest and get your debt paid off faster.
Travel will remain unpredictable for a while with events and flights continuing to be canceled. If you must book travel, wait as long as possible and use a credit card that includes travel protections, such as trip insurance. If you must cancel a trip, first try to do so online. If that doesn’t work, wait until about 72 hours before the flight to call the airline and be prepared to wait on hold for an hour or more. Airlines are overwhelmed right now and are prioritizing customers whose flights leave in the next three days.
If you are struggling, contact your lenders and credit card issuers. Financial companies are offering more hardship options and you may be able to skip or reduce payments without hurting your credit.
Consider a balance transfer card or a personal loan if you can pay your debt but want to take advantage of lower rates.
Wait as long as possible to book future travel. Use a credit card that offers travel protections and consider getting travel insurance.
More about savings, budgeting and travel on NerdWallet:
Liz Weston: And I’m your other host, Liz Weston. As always, be sure to send us your money questions. Call or text us at (901) 730-6373. That’s (901) 730-NERD. Or email us at [email protected]
Sean: In this special coronavirus episode of the SmartMoney Podcast, we’re talking about some of the financial issues surrounding the pandemic. Specifically, we’ve asked our fellow Nerds Kim Palmer and Sara Rathner to talk about what we should know about savings, budgeting and travel in the coming months.
Liz: Let’s start with Kim. So, Kim, what are some of the important things people need to know right now?
Kim Palmer: A lot of the questions we’ve been getting are around budgeting during these times, how to prepare for emergencies, how to handle the current emergency that you’re in. One of the huge pieces of advice we always emphasize is that this really underscores the importance of having an emergency fund. We talk a lot about this with our content and we have a really helpful tool, the emergency fund calculator. It helps you come up with the number for how much you should have in your emergency fund. We also talk about the importance of having or of applying the 50/30/20 budget. It’s something that comes up a lot. That means 50% of your [after tax] pay is going toward needs, things like your mortgage or your rent, groceries; 30% toward wants, which is things like restaurant spending, which a lot of us aren’t doing right now anyway; 20% toward debt payments and savings.
And it’s that 30% for wants where we have the ability to cut back quickly if we need to. Right now a lot of that cutting back is happening because we just don’t even have the choice, so some expenses are going down naturally, [such as] commuting expenses, for some people, and restaurant spending. Those are areas that we can cut back on now if needed. Of course, other expenses are possibly going up right now, so people are spending more on things like at-home activities that keep kids occupied, online exercise programs, that kind of thing.
Sean: I know right now a lot of people are going to have a hard time paying all of their bills no matter how well they’re budgeting. I’m wondering, Kim, how do you think people should prioritize all of their expenses when they can’t cover everything?
Kim: In terms of prioritizing different expenses in an emergency, we do really recommend that people still try to pay their most important things like mortgage or rent. Of course, prioritizing groceries. If you have to prioritize things and you just can’t make a certain payment or you can’t pay your credit card bill, the first call can definitely be to that company. Some companies have already announced leniency programs. Some are waiving things like late fees. So definitely calling them first can help in case it’s something that can’t happen this month. In terms of withstanding financial shocks and just building up your own financial security, having that emergency savings and making sure it’s in a high-yield online savings account.
We talk about this so much at NerdWallet, and of course we have a really helpful list of the best or the highest high-yield online savings accounts. Even in an environment like this when rates are lower, maybe even going lower, the best or the highest rates are still found online. And it’s also a good time as we are at home more now just to take some time to review what safeguards you have put in place for yourself, things like insurance programs, just taking a minute to review health insurance, disability insurance, life insurance. Homeowners and renters insurance is actually coming up a lot right now because more of us are working at home. We may have actually spent more and brought more expensive equipment into our homes right now. You really want to make sure that it is protected, so it might be a good time to review your current policy and see if you need to make any updates. We have many, many more resources, of course, with more details on everything on our website. Our really handy resource guide, which is now linked on the homepage, is definitely a great resource.
Sean: Hey Sara, what should people who are having trouble paying their credit cards and other bills right now know?
Sara Rathner: You do not need to struggle alone. Credit card companies and banks have always had consumer assistance programs available, and they’re especially important now. So one of the first things you can do is just call the phone number on the back of your credit card and talk to somebody and explain your situation and see what’s available. Lots of banks and credit card issuers are advertising their programs now. If you’re on their email list, you’ve probably heard of them. Point being, use the resources that are available. So if you have credit card debt, if it is a priority for you to free up cash flow, then paying off any credit card that you have is a great way to do that. And one option that you have are balance transfer credit cards. They allow you to move a credit card debt off of a card that has a high interest rate and onto a card that charges 0% interest often for a year or more.
But keep in mind that these often require good to excellent credit to qualify for and many cards charge a 3% to 5% fee of the transferred balance. So that’s something that you want to budget for. And remember that if you have any debt remaining on your card, once this promotional period is over, you will begin to owe interest on that remaining debt. So you’ll want to time your payments accordingly. Another option for debt repayment are personal loans, and this allows you to consolidate multiple debts into one payment that often has a lower interest rate than your credit cards would charge you. So not only could this be a way to save on interest payments, but it could also be a way to streamline your debt payments. You only have one monthly payment instead of several.
So whether or not these are good deals for you depends on what you would qualify for. You want to make sure that if you are shopping around for a personal loan, you want to look for one with an interest rate lower than what you’re paying on your credit cards. Also look at the length of time you have to repay the loan as well because that can influence your monthly payment total.
Finally, there are different debt repayment methods if you don’t want to take out any sort of loan or do a balance transfer. One that I talk about often is the debt avalanche method. What you do in this situation is you’ll list your debts from highest interest rate to lowest interest rate, not just credit cards, but any other debt payments you have like an auto loan or a mortgage, and you make minimum payments on every single debt that you have, so you remain in good standing with your creditors. And from there, any additional cash that you have in your budget to aggressively pay down a debt, it’s applied to the debt with the highest interest rate. Once you pay that off completely, move that extra cash flow to the debt with the second highest interest rate and so on until you are out of debt. That’s one of several debt repayment methods that we’ve talked about on NerdWallet. It’s always better to do something than nothing, rather than freak out over what the most optimal debt repayment choice is. So if you find yourself struggling to make a choice, it’s better to choose something. So keep that in mind.
Liz: Let’s switch to my favorite topic, which is travel. With all the uncertainty, what should people do about any travel reservations they have or they may want to make?
Sara: If you already have travel booked for the near future, keep in mind that you might not have to do anything. The airline might cancel your flight anyway. And if they do, they will notify you. They will work with you to either rebook you on a different flight or refund the unused value of your ticket. But if your flight is still on but you need to cancel or reschedule, just keep in mind that airlines are waiving fees but their policies vary from airline to airline and they can even change from day to day. So if you need to rebook, try doing it online to save time. But if that isn’t working for you, then wait until about 72 hours before your flight. Airlines are asking passengers to do this because they have such high call volume right now. And give yourself an hour or two to wait on hold because this is going to be a long process.
If you need to book travel, wait as long as you possibly can because everything is changing so quickly and the event that you need to travel for might get canceled anyway. So you wouldn’t have to book that travel at all. But if you must book, the first thing you should do is use a credit card that offers travel protections. And if you have a card in your wallet that does this, you have to actually use the card to make the booking to get protected. You can’t just be a cardholder but use a different card to pay for the flight. That doesn’t work. For very expensive trips like international travel, those once-in-a-lifetime vacations, you’re talking a couple thousand dollars to even a five-figure sum of money you’re spending on a trip, consider travel insurance.
And “cancel for any reason” coverage exists. It is an expensive add-on to an existing policy, but like I said, if you’re spending $10,000 or $15,000 it might be worth it to pay that extra amount of money. Keep in mind that when it comes to insurance and credit card travel protections, they cover what has happened, not what might happen, and being afraid to travel is not a covered reason.
Sean: Thanks for all this helpful information, Sara and Kim. Now, let’s get to our takeaway tips. First, if you are struggling, contact your lenders and credit card issuers. Financial companies are offering more hardship options to people who are having trouble paying their bills right now.
Liz: If you can pay your debt but want to take advantage of lower rates, consider a balance transfer card or a personal loan.
Sean: Lastly, wait as long as possible to book future travel. Use a credit card that offers travel protections and consider getting travel insurance. And that is all we have for this episode.
Do you have a money question of your own? Turn to the Nerds and call us or text us your questions at (901) 730-6373. That’s (901) 730-NERD. You can also email them to [email protected] You can even email us your voice memos if that works for you. 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.
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 education and entertainment purposes and may not apply to your specific circumstances.
Sean: And with that said, until next time, turn to the Nerds.